ahead of the game: succeeding in emerging...

Ahead of the game:Succeeding in emerging markets

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© Economist Intelligence Unit Limited 2008Ahead of the game:Succeeding in emerging markets

Ahead of the game: Succeeding in emerging markets aims to provide insights into how companies today are overcoming key barriers to growth in the world’s major emerging markets.

The insights and conclusions of this study are based on �5 countries, which together represent the major targets for foreign direct investment (FDI) over the next five years, based on forecast FDI inflows from the Economist Intelligence Unit. These countries are: China, India and Thailand from Asia-Pacific; Poland, Russia and Turkey from Eastern Europe; Brazil, Chile and Mexico from Latin America; Egypt, Saudi Arabia and the United Arab Emirates from the Middle East and North Africa; and Angola, Nigeria and South Africa from Sub-Saharan Africa.

This study is based on a survey of more than �,300 executives from within these emerging markets, making it one of the biggest ever business surveys of these countries. The respondents represented all major industry segments and were evenly split between domestic firms and multinational companies operating in these markets. Only relatively large companies were polled: all companies reported annual revenue of at least US$100m, making them significant players in many of these markets, and one in four companies had revenue of at least US$�0bn. All respondents hold management positions, with over 400 respondents from C-level positions. The survey was conducted by the Economist Intelligence Unit during June, July and August 2008.

The Economist Intelligence Unit also conducted over 20 in-depth interviews with CEOs and other senior executives from companies across these markets. Our thanks are due to the following for their time and insights:

Mahmoud Abdel Latif, chairman, Bank of AlexandriaBarry Swartzberg, group executive director, Discovery HoldingsFlavio Díaz Mirón, chief country representative, BombardierMarek Matraszek, founding partner and managing director, CEC Government RelationsRicardo Claro, head, Claro Group Clyde Tuggle, former president, Russia, Ukraine and Belarus Business Unit, The Coca-Cola CompanyRalph Nitzgen, senior executive officer and general manager, Commerzbank DubaiChristoph Remund, CEO, DHL Logistics IndiaVinod Nair, managing director for India, Diamond Management & Technology ConsultantsLouise Goeser, president, Ford MexicoHandan Saygin, head of investor relations, Garanti BankDavid Pan, general manager, HR and shared services, Guangdong Dapeng LNGGraham Briggs, CEO, Harmony GoldDavid Brown, CEO, Impala PlatinumRoberto Setubal, CEO, Itaú Financial HoldingLevent Eyuboglu, CEO, Multi Turkmall

About the research

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Paulo Zottolo, CEO for Latin America, Philips BrazilRui Manuel Dos Santos, chairman and CEO, SistecSanjay Vakharia, director of marketing, Spykar LifestylesAaron Tong, general manager, strategy and investment centre, TCL CorporationJean Lebreton, senior vice-president and head of strategy and business development, ThaiBev

The author of the report is James Watson. Alasdair Ross is the author of the chapter on risk. Additional interviews were conducted by Andrew Bossone, Mimi Cauley, Aviva Freudmann, Edward George, Luis Kaffman, Paulius Kuncinas, Thierry Ogier, Matthew Shinkman and Pamela Whitby.

Country profiles were contributed by Justin Alexander, Anjalika Bardalai, Erica Fraga, Edward George, Ann-Louise Hagger, Duncan Innes-Ker, Bernard Kennedy, Jane Kinninmont, James Owen, Martin Pickering, Danny Richards, Pat Thaker, Ania Thiemann, Justine Thody and Philip Walker.

September 2008

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Looking to emerging markets as a source of corporate growth is not a new story. But since the wave of reforms and geopolitical changes during the �990s, emerging markets have moved more clearly onto

the radar of executives around the world. These countries grapple with a range of legacies—communism, colonialism to war, to name a few—as they embrace globalisation. But as economic progress has taken hold in these countries, the business environment that companies encounter within these markets has been rapidly changing. Alongside this, many of the formerly slow and often state-owned companies have emerged as fierce competitors, both locally and abroad.

This report seeks to provide a better understanding of how firms are entering these countries, what risks and operational barriers they face there and what the key factors are for succeeding in these markets. It also aims to provide some clues as to how domestic firms are competing against their foreign rivals. Above all, it explores whether or not the emerging-market success story is likely to continue in the years to come.

A single study cannot hope to be comprehensive with regard to insights on every country or industry, so this report aims to provide a broad view of the major operational issues that executives from various sectors face in these markets. Some of the key findings emerging from this study include the following:

l Executives are bullish about the growth prospects of these countries. The emerging markets reviewed within this study have delivered strong economic growth during the last decade, a trend that is forecast to continue. According to the executives polled for this report, and despite current gloominess in the developed world, confidence within the countries being polled could barely be higher: nearly nine out of ten (87%) are optimistic about their company’s revenue growth over the next two years (just 3% are pessimistic). Similarly, about eight out of ten (79%) are optimistic about profitability (just 6% are not).

l The number one rationale for operating in these markets is to tap into domestic demand. Years of economic growth has created an extraordinarily large pool of active consumers to target. More broadly, average individual incomes are likely to nearly double between 2000 and 20�2 within many of these countries. Tapping into this potential consumer demand is now the number one reason for companies to enter these markets, far ahead of simply wanting to cut production costs or gain access to natural resources. Seven out of ten executives from foreign multinationals state that accessing the domestic market is one of the primary reasons for being there—the second-highest reason is as a base for expansion into surrounding countries, selected by five in ten executives. This holds true across nearly all industry sectors, from manufacturing to services, with the only obvious exceptions being energy and natural resource firms.

l Succeeding in these markets requires a focus on quality, ahead of cost. The top success factor noted by executives across all regions and most industries is the need to focus on product quality. Nearly six out of ten firms (56%) cite this as the key driver for their success in these markets. Competitive prices (41%) and strong brand appeal (24%) are important too, but lag behind quality. Christoph Remund, CEO of DHL Logistics India, says quality is “critical” to his company’s business in the country. TCL, a Chinese television maker, is another

Executive summary

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example: it is rapidly evolving from its former low-cost focus to emerge as a provider of high-quality goods. Other firms, such as South Africa-based Discovery Holdings, are even seeking to introduce product innovations into developed markets, such as the UK.

l A shortage of skills is the number one barrier to growth. Political instability and macroeconomic fundamentals, bad roads and congested ports are all concerns that firms grapple with, but the main barrier to growth in emerging markets is a shortage of skills. Nearly one in four executives (23%) rates this as a major barrier—and for about three-quarters of companies it is at least a moderate barrier. Other labour-related concerns, such as rising labour costs and high rates of staff turnover as a result of a highly competitive job market, add to the challenge for HR departments. About one in five companies (18%) have to replace between one-quarter and one-half of all their staff every year.

l Key risks are on the decline across every region. Barring individual exceptions (Thailand and the United Arab Emirates), the overall risk level is falling in every country under review in this report. Most of the decline is explained by falling macroeconomic risk. Given the tough economic conditions currently being experienced within developed markets, this decline in risk highlights the stable growth that has been achieved within these emerging markets over this decade.

l Partnering with other firms is important, especially in riskier markets. About six out of ten executives (58%) feel that it is important or very important for them to collaborate with other firms in order to succeed in that market. This is also true, to an extent, with market entry. Although acquisitions and greenfield investments are the most popular forms of entry, some form of partnership is widely used as a means of entry, especially when going into riskier countries.

l Domestic firms are confident that they can compete with their foreign rivals. Although global brand surveys are still dominated by developed-country companies, a growing number of nimble competitors are rapidly expanding within (and beyond) these emerging markets. They bring with them much confidence in their ability to take on their multinational rivals: eight in ten domestic firms polled for this report feel they are somewhat well positioned or well positioned to compete with foreign rivals on their home turf. Just 4% say they are not.

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Since the start of this decade, the countries selected in this sample have delivered substantial rates of economic growth. Eight of the 15 countries delivered average real GDP growth rates of more than

5% between 2000 and 2007, with the lowest delivering a healthy 3% average over that period. Of course, within this sample, different countries are at very different stages of development. Angola only recently emerged from civil war, but has grown rapidly since then, with GDP growth peaking at 21% in 2005. Other economies, such as Brazil and Mexico, are already substantial and continue to deliver solid growth. Russia, India and China, all already large economies, are still expanding quickly. China’s GDP growth rate alone has averaged about �0% since 2000.

Accordingly, income per head within many of these countries is likely to nearly double between 2000 and 20�2. In Chile, for example, this is forecast to expand from less than US$�0,000 per year (measured at purchasing power parity, PPP) to more than US$�8,000 by 20�2. Since 2000, per head income in China, despite its enormous population, has increased by about 50% from below US$4,000 to nearly US$6,000 this year—and is forecast to exceed US$7,000 by 20�2. Average incomes for Russians have already more than doubled since 2000, reaching around US$16,000 this year and on track to surpass US$20,000 by 20��. At the top end of the scale, per head income in the United Arab Emirates (UAE) is expected to pass US$35,000 by 2012. Even the poorest of the sample, Nigeria, will nearly double between 2000 and 2012, albeit from a very low base of just US$�,000.

Given this story of rising prosperity, it is unsurprising that these 15 countries have each had an impressive track record of attracting inflows of foreign direct investment (FDI) over the past five years—and are all forecast to be the biggest recipients of FDI inflows within their respective regions between now and 20�2 (see table).

All of this economic success underpins a fundamental point emerging from this survey, which is that the vast majority of executives polled for this report have been succeeding in emerging markets in recent

Introduction

Key points

n All15marketsunderreviewinthisstudyhavereportedstrongaveragerealGDPgrowthoverthisdecade,withsoaringpercapitaincomesacrossmanyofthesecountries

n Nearlyallcompanieshavereportedstrongsuccessinthesemarketsinrecentyears,bothintermsofrevenuegrowth and profitability

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years. About nine out of ten executives say that their company has been either very or somewhat successful in these markets, in terms of revenue growth. This is true of both domestic firms and foreign multinationals operating in these markets—and broadly holds true across all regions and industry segments.

GDPgrowthrates

(RealGDPgrowth,%)

Country 2008 2009 2010 2011 2012

Angola �5.� 9.8 9.3 9.8 �0.�

China 9.8 8.5 9.� 9.� 8.4

India 7.5 6.8 7.5 7.6 8.�

United Arab Emirates 8.4 7.6 7.2 6.6 6.1

Nigeria 6.5 6.7 6.9 6.7 7.�

Egypt 7.� 6.7 6.3 5.6 5.8

Saudi Arabia 7.2 6.7 5.9 5.4 6.0

Russia 7.5 6.8 6.1 5.5 5.0

Turkey 4.5 3.7 5.� 5.0 5.0

Poland 5.3 4.2 4.0 4.4 4.3

Thailand 4.8 4.5 4.6 4.2 4.4

South Africa 3.5 2.8 5.0 4.6 3.7

Chile 3.6 3.6 4.3 4.4 4.3

Brazil 4.6 3.4 4.0 4.0 4.0

Mexico 2.3 1.6 3.4 3.8 3.6

Source: Economist Intelligence Unit.

Has this growth delivered profitability? Here the story is one of success too, although not as

unqualified. Globally, 14% of executives gave either a neutral or negative response when asked about their success in growing profits over the past few years. The situation seems toughest in Eastern Europe (20% of responses were negative or neutral) and best in the Middle East (8%). Overall, however, more than eight out of ten executives (83%) from across these emerging markets have been somewhat or very successful with regard to profitability. This does not mean that competition is not tough. When asked about expansion of market share, the story remains bullish, but less strikingly so. About 23% of respondents were either neutral or negative on this point.

Very successful

Revenue growth

Profitability

Growth in market share

How successful has your company been in this market over the past two years, in terms of each of the following? (% respondents)

Somewhat successful Neither successful nor unsuccessful

Somewhat unsuccessful Very unsuccessful Don't know/Not applicable

58 32 6 1 1 2

46 37 10 3 1 2

35 39 32417

Source: Economist Intelligence Unit survey; June-August 2008.

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The rest of this report seeks to explore what the key factors are for succeeding in these markets, based on the experience of executives operating there. It looks at why firms are in these countries in the first place, what advice they offer for entering these territories and how they deal with major operational barriers, such as poor infrastructure or corruption. It will also review how domestic firms are fighting back, providing insights into what sort of competitors foreign rivals face in tomorrow’s primary growth markets.

Boominginvestmentinemergingmarkets

(Inwarddirectinvestment,US$bn)

2008 2009 2010 2011 2012

China 95.4 81.6 80.9 82.9 95.3

Russia 48.0 42.0 40.5 39.5 40.0

India 37.7 35.0 40.0 50.0 60.0

Brazil 34.0 28.5 30.0 3�.0 32.0

Turkey �5.0 16.0 28.0 32.0 35.0

Mexico �8.0 16.0 24.0 25.0 26.5

Poland 2�.0 �9.0 �5.5 �4.5 �4.8

Chile �8.5 15.6 16.6 �7.7 �9.0

UAE ��.2 ��.8 �0.� 9.3 8.8

Thailand 9.5 9.9 �0.� �0.5 �0.5

Egypt 9.6 8.0 7.2 6.4 5.8

South Africa 6.1 3.5 3.7 4.5 5.0

Saudi Arabia �.9 2.3 2.5 2.6 2.7

Angola 2.3 2.6 �.9 2.3 2.0

Nigeria 2.� 2.� 2.� 2.3 2.�

Source: Economist Intelligence Unit.

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Emerging markets are not a new phenomenon. Of the foreign companies polled for this report, over 80% had been operating in these markets for at least five years, with nearly two-thirds having racked

up ten years or more. Just one in ten had been in these markets for less than three years. Regionally, multinationals are most entrenched in Latin America, whereas Eastern Europe has the most recent entrants. However, the motive for being in these markets has been changing steadily.

Domestic demandWhereas in the past, third world countries or developing markets were seen primarily as a source of natural resources and low-cost labour, today they are first and foremost a new source of demand for all kinds of businesses. Seven out of ten executives (7�%) polled state that one of their company’s main reasons for operating in that market is to gain access to the domestic market. The second-highest reason (52%) is to act as a base for expansion into surrounding countries. “It is easier to open doors when doing business in the region from Mexico. We view great potential demand in the future for airplanes in the region and Mexico is an important springboard to exploit these opportunities,” says Flavio Díaz Mirón, the chief country representative for Bombardier, a Canadian aeroplane and train manufacturer, in Mexico.

In Brazil, Roberto Setubal, CEO of Itaú Financial Holding, a local bank, says the country now has a growing set of consumers wanting financial services. In response, his bank has developed consumer finance and credit cards. “This is a great novelty, because this would not have been possible ten years ago because of economic uncertainty and volatility,” he says. “For instance, car financing boomed and helped the local output to grow from �m vehicles to 3m vehicles within a few years.”

In India alone, the number of active consumers is nearly as large as the population of Europe. Of course, per head incomes remain much lower, but their purchasing power is growing rapidly. According to Christoph Remund, CEO of DHL Logistics India, growth in the country remains very strong, which in turn bolsters domestic demand. “India has a middle class of �50m-200m who are buying computers and

Why go there?

Key points

n Companiesareprimarilyinthesecountriesinordertotapintothedomesticmarketandrapidlyexpandingconsumerclass

n Thesemarketsarealsoseenasamajorsourceofskills

“[Egypt has] a wealth of people and they can be used like in India on the IT sectors and service-related sectors.”Mahmoud Abdel Latif, chairman, Bank of Alexandria

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taking holidays,” he says. Even in Africa, domestic consumers are the number one target, according to executives, although access to natural resources remains a key reason.

A source of skills Asia, unsurprisingly, remains both the world’s biggest workshop and the biggest source of skills and talent: about four out of ten firms say their main reason for being there is to lower manufacturing costs (44%) or get access to skills (4�%)—far higher than any other region on both counts.

Of course, cheap skills are only part of the equation. A US carmaker, Ford, has established a significant operation in Mexico, on the back of a highly developed local supplier base, good infrastructure links and strong local skills. “As with any large production facility, having a local supplier base to support that manufacturing is crucial. You can’t just go to the country with the lowest labour costs,” says Louise Goeser, president of Ford Mexico. Regardless, parts and materials represent a much bigger part of Ford’s overall costs than labour. And as Mexico has evolved, the company has been developing its design and engineering operations in the country. “The next wave of Mexico’s labour force will see a need to develop these higher value-added skills. Manufacturing and supply base operations are important here but the next step is to add higher-value engineering skills to the workforce,” says Ms Goeser.

From an industry perspective, IT firms, healthcare firms and professional services companies are most interested in accessing the developing world’s brains—a much higher proportion of those firms say they are in these markets for that reason. Energy companies, naturally, are there for the resources rather than the domestic market; and manufacturers for the low cost of labour.

And although countries like India have become famous for their rich source of skills, particularly with regard to IT outsourcing and call centres, other emerging-market countries are jostling to provide similar services. South Africa, for example, has sought to exploit its time-zone proximity and English-language skills to tap into the European market. Egypt, Nigeria and others have similar aims. “We have a wealth of people and they can be used, like in India, in the IT sectors and service-related sectors,” says Mahmoud Abdel Latif, chairman of the Bank of Alexandria in Egypt. “A lot of companies started to use Egypt as a call centre actually. [Many] moved their activities from India to Cairo’s Smart Village.”

Access to the domestic market (eg, sell goods/services)

Using this market as a base for regional expansion

Ability to reduce manufacturing/production costs (eg, low labour costs)

Access to skills/talent (eg, to conduct R&D, business process outsourcing)

Access to other resources (eg, minerals, oil)

71

52

28

28

13


Which of the following represent your company’s main reasons for operating in this country? Select all that apply (% respondents)

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Risk trends in emerging markets

For decades, countries from outside the so-called developed world have been synonymous with risk—political coups, poor economic fundamentals, crime and so on. But just as these countries have delivered impressive growth results and received soaring FDI inflows, so have their risk fundamentals steadily improved. The Economist Intelligence Unit’s operational risk model, which tracks ten categories of risk within all key economies, highlights the gains that have been made over the past six years (see tables � and 2). The model rates a series of key indicators within each of the �5 countries under review in this report on a scale from 0 (no risk) to �00 (extreme risk). A detailed breakdown of the full methodology and country scores is available in appendices � and 2.

The first thing to note is that the level of risk has declined in every case, except Thailand and the UAE. The second point is that the improving trend is explained mostly by declining macroeconomic risk; on average, this has fallen by 16 points, and the gain is observed in all countries except India (unchanged at a low-risk 30) and the UAE (up to a low-risk 20 from a very-low risk 10). Given the economic storm gathering over the main developed economies, this result is testament to the remarkable progress made in achieving stable growth in emerging markets. Even if, as most respondents to the survey consider likely, the slowdown in the developed world dents growth prospects in the developing economies, the relative gains in terms of macroeconomic risk are likely to endure. Investors clearly share this perception: most survey respondents cite local market opportunities as the main reason for investing, in contrast with the widespread perception of emerging markets as sources of cheap labour and other inputs.

Similarly, the next most notable trend, a generalised decline in levels of financial risk, is evidence of more open, better-regulated

economies with deeper capital markets. The only areas in which the sample countries show a significant deterioration since 2002 are security risk and labour market risk; in both cases the average score has increased by 3 points. But the averages hide a nuanced picture. In the case of security risk, scores have increased in only five of the 15 countries. Removing the worst case (Thailand, with an increase of 46 points) brings the average change to zero. The rise in labour market risk is more evenly spread, with �3 countries worse or unchanged and only two showing improvement. However, in all cases the score changes are modest. The main factors explaining the decline are a slight increase in the frequency of strike action and a tightening skills market. These declines are offset by a tendency towards greater freedom of association.

In all other areas average scores have improved, albeit not on the dramatic scale of macroeconomic risk. This secular decline in emerging-market risk corresponds to a period (up until late 2006) of almost unprecedented global stability and growth, and this in itself is sufficient to reduce the risk of investing. But many emerging markets have exploited these benign external circumstances to address the shortcomings that perennially led to instability in the past. Debt burdens have been restructured, budget deficits wrestled down or eliminated and current-account gaps erased or brought within comfortable limits. Many of the policies giving rise to these gains have become a matter of political and social consensus, helping to lock them in for years to come and suggesting that the decline in risk levels is a durable one.

Security risk shows the greatest regional diversity, with Asia-Pacific once again the under-performer (again, Thailand explains most of the rise in risk). There are also notable differences in macroeconomic risk; while the rising tide in the global economy during most of the decade raised all boats, Asia-Pacific and the Middle East saw less benefit than the other regions. India’s stable low-risk status explains the former, and the slippage in the UAE’s very-low risk rating the latter.

Table1:Decliningcountryrisk

Overallriskscoresacrosstencategoriesofrisk,July2002andJuly2008;Countriesarescoredonascalefrom0(norisk)to100(extremerisk).

Angola Brazil Chile China Egypt India Mexico Nigeria Poland RussiaSaudi

ArabiaSouth Africa Thailand Turkey

United Arab

Emirates

July 2008 54 46 2� 47 4� 50 42 65 30 57 47 43 52 49 33

July 2002 61 50 23 5� 50 53 43 69 35 59 48 46 45 56 29

Change -7 -4 -2 -4 -9 -3 -� -4 -5 -2 -� -3 7 -7 4

Source: Economist Intelligence Unit Risk Briefing.

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The final regional variation worthy of note comes in the political stability category, where Africa sees its second-biggest gain, overshadowing the more modest improvements elsewhere. Again, despite cases of internal conflict and persistent ethnic rivalries, the gains made over the past decade in African democracy appear to have been consolidated. Among the country selection, Egypt’s score has fallen the most; to 41 today from 50 in 2002. The gains here are virtually across the board, although the biggest improvements have come in foreign trade and payments risk (-21 points) and financial risk (also -2� points). Lower tariff barriers and improved current-account convertibility explain the former, a steadier currency and a more liquid stockmarket the latter.

By contrast, Thailand and the UAE show an increase in risk. However, the reasons are very different. Between 2002 and 2008, Thailand has seen a rapid decline in governability followed by a military coup, and the subsequent transition from an ill-starred military-backed government to an inherently unstable civilian one--all amid unremitting political polarisation. The deterioration in the risk score, from 45 to 52, is hardly a surprise. The increase in UAE risk

is from an extremely low base relative to the countries in this study. The deterioration reflects a modest worsening on most indicators. The biggest of these, security risk, reflects in part the growing terrorism threat in the region as a whole. Despite the slide, the UAE remains third in the overall ranking, behind Chile and Poland.

A final note: although emerging markets are increasingly taking their place as global players, their very success can give rise to new risks. Rising investment levels test infrastructure and social capital, as witnessed by the rising impact of skills shortages on the labour risk scores. This resonates with the findings of the survey, which show that the availability and cost of labour are considered important operational barriers by most companies investing in emerging markets. The boom in commody prices replenishes international reserves and provides revenue for social spending, but can encourage resource nationalism and growing internal competition over access to the revenue windfall. Among this sample of countries these are isolated problems, however, and the overall expectation is for improved conditions for investors over the coming years.

Table2:Aregionalperspectiveofrisk

Regionalriskscoresacrosstencategories;averagechangebetweenJuly2002andJuly2008

Sub-Saharan Africa1 Asia-Pacific2 Eastern Europe3 Latin America4

Middle East and North Africa5

Overall evaluation -4.7 0.0 -4.7 -3.1 -2.0

Security risk -5.0 �5.3 -7.3 �.0 7.3

Political stability risk -�5.0 0.0 -5.0 -6.7 0.0

Government effectiveness risk -3.7 8.7 �.0 2.0 -�.3

Legal & regulatory risk -�.7 -�.0 -�.0 -�.2 -2.7

Macroeconomic risk -2�.7 -8.3 -20.0 -16.7 -8.3

Foreign trade & payments risk -�.0 �.3 4.0 �.4 -4.7

Financial risk -4.0 -8.3 -7.3 -6.6 -5.7

Tax policy risk -2.3 2.3 -3.7 -�.2 -2.3

Labour market risk 3.7 �.3 5.0 3.3 �.3

Infrastructure risk 5.3 -9.7 -��.3 -5.2 -3.0

Source: Economist Intelligence Unit Risk Briefing. �Based on scores for Angola, Nigeria, South Africa; 2Based on scores for China, India, Thailand; 3Based on scores for Poland, Russia, Turkey; 4Based on scores for Brazil, Chile, Mexico; 5Based on scores for Egypt, Saudi Arabia, United Arab

Emirates.

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On the question of how best to enter a new market, there is no one-size-fits-all approach. The rationale for a particular market entry approach depends on a range of factors, including the industry in

question, a firm’s risk profile (and the risk profile of the country), the scope of activities planned for that market and also the level of development in the country.

The majority of respondents from foreign multinationals say that their firm entered these markets via either a greenfield investment (29%) or else an acquisition of a local company (23%)—a decision that most feel was successful. The rest either partnered with a local player or set up a joint venture or franchise. From an industry perspective, consumer goods companies and IT firms tend to follow the acquisition route, while construction and energy firms prefer to set up from scratch. Regionally, firms were far more likely to take an acquisition route in Latin America (4�%), whereas franchising or licensing a local company was more typical in the Middle East (21%).

Entering the market

Which of the following best describes how your company entered this market? (% respondents)

Set up a greenfield investment

Acquired a local company

Established a joint venture with local company

Licensed a local company or set up a local franchise system

Established a partnership or alliance with local company

Set up a contracting/sub-contracting arrangement

Other, please specify

29

23

15

11

10

3

10


Key points

n Decisions on how to enter new markets vary by industry, risk profile and a range of other variables

n The majority of firms pursue either an acquisition or a greenfield investment, although most agree that it is important to collaborate with local firms

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Of course, much depends on the sector a firm is entering. “Greenfield investments are for companies that have experience in the country,” says Mr Díaz Mirón of Bombardier. This is not always a rapid process: Bombardier’s decision to set up aerospace operations in Mexico took the company at least two years to make, despite its knowledge of the market.

Naturally, experiences vary according to each country’s conditions. In riskier countries, however, the recommended approach often relies on partnership. “Nobody comes to Russia on their own. Even if you are thinking of entering alone, you will end up partnering with a number of stakeholders: local authorities, suppliers, and so on,” says Clyde Tuggle, president for The Coca-Cola Company’s Russia, Ukraine and Belarus business unit. “We built a greenfield operation just after perestroika [the economic reforms introduced in 1987 by Mikhail Gorbachev], but we relied heavily on local suppliers such as bottling partners, who in turn depended on local municipalities.” In his view, a company’s entry strategy depends on its risk profile. Levent Eyuboglu, CEO of Multi Turkmall, the Turkish subsidiary of the Dutch-based Multi Corporation, a shopping mall company, agrees. “It’s not easy to start a business from scratch. Most sectors have active players, so it is advisable to find a local partner.”

Some firms wishing to buy their way into a new market can find that the most promising acquisition targets have already been snapped up. Poland is one example. “The main wave of privatisation is over and there are few attractive assets left on the market, which is why most foreign companies go greenfield,” says Marek Matraszek, founding partner and managing director of CEC Government Relations, a consulting firm based in Poland. In other markets, local bureaucracy can be the obstacle preventing an easy entry. In Chile, for example, local executives warn that red tape has worsened in recent years, and getting the necessary permits to start a business has become more cumbersome. “New foreign investors

How important has it been for your company to collaborate with other companies in this market in order to succeed here (eg, for product development, sales)? Rate on a scale of 1 to 5, where 1=Very important and 5=Not at all important (% respondents)

1 (Very important)

2

3

4

5 (Not at all important)

28

31

21

13

8


When seeking to choose an organisation to partner with in this market, which of the following criteria do you believe are most important to ensuring a good strategic fit? Select up to three (% respondents)

Good cultural compatibility between our organisations

Financial strength

Relationships with local business/government contacts

Brand/reputation

Customer network/reputation for customer service

Reputation for sustainability and/or ethical behaviour

Sales and marketing resources

R&D and technology resources

Logistics/distribution network

Production/manufacturing resources

Risk analysis capability

40

39

39

35

34

25

18

16

16

11

9


“It’s not easy to start a business from scratch. Most sectors have active players, so it is advisable to find a local partner.”Levent Eyuboglu, CEO, Multi Turkmall

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probably need expert advice to navigate through these obstacles,” says Ricardo Claro, head of the Claro Group in Chile, a diversified conglomerate.

Regardless of entry strategy, about six out of ten companies (58%) within emerging markets feel that it is important or very important for them to collaborate with other firms in order to succeed in that market. Just two out of ten feel it is somewhat unimportant or not at all important. This holds true for both domestic firms and foreign firms, although the latter are slightly more reliant on partnerships or collaboration with others. What matters most when partnering with others? Financial strength, good cultural compatibility and relationships with local business or government contacts are all crucial (selected by at least 39% of respondents). Brand and reputation (35%) and a good customer network (34%) were also important. Unsurprisingly, foreign firms have a greater need to tap into partners’ distribution networks, while domestic firms are interested in others’ research and development (R&D) capabilities and brand.

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Despite the impressive improvements that many of these emerging markets have made over the past decade in terms of economic fundamentals, political stability and infrastructure, companies—both

domestic and foreign firms—still face a range of challenges.

l A shortage of skillsThe first challenge for companies seeking to use emerging markets as a source of skills is actually finding (and keeping) such talent. Indeed, the number one barrier to growth in these countries is the general lack of sufficiently skilled or experienced labour that firms operating in these markets have encountered. Nearly one in four companies (23%) rate this as a major barrier—and, overall, three in four executives rate it as at least a moderate barrier. Just one in ten (��%) say that a shortage of skills is no barrier to growth. This is particularly true in the Middle East (35% report this as a major barrier) and Africa (31%). By comparison, the cost of labour is seen as far less of a concern, with just 7% of respondents seeing that as a major barrier globally.

Another common concern is the high rate of staff turnover. Companies in India, in particular, complain of significant rates of turnover in the scramble for talent. The vast majority of firms (76%) deal with an annual turnover rate of between 5% and 20%—not small, but not unmanageable either. However, about one in five companies (18%) have to replace between one-quarter and one-half of all their staff every year, no mean feat for any HR department.

Coca-Cola in Russia is one firm that battles with this problem. The company employs about 12,000 people, but experiences a high rate of staff turnover owing to constant competition for its skills. “Not a week passes without people trying to acquire our talent,” reports Mr Tuggle. He notes that English-speaking executives are in particularly high demand. In response, the company invests heavily in training as an incentive for people to stay on board. “We are currently partnering with Georgia State University to put some of our high-performing, high-potential associates through these programmes,” explains Mr Tuggle.

The major barriers to growth

Key points

n Ashortageofskillsisseenasthenumberonebarriertogrowth.Typicallyhighratesofstaffturnoverdon’thelpthesituation

n The state is the next major obstacle. Red tape, tax and regulatory pressures all hit firms hard

n Risingenergyandrawmaterialcosts,alongwithshortagesofelectricity,providefurtherheadaches

“Not a week passes without people trying to acquire our talent.”Clyde Tuggle, former president, Russia, Ukraine and Belarus Business Unit, The Coca-Cola Company

16


Lack of sufficiently skilled/experienced labour

Rising energy and raw material prices

Tax and regulatory pressures

Price competition from local firms

High levels of bureaucracy/red tape

Political uncertainty/instability

Poor and/or expensive electricity supply

Poor physical infrastructure (eg, roads, rail)

Poor rule of law / weak regulatory regime

High levels of corruption/bribery

Cost of available labour

Poor security/threat of crime

Restrictive business policies (eg, economic empowerment)

High rates of staff turnover

Poor and/or expensive communications infrastructure

Limited access to capital

Trade and investment barriers

Local cartels/monopolists

Required social commitments in market (eg, provision of medical care, etc)

Strong local trade unions

23

17

15

14

13

10

10

9

9

8

8

7

7

7

6

6

5

4

3

2

How much of a barrier to growth to your business are the following operational and state-related issues in this market?(% respondents)


Russia is not alone in this; even countries known for their vast output of university graduates struggle. “Corporate India is in the unique position of being surrounded by one of the world’s largest populations but still desperately lacks quality talent,” says Vinod Nair, managing director for India at Diamond Management & Technology Consultants. In his view, this is largely a result of the country’s educational system, which has emphasised quantity over quality. As a result, companies such as Infosys and Wipro have been taking on a larger portion of the educational challenge themselves.

A further challenge for businesses, given the paucity of skilled people, is that promising graduates expect rapid career development once they are on board. “Building a career takes 20 years in Europe, but here in India people expect it in half the time,” says Mr Remund of DHL. Elsewhere, such as the Middle East, the high cost of local labour is the problem. “There is a lot of growth and a lot of demand for people, and that of course drives up salaries,” says Ralph Nitzgen, senior executive officer and general manager at Commerzbank in Dubai.

Relative to other regions, Latin America fares better on the availability of skills. Ms Goeser of Ford,

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Hanging on to key talent

In all markets, the availability of people with suitable skills and experience is a major factor in a company’s success. So what do companies do to attract and hang on to their top people? Across all emerging markets, association with a top brand (45%) and a clear career development path (43%) are the two key points. The next three points all broadly fall into third place: clear decision-making powers (27%), international training and development (3�%, and far ahead of local training at �9%) and higher salaries than rivals (30%, ahead of bonus schemes at 24%). Other factors—ranging from competitive pension schemes, housing allowances, healthcare, a company car, a free or cheap canteen—feature low on the list.

Many of the executives interviewed for this report cite training, especially abroad, as a key factor. Take Guangdong Dapeng LNG, for example, a joint venture between a Chinese state-owned company and BP that supplies liquid natural gas. It invests about Rmb3m (£235,000) annually on training for its 350 employees, or about Rmb8,570 per

employee, excluding specific technical training. David Pan, the company’s general manager for HR and shared services, believes this is crucial to the company’s success and ability to hang on to staff. “People say that life at state-owned companies is ‘soft’ and uncompetitive, but we find that taking care of our employees more or less supports us being productive and profitable during working hours.”

Of course, incentives vary by region and market. In Eastern Europe, a top brand to work for was rated far above anything else, while a company car allowance was noticeably more important than in other regions. In Latin America, the potential for overseas travel was more highly rated as a secondary reason than elsewhere, while Asians prized a clear career path far above all else. In the Middle East, decision-making power lay far down the list, while salary concerns were more important than elsewhere. In Africa, share options, while still some way down the list, appear more important to executives than elsewhere. In the energy sector, international training is rated as the top consideration, while overseas job rotations are much more important than elsewhere. Unsurprisingly, for foreign executives based in these markets, the potential for international rotation is the major concern—even subsidised or

Keymeansofattractingandretainingtoptalent,byregion

Total

Eastern

Europe

Latin

America Asia-Pacific

Middle East and

North Africa

Sub-Saharan

Africa

Association with our brand/reputation in the market 45% 5�% 40% 42% 48% 48%

Clear career development path 43% 32% 36% 50% 49% 50%

International training and development 3�% 34% 27% 28% 34% 34%

Higher salaries than rivals 30% 27% 23% 32% 37% 30%

Clear autonomy/decision-making powers 27% 22% 26% 38% 20% 23%

Bonus scheme 24% 27% 30% 20% 20% 2�%

Local training and development �9% �8% 23% �8% �9% 16%

Potential for overseas travel/job rotation �5% �4% �9% 16% �2% �5%

Share options/share incentive scheme �2% 6% �2% �3% ��% �7%

Healthcare insurance/benefits 8% ��% �2% 5% 7% 5%

Benefits for person’s family (eg, free/subsidised education) 5% 5% 6% 4% 7% 5%

Company car or allowance 5% �0% 6% 3% 2% 2%

Competitive pension scheme 4% 5% 6% 2% 3% 2%

Housing or allowance 3% 2% �% 2% 8% 2%

Free or subsidised canteen �% 2% �% 0% 0% �%

Source: Economist Intelligence Unit survey, June-August 2008.

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Which of the following are your company’s key means of attracting and retaining executives and other top talent (eg, specialist engineers) in this market? Select up to three(% respondents; Top 10 of 16 options shown)

Association with our brand/reputation in the market (ie, prestige of working for highly rate firm)

Clear career development path

International training and development

Higher salaries than rivals

Clear autonomy/decision-making powers

Bonus scheme

Local training and development

Potential for overseas travel/job rotation

Share options/share incentive scheme

Healthcare insurance/benefits

45

43

31

30

27

24

19

15

12

8


for example, has a high regard for Mexico’s labour force. She finds no problem in securing engineers to fill positions, although she concedes that the company invests reasonably heavily in training. A similar view is found in Turkey. “There is no problem in finding talented people especially for [firms] with a good brand,” confirms Handan Saygin, head of investor relations at Garanti Bank, a major Turkish bank. “The main challenge is in training graduate-level employees, incentivising and retaining them.” However, she notes a concern about high inflation, which requires the bank to adjust salaries regularly.

l Regulation, red tape and the state Following skills, the next biggest barriers to growth originate from the state. While political instability is much less of a concern for businesses than it used to be, red tape and tax and regulatory pressures are the key concerns: 68% and 66% respectively of executives globally cite these issues as at least moderate barriers to growth. This hits local firms and foreign firms alike, with Latin American firms battling most with tax and regulatory pressures, while African firms struggle the most with bureaucracy. From a sector perspective, energy and construction firms are hardest hit by red tape, as both are often required to deal with both local and national levels of government in their operations. “It depends on your sector, but my advice is to avoid the central government as much as possible,” warns Mr Matraszek of CEC Government Relations in Poland.

When it comes to the rule of law, Africa performs relatively weakly (�4% say that poor rule of law, a weak regulatory regime and restrictive business policies are major barriers to growth). In part, this

free education for children, the staple of many an expat package, remains far down the list.

In South Africa, companies such as Impala Platinum recognise the need to pay more for workers to cope with a skills shortage. However, it also invests in a range of other initiatives, such as a share option scheme

for workers and a R2bn (£140m) housing development scheme. “We want to try to encourage home ownership but instil pride among our workforce as well,” says David Brown, the company’s CEO. “If we can improve living conditions and the environment, then this results in a better, healthier workforce. It’s a good trade-off and is sensible business.”

�9


reflects the countries within the sample, of which only South Africa has a relatively long-established regulatory environment. And even there, specific policies, such as black economic empowerment initiatives and mining reforms, have met with much criticism from the private sector. Both Nigeria and Angola have only relatively recently stabilised from civil strife and war.

And despite the widely publicised collapse of the Doha talks, trade and investment barriers do not loom as a major issue. It was a low single-digit issue for the majority of respondents.

l Rising energy and raw material costsAnother major issue, perhaps unsurprisingly in the current climate, is that of rising energy and raw material prices. In all, 17% of firms believe this is a major barrier to growth. Obviously this hits manufacturers hardest (40% rate it as major), followed by construction firms (21%).

Rising costs worry executives across all regions, although especially within Africa (24% of firms there think it is a major barrier). “Rising costs are probably one of the most worrying things as it is becoming increasingly difficult to manage these,” says Graham Briggs, CEO of Harmony Gold, a mining firm. “Costs are coming from all quarters. Cost increases in steel, power, water and labour.”

For companies like TCL, a Chinese television maker, this concern is especially strong, as it faces a limited ability to raise prices, given the sector’s intensely competitive pricing. This, in turn, highlights another key pressure felt by companies across the sample: two-thirds of executives rated price competition from local firms as, at the very least, a moderate barrier to growth.

l Infrastructure shortagesOne possible surprise among the list of barriers is that of physical infrastructure, which is relatively low on the list of concerns. Just 9% see this as a major barrier, while 30% think it is not at all an issue. Across Africa, Latin America and Asia, businesses identify road and rail infrastructure as something of a concern, especially within manufacturing, energy and natural resource firms, all of which rely on logistics. “The big theme that comes up time and again is the general infrastructure, specifically airports, roads and rail. It is a huge problem when it comes to locating investment,” says Mr Matraszek. A further issue raised by many executives is the challenge of dealing with an inadequate supply of electricity (see box). Globally, 40% of respondents rated this as at least a moderate barrier.

Nevertheless, the general picture for infrastructure is that of improvement. The situation is most optimistic in Eastern Europe, where rapid development has boosted infrastructure, and the Middle East, with oil money funding grand infrastructure expansion plans. India has seen definite infrastructure improvement in recent years, with both its railways and telecommunications infrastructure becoming significantly more reliable. But major problems persist. “India has grown faster than just about anyone would have predicted, [with the consequence that] some areas are falling behind fast,” says Mr Nair of Diamond Management & Technology Consultants. “Air traffic has grown so fast that airports have become a major transport bottleneck.” Likewise, road infrastructure remains inadequate—Mumbai and Bangalore are classic examples of cities approaching gridlock.

l Corruption and crimeFor many Western executives, corruption is synonymous with emerging markets. Although just 8% regard this as a major problem, nearly one-half of all respondents (44%) cite it as at least a moderate barrier to

“It depends on your sector but my advice is to avoid the central government as much as possible.”Marek Matraszek, founding partner & managing director, CEC Government Relations

20


growth. Foreign companies appear to suffer slightly more, perhaps because of their need to comply with home country regulations.

Overall, just one in four companies cite corruption as no barrier at all, far below the proportion for issues such as access to capital, infrastructure concerns and crime. Asia and Africa are hardest hit here, while the Middle East does best. In interviews, few executives, unsurprisingly, admit to any kind of backhanded affairs to getting business done. Nevertheless, kickbacks and bribes remain relatively prevalent. One businessman notes that within his industry it is simply referred to as “olive oil” and is a standard part of securing deals. Another consultant notes that although corruption has been reduced at higher levels in his country, it is still prevalent at the local level, affecting zoning and licensing, for example.

Overall, nearly three in ten executives—or over 350 businesses in total—agree that for many firms, paying bribes is a standard part of doing business. This ratio remains consistent across all regions and within both domestic and foreign firms. All industries appear to be affected, with more obvious capital-intensive sectors, such as construction and energy, slightly worse. Encouragingly, however, a higher proportion of respondents—four in ten—disagree that bribes are the norm in their industry. Perhaps linked to this is the relative use of informal “social” contracts, made outside of a formal legal arrangement. In all markets polled, more executives disagree than agree that this is widely used to get business done.

Aside from corruption, Africa is also hard hit by crime—nearly one-quarter (23%) of respondents in the region say that it is a major barrier to growth, whereas just �0% of executives in Latin America, the second-worst continent, agree.

Power cuts ahead

In January this year, South African businesses were suddenly forced to grapple with a nationwide shortage of electricity. The problem resulted from rapidly increasing demand for power across the country, combined with a long-running lack of investment in energy infrastructure. As a result, firms have had to adjust to power rationing and a major nationwide campaign to reduce demand for energy. The dip in production during the first quarter has already caused a spike in commodity prices, such as platinum.

David Brown, the CEO of Impala Platinum, says his firm has responded by investing R100m (£7.4m) in generators, to ensure that in the event of a blackout workers can still be safely evacuated from its mines. It has also embarked on a range of power-saving initiatives, enabling it to squeeze close to 100% production on just 90% power utilisation. But the real challenge is that new energy supply is unlikely to come online before 20�2. The company even considered building its own power station, but ruled that out, in part owing to the country’s

shortage of skills. South Africa is not alone in this problem. The US Central

Intelligence Agency (CIA) reported in July 2008 that at least 90 countries or dependent areas—accounting for over one-half of the world’s population—are suffering serious energy shortages. Guangdong province, China’s manufacturing hub, has had to deal with an estimated �0 gw shortfall at the peak of its crisis earlier this year, which was exacerbated by record snowfalls. Chile has been dealing with reduced natural gas supply from Argentina and a lower than average rainfall, which has pushed up electricity spot prices. “Generation capacity is now dangerously low as a result of populist regulatory changes enacted in �999 that discouraged new investment in electricity generation for five years,” says Richard Claro, head of Chile’s Claro Group, a conglomerate. Many hydroelectric and coal-fuelled plants are now being built to alleviate the problem, but this will take time. “Meanwhile, electricity has become awfully expensive, and the country’s energy security position is precarious and will remain so for two or three more years,” notes Mr Claro.

2�


Once the necessary obstacles have been overcome, the next key question is what it takes to actually succeed in these markets. Although different industries and markets necessarily vary, two broad

points emerge from this survey. One is the need to deliver strong product or service quality, ahead of price

Succeeding in emerging markets

High quality products/services

Competitively priced products/services

Ability to move and adapt rapidly

Good local contacts and relationships

Ability to attract and retain the best local talent

Strong brand appeal

Appreciation of local consumer culture/values

Flexibility and innovation in structuring deals/offers

Appreciation of local business/regulatory norms

Selling through appropriate sales channels

Good appetite for risk

Highly efficient supply chain

Willingness to share knowledge with local partners

56

41

32

26

24

24

17

16

14

11

11

10

3


In your view, which of the following factors are most important to your company’s success in this market? Select up to three (% respondents)

Key points

n Providing high quality goods and/or services is seen as the number one factor for success in these markets, a viewheldacrossallindustrysegments

n Moregenerally,abroadlocalengagement–goodlocalcontacts,hiringthebestlocaltalentandunderstandinglocalbusinessandconsumernorms–isimportant

22


or branding (although the latter is often closely related). Another is the need for a deep local engagement: establishing good contacts, appreciating local culture and business norms, and engaging with local talent.

A focus on product qualityJust a decade ago, it was easy to find examples of firms simply shipping off any end-of-line or obsolete goods, such as computers or television sets, for sale in emerging markets. Today, the number one success factor selected by executives responding to this survey, by some margin, is high-quality products/services. Nearly six out of ten firms (56%, rising to 74% for professional services firms) cite this as the key driver for their success in these markets. “Quality is critical to our business and our business is driven by the quality of the products and services we offer,” says Mr Remund of DHL.”

Of course, price does matter, and many consumers in these markets are highly price-sensitive, but this is secondary to quality (4�% selected this), followed by a strong brand (24% on average, but much higher for consumer goods firms). This picture broadly holds out across all industry segments. Price is particularly important for manufacturers, construction firms and IT or technology providers. Brand appeal obviously mattered most to consumer good firms. More generally, the ability to move quickly was also seen as important across all industries.

Of course, for many consumers high quality is directly linked to brand strength, a key point that foreign companies seek to exploit when entering new markets. This is a major challenge for domestic firms, such as Spykar Lifestyles, an Indian jeans producer. “As a local brand, we face an inherent problem that in India anything foreign is automatically seen as better than anything local,” says Sanjay Vakharia, the company’s director of marketing. At its inception in the early �990s, the company competed with numerous domestic rivals, but just two foreign brands: Wrangler and Pepe jeans. Since then, reports Mr Vakharia, almost all of these domestic brands have disappeared. In his view, they lost out because of their

Keysuccessfactors,bymajorindustry

Financial

services Manufacturing

IT and

technology

Consumer

goods

Energy & natural

resources Healthcare

High-quality products/services 53% 64% 59% 52% 36% 64%

Competitively priced products/services 36% 48% 54% 42% 35% 34%

Ability to move and adapt rapidly 36% 34% 3�% 2�% 28% 36%

Good local contacts and relationships 28% 22% �5% 7% 35% 26%

Ability to attract and retain the best local talent 29% 20% 27% �8% 29% 23%

Strong brand appeal 24% 22% 25% 4�% ��% 30%

Appreciation of local consumer culture/values 16% 16% �9% 3�% ��% ��%

Flexibility and innovation in structuring deals/offers 20% �2% �8% �0% �2% �9%

Appreciation of local business/regulatory norms �4% 7% �4% 9% 25% �5%

Selling through appropriate sales channels 9% �4% �4% 25% �0% �3%

Good appetite for risk �9% 9% 7% 5% ��% 4%

Highly efficient supply chain 3% �8% 5% 22% 23% 4%

Willingness to share knowledge with local partners 3% 2% 4% 4% 7% 2%

Source: Economist Intelligence Unit survey; June-August 2008

“The quality of brand image is the most important element when a customer decides to buy a product, especially if it is in the higher price range.”Paulo Zottolo, CEO for Latin America, Philips Brazil

23


failure to build a strong brand and retain customers for repeat sales. “Over the last five years we haven’t seen any Indian brands really coming up in the market,” he says.

Some executives even argue that brands have become even more important in these markets than in mature countries. Paulo Zottolo, the CEO for Latin America at Philips in Brazil, argues that brand loyalty is greater in emerging markets than in mature countries. “The quality of brand image is the most important element when a customer decides to buy a product, especially if it is in the higher price range.”

In Thailand, a major local brewer, ThaiBev, has even adopted a strategy of developing products with similar brand attributes to foreign competitors—but with a distinctly “Thai” feel—to go after the market space they occupy today. ThaiBev recently launched its “Federbräu” beer, which has been positioned to compete with the “old world” and “master brewer” branding of the high-end European beers in the market. “We used international branding and packaging consultants to help us develop a look and feel that would be of international standard,” says Jean Lebreton, a senior vice-president at the company and head of strategy and business development.

Also gone are the days when firms expected their products to sell in other markets without any localisation. Although a fair proportion (16%) of firms polled do not customise their offering at all for these markets, 18% now customise them heavily—and the majority (60%) do at least some modification of the product, even if it is only an update of the packaging. IT companies have introduced advanced dust protection for the PCs they sell in India, as one example. “The challenge not only for Philips but for all multinationals in emerging markets is the change of mentality in order to sell existing products that are adapted to local consumer taste with minor changes,” says Mr Zottolo. “These may be aimed at more affluent consumers, while also meeting specific needs and latent aspirations of a broader, less affluent range of consumers.”

What of profit margins in these countries? This presents another surprise: emerging markets are seen as sources of low-cost wares, from consumer durables to business process outsourcing, thus suggesting razor-thin margins for most firms. Not so. The majority of executives consider margins of between 10% and 40% to be the level they aim for in these emerging markets—about two-thirds of all respondents selected a value within this range. A lucky minority (5%) seek margins of 60% or more, whereas a larger minority (10%) aim for single-digit margins. None of this implies that profits are easy to come by. About two-thirds of respondents noted price competition from local firms as a barrier to growth.

Deep local engagement Beyond product and brand-related issues, key success factors involve a localisation element. A major one is establishing good local contacts and relationships (26%), followed by the ability to attract and retain the best local talent (24%) and an appreciation of local consumer culture and norms (17%). Naturally, consumer goods firms were far more interested in the latter point, whereas good local contacts matter most for professional services firms, along with natural resource and construction firms.

Indeed, cultural understanding is something repeated by many executives in interviews, despite the fact that the majority of the respondents to this survey agree that these emerging markets are becoming increasingly “Westernised” in how they conduct business, especially within Eastern Europe and the Middle East.

Nevertheless, foreign firms fail to grapple with local cultural norms at their peril. “The biggest barrier

“As a local brand, we face an inherent problem that in India, anything foreign is automatically seen as better than anything local.”Sanjay Vakharia, director of marketing, Spykar Lifestyles

24


is the cultural difference,” says Mr Nitzgen of Commerzbank. In his experience, business in the Middle East requires a change of behaviour and lifestyle. “There is for example a different perception of time. You need to invest more time in a relationship. Some people try to come here and just sell a product. That is the wrong approach; things do not work like that here.”

From an industry perspective, this affects companies across the sample. When operating in these markets, executives agree that management and leadership style changes most of all (27% say this has changed significantly, although 28% say it did not change at all), followed by product pricing (26% say this has changed significantly) and the approach to HR (24%). This is not just a foreign company issue. Cultural concerns also apply to domestic companies, especially as they adapt to a globalised marketplace. In Brazil, for example, Itaú Financial Holding has had to adapt to a new era of increased competition, open markets and deregulation. “We had to introduce new elements in the corporate culture to adapt to the new reality,” says Mr Setubal, the bank’s CEO. “The [corporate culture] used to be strongly structured and organised, but it was very bureaucratic and not really dynamic.” In his view, this change in culture has helped to improve the company’s competitiveness with foreign banks entering Brazil. “When they come to Brazil, foreign banks have a lot of difficulty to compete with local institutions that know the country well.” Of course, foreign banks do have advantages, he concedes, especially with regard to their risk diversification and their international experience.

Evolving from low cost to high quality

China is well known as the world’s workshop, a seemingly endless source of low-cost goods. But there are two key pressures being applied to this position: one is the country’s steadily rising average incomes, which is changing the nature of domestic demand; the other is the growing prominence of foreign competitors that are better able to cater to the high-quality niche. “In China and the richer developing countries, companies such as LG and Samsung are taking up more market share, since consumers are upgrading their products and are unable to find higher-quality goods with local producers,” explains Aaron Tong, general manager for TCL Corporation’s strategy and investment centre in Shenzhen, China.

In Mr Tong’s view, many Chinese white goods and electronics companies grew by chasing low-cost production for the local and global markets. They thrived as original equipment manufacturers (OEMs), but failed to invest early on in R&D development. “As markets mature, these producers now need to learn how to manage skilfully research, product development and information. In market-oriented developing countries, foreign brands already make up the majority of market share,” he argues. “But there will definitely be a shake-out as global brands gain more market share and local brands either upgrade to compete head to head, or exit because they can’t keep up.”

But this is not just a manufacturing story—and emerging-market

firms are not always playing catch-up. Some are actively leading the way. Take Discovery Holdings, a South African healthcare and insurance firm. Over a decade ago, the company decided to turn the typical approach to healthcare on its head, by providing incentives to its members to ditch unhealthy habits and start spending more time exercising, eating healthily and getting regular check-ups. In its Vitality wellness programme, members accrue points for engaging in healthy activities (for example, each time they go to the gym). In turn, these points can be traded for a wide range of rewards, such as free gym membership, flight discounts and cinema vouchers. “We provide massive incentives for people to get into better shape,” says Barry Swartzberg, a group executive director at the company.

Today, 60-70% of the company’s members participate in the scheme. In turn, they make far fewer healthcare claims, which is the key incentive for Discovery. This kind of thinking has been adapted across all of the company’s product lines, including life insurance. Its policies allow for dynamic pricing, so that people making healthier choices in their day-to-day life are able to lower their premiums—throughout the life of their policy. “It’s put us in a different realm,” says Mr Swartzberg. This is not only true in South Africa’s healthcare market, where the company has grabbed healthy double-digit market shares, but it is now actively making forays abroad. It already offers products in both the US and the UK and is now eyeing out territories in India, China and other emerging markets. Domestic insurers beware.

25


Barring market entry, the issues addressed within much of this report apply equally to both foreign and domestic firms—dealing with risks, overcoming barriers and winning new customers. But how

do the domestic firms feel about the competitive challenge from their foreign rivals? Of course, as noted earlier, foreign firms are far from new within most of these markets. But as these countries continue to stabilise and grow, they will become natural targets for yet more foreign entrants. As it happens, the majority of domestic firms polled for this report feel they are well positioned to overcome such a threat. Eight in ten say they are somewhat well positioned or well positioned to do so. Just 4% say they are not.

Specifically, the advantages are most keenly felt in brand strength (35% say this is a strong advantage) and distribution channels (30%), as well as the depth of skills and experience (29%) and management expertise (30%). So far, no surprise—indeed, foreigners feel much the same about their advantages over domestic firms, along with an edge in access to capital and product development. However, a key weakness for foreign firms is that local firms hold stronger local contacts (48% of domestic firms feel this to be a strong advantage). This benefits local firms in a variety of ways. For example, Spykar Lifestyles, an Indian jeans producer, has a network of about 200 retail outlets, giving it an in-built advantage over any new rival. “Our deals were struck yesterday, at yesterday’s prices, so our network is much cheaper to maintain than it would be if we had to go out now and build it up from scratch,” says Mr Vakharia, the company’s director of marketing.

One of the key weaknesses for domestic firms is access to capital, which over 40% of respondents say is either a disadvantage for their firm or no advantage at all. In part, this is being addressed by increasing stockmarket participation across emerging markets. Across this sample, nearly one-half (45%) of the domestic firms polled are publicly listed, either at home or abroad. Much of the rest are privately owned (38%), of which a significant minority (10%) are family-owned. Family-dominated businesses face other challenges. “One negative trait in many Indian corporates is a decision-making process that goes all

Defending their turf: adapting to the challenge of foreign rivals

Key points

n Most domestic firms feel well positioned to take on the competitive threat of foreign rivals

n Domestic firms feel strong on most aspects of their business, but access to capital is a weak point. Family-ownedcorporatestructurescanalsobringmixedblessings

26


the way to the top—to the family—which means senior and middle-level management can be hesitant to take bold decisions because of the dominating presence of the family,” says Mr Nair of Diamond Management & Technology Consultants. On the flip side, many Indian companies have broken out of the family-owned legacy, and are now run as professional companies with local Indian talent. In those cases, argues Mr Nair, Indian managers are often more willing to take risks and think outside the box than their

How much advantage or disadvantage does your company hold over foreign rivals in this market? (% respondents)

30Distribution channels

10Intellectual property/patent stock

16Access to natural resources

48Local contacts/relationships

15Product development

30Management experience/expertise

23Customer service

35Brand strength

16Labour costs

28Depth of skills/ experience

23Access to capital


Competing with foreign rivals: an Indian perspective

According to Vinod Nair, managing director at Diamond Management & Technology Consultants, Indian companies have adapted four key parts of their business in order to compete better with their foreign rivals. These include improved product quality, better processes, an increased global presence and a renewed focus on people.

Higher product and service quality: Indian firms have had to step up to match international quality standards. Consumers are increasingly exposed to high-quality products from abroad, which pushes local firms to keep up. Nevertheless, in some sectors, local quality standards have always been high. Jet Airways and Kingfisher Airlines, for example, match international standards on their flights.

Better processes and systems: This is particularly important as growth starts to slow. “It was easy when the market was booming to rely on a few smart people to drive growth,” says Mr Nair. “Now we see our clients becoming more willing to invest heavily in IT, build their

capabilities in R&D and strengthen internal processes—financial, accounting, performance monitoring, and the like.”

Going global: “For leading Indian corporates this is no longer a “nice to have”, but is now essential for them to compete against multinational firms in their home market,” argues Mr Nair. These companies are starting to realise the benefits of being a global company: operating across markets and having access to global consumers and global talent. ICICI Bank, for example, is learning from the experience of serving both Indian expatriates and customers in Western markets.

People development: Indian companies are starting to realise that multinationals have had many more years of experience in recruiting, training, coaching and promoting people, and from which lessons can be learned. Hindustan Unilever, Proctor & Gamble and Nestle are rightly seen as model companies from which the basics of marketing, branding and distribution can be harnessed. In the IT market, firms such as Accenture and IBM provide up and coming local companies with benchmarks on how to develop talent.

27


international counterparts. Despite the competitive threat that foreign firms bring, collaboration with them is high on the

agenda for domestic firms. More than one-half (55%) of all local companies polled already do so. Most of the balance would consider it, or currently are putting such a collaboration in place. Just 11% are against the idea. The rationale behind this is primarily to gain access to management expertise, despite the fact that many local firms feel that to be an advantage, which is possibly a nod to the talent shortages noted earlier. Beyond this, being able to grow faster in international markets, along with access to R&D and technology, are key reasons for linking up. Such motives have been witnessed in major acquisitions over the past few years: the Tata Group’s purchase of Jaguar and Land Rover, Lenovo’s acquisition of IBM’s PC business and Haier’s attempted purchase of Maytag are all examples of these desires in action.

Despite their confidence about outdoing their international rivals, local firms have clearly changed the way they work in order to compete better. In particular, branding and management style have been changed—at least one in five firms reckon that significant changes have been made. In some regions, foreigners themselves are the ones leading such changes, along with returning expatriates who are asked to head up local firms. The Middle East is most striking for its reliance on foreign workers. For example, 28% of firms in that region say their CEO is a foreign worker, while 44% say the same for their CFO. There is also a high reliance on repatriated employees in both the Middle East and Eastern Europe, where at least one in ten firms is run by a repatriated employee.

Doing business in Angola

The Angolan economy has undergone a significant transformation in recent years, recovering from its debilitating civil war to become one of the fastest-growing economies in the world—expanding by nearly �7% in 2007 alone. Although this is primarily a result of its significant oil reserves, which made it the largest oil producer in Sub-Saharan Africa this year, business is booming across just about every sector.

Refriango, an Angolan soft drinks manufacturer, is one example. The company has grown from nothing to a dominant market position in just four years. Perhaps surprisingly, executives say the key to its success has been product quality. As there is no history of domestic production of soft drinks, the company has had to work to build confidence in its products, for example by running Angola’s first-ever national marketing campaign for a local product. Of course, the firm faces many challenges, not least the country’s infrastructure restraints. Port blockages mean delays in the import of key ingredients, while night-time deliveries are not possible, owing to a lack of adequate street lighting, security and warehousing facilities. All this adds to operating and financing costs. Despite these setbacks,

however, the firm continues to expand rapidly. Another example is Sistec, an IT firm. Around 80% of its business

comes from the government, reflecting the reality for most of Angola’s private companies. It is an official business partner for IBM, one of several lines of business, and already faces competition from the likes of Dell, an indication of the country’s rapid competitive development. In fact, Rui Manuel Dos Santos, the company’s chairman and CEO, rejects many of the criticisms made of Angola’s business environment, in particular the complaint that it is difficult for foreign companies to establish a foothold.

Of course, plenty of barriers do exist. In Mr Dos Santos’s view, one of the key ones relates to import delays. Acute congestion at Luanda’s port is what he terms “the crisis of growth”, resulting in an average three-month delay to import goods from Europe. Another concern is the competition for skills. Many foreign companies implementing mega-contracts plan to hire foreign experts, but once they set up in Angola they struggle to get work permits so they instead recruit the best Angolans, at the expense of local firms. This is not to say that there is a lack of skills. A job advert for an IT engineer in a local newspaper generated dozens of applications, says Mr Dos Santos, a direct result of heavy training during the Communist era. The key problem is simply a lack of experience and track record.

“One negative trait in many Indian corporates is a decision making process that goes all the way to the top—to the family—which means senior and middle level management can be hesitant to take bold decisions because of the dominating presence of the family.” Vinod Nair, managing director for India, Diamond Management & Technology Consultants

28


As described at the beginning of this report, companies have been cashing in on the boom in emerging markets over the past decade. The question is whether this growth will last, as countries grapple with

rising energy and commodity costs, along with a slowdown in the West, among other challenges. Right now, the response from executives in these markets is absolutely clear: 87% of firms polled are

optimistic about revenue growth over the next two years (just 3% are pessimistic); and 79% are optimistic about profitability (6% are not). Clearly there will be losers too, but few firms appear to feel much concern today. In the Middle East, for example, Mr Nitzgen of Commerzbank highlights the enormous potential: “There are trillions of dollars worth of new projects coming up.” These projects are also aimed at reducing the Gulf economies’ dependence on oil, by expanding into manufacturing and services.

Of course, not everything is rosy. About six in ten executives agree that an economic slowdown across developed markets will have a major impact on business, as these countries still account for the lion’s share of global demand. Asian and Latin American businesses feel particularly exposed. “The crisis is challenging for all countries, and Mexico is no exception,” says Ms Goeser of Ford. “Yet the Mexican economy is far more insulated from the US than in the past, as exemplified by its stronger financial management, and the country has come a long way from previous crises.”

Is the emerging-market growth story set to continue?

Revenue growth

Profitability

Market share growth

46 41 9 3 1

34 44 14 5 1 1

32 41 19 4 1 2

Very optimistic

How optimistic are you about your company’s prospects within this market over the next two years, in terms of each of thefollowing? (% respondents)

Somewhat optimistic Neither optimistic nor pessimistic

Somewhat pessimistic Very pessimistic Don't know/Not applicable


Key points

n Nearlynineoutoftenexecutivesintheseemergingmarketsfeelthatrevenuegrowthissettoremainstrong,most of them also feel the same about profits

n Manyofcharacteristicweaknessesofthesemarketsareslowlybeingaddressed,butglobaleconomicpressuresremainamajorconcern

29


Others agree. “[The economic slowdown] is going to have an indirect impact on emerging markets, but I believe emerging countries will continue to experience robust growth,” says Mr Setubal of Itaú. What is common across many of these countries is the ongoing emergence of a new middle class, which has never before been adequately catered for. Mr Latif of the Bank of Alexandria, for example, says growth will come from the simple fact that few Egyptian citizens have any banking products today: just 7m-8m out of a total population of 78m hold any kind of account. This provides an array of opportunities for financial services firms like his. The bank launched a microfinance programme in January 2008, which has since acquired more than 30,000 customers, an indication of the country’s pent-up demand.

Another benefit stems from these countries’ ongoing efforts to improve their business environment. At one extreme is Angola, where businesses are scrambling to fill the void left by years of civil war (see box). At another end, established markets such as India are slowly but surely improving their business environment. “Corporate India in general is fairly bullish about India’s growth prospects in the long term, and this is a reflection of a broader sense of optimism across Indian society as a whole,” notes Mr Nair. “If you look at the historical reasons why growth in India has been constrained–lack of access to capital, onerous red tape, infrastructure weaknesses–most are now largely being addressed.”

This broadly summarises the view held by nearly all executives interviewed for this report. Despite ongoing and inevitable setbacks in individual markets and industries – and a general cooling of the global economy – the overall outlook amongst business leaders within emerging markets remains bright.

“[The economic slowdown] is going to have an indirect impact on emerging markets, but I believe emerging countries will continue to experience robust growth.”Roberto Setubal, CEO, Itaú Financial Holding

30

© Economist Intelligence Unit Limited 2008AppendixMethodologies


1. Business environment rankings overviewThe business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by Country Forecasts using a standard analytical framework. It is designed to reflect the main criteria used by companies to formulate their global business strategies, and is based not only on historical conditions but also on expectations about conditions prevailing over the next five years. This allows the Economist Intelligence Unit to use the regularity, depth and detail of its forecasting work to generate a unique set of forward-looking business environment rankings on a regional and global basis.

The business rankings model examines ten separate criteria or categories. Each category contains a number of indicators that are assessed by the Economist Intelligence Unit for the last five years (historical period) and the next five years (forecast period). The number of indicators in each category varies from five (foreign trade and exchange regimes) to 16 (infrastructure), and there are 91 indicators in total.

Overall position

Political environment

Political stability

Political effectiveness

Macroeconomic environment

Market opportunities

Policy towards private enterprise & competition

Policy towards foreign investment

Foreign trade & exchange controls

Taxes

Financing

The labour market

Infrastructure

Almost half of the indicators are based on quantitative data (for example, GDP growth), and are mostly drawn from national and international statistical sources for the historical period (2003-07). Scores for the forecast period (2008-�2) are based on Economist Intelligence Unit forecasts. The other indicators are qualitative in nature (for example, quality of the financial regulatory system), and are drawn from a range of data sources and business surveys, frequently adjusted by the Economist Intelligence Unit, for 2003-07. All forecasts for the qualitative indicators covering 2008-�2 are based on Economist Intelligence Unit assessments.

Appendix 1: Methodologies

3�



Businessenvironmentrankings

Value of index1 Global rank2 Regional rank3

2003-07 2008-12 2003-07 2008-12 2003-07 2008-12

1. Value of index is out of 10. 2. Global ranking is out of 82 countries. 3. Regional rank varies by region, as follows:

Middle East and Africa (17 countries): Algeria, Bahrain, Egypt, Iran, Israel, Jordan, Kuwait, Libya, Morocco, Qatar, Saudi Arabia, Tunisia, UAE, Angola, Kenya, Nigeria and South Africa.Latin America (12 countries): Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Mexico, Peru and Venezuela.Eastern Europe and the former Soviet Union (16 countries): Azerbaijan, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Kazakhstan, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine.Asia-Pacific (17 countries): Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam.

2. Operational risk modelThe operational risk model provides a standard framework for the analysis contained in the Economist Intelligence Unit’s Risk Briefing. It quantifies the risks to business profitability in each of the countries covered by the service. In these assessments, we take into account current conditions and our expectations for the coming two years. The model considers ten separate risk criteria, which encompass a total of 66 specific indicators:

l securityl political stabilityl government effectivenessl the legal and regulatory environmentl macroeconomic risksl foreign trade and payments issuesl labour marketsl financial risksl tax policyl the standard of local infrastructure

The ten criteria are assessed on a scale of 0-100, with 0 indicating very little risk to business profitability and 100 indicating very high risk. All of the 66 indicators are scored on a scale from 0 (very little risk) to 4 (very high risk). Every indicator is given the same weight within its category. The overall assessment is a simple average of the scores for the ten categories. None of the countries assessed earns a score of 0 or 100. This reflects the fact that risks are present even in the least risky countries and that even at the other end of the scale the risks could yet increase.

Ultimately, the ratings and scores for the operational risk model rely on the expert opinion of the Economist Intelligence Unit’s analysts working in regional teams. These analysts have a wide range of

32



open and closed sources at their disposal. One of the main closed sources is our network of in-country experts, who provide detailed, regular information on conditions within a country. The business operating risk model also draws on the existing analytic work already developed at the Economist Intelligence Unit through its Country Risk Model and business environment rankings. The use of open sources is extensive and includes country-specific sources such as central bank reports, statistical yearbooks and country websites. International open sources include publications from the UN, CIA, IMF, World Bank, Heritage Foundation, International Institute for Management Development, International Labour Organisation, US Social Security Administration, World Economic Forum, Interpol and the US Commerce Department.

Overview of risk categories

Security risk: Is the physical environment physically secure? This category asks: Is this country presently subject to armed conflict or is there at least a moderate risk of such conflict in the forecast period? Is armed conflict likely to be contained? Are violent demonstrations or violent civil/labour unrest likely to pose a threat? Has one of the parties in the armed conflict or demonstrations/civil unrest shown hostility to foreigners or private ownership? Is violent crime or organised crime likely to be a problem? What is the risk of kidnapping and/or extortion?

Political stability risk: Are political institutions sufficiently stable to support the needs of businesses and investors? This category asks: What is the risk of significant social unrest during the next two years? How clear, established and accepted are constitutional mechanisms for the orderly transfer of power from one government to another? How likely is it that an opposition party or group will come to power and cause a significant deterioration in business operating conditions? Is excessive power overly concentrated, or likely to be concentrated? Will international disputes/tensions have a negative effect on the economy and/or polity.

Government effectiveness risk: Does the political culture foster the ability of business to operate effectively? This category asks: Is the present/prospective government likely to espouse and implement open, liberal and pro-business policies for nationals and foreigners? What is the quality of the bureaucracy in terms of overall competency, morale, status and so on? How pervasive is red tape? To what degree do vested interests/cronyism distort decision-making in the public and/or private sectors? How pervasive is corruption?

Legal and regulatory environment risk: Will the legal system safeguard investment? This category asks: How vulnerable is the legal process to interference or distortion to serve particular interests? What is the risk that contract rights will not be enforced? To what extent is the judicial process speedy and efficient? To what extent do the authorities favour domestic interest over foreign companies? How much risk is there of expropriation of foreign assets? How reliable is the protection of intellectual property? To what degree are private property rights guaranteed and protected?

Macroeconomic risk: Is the economy stable and predictable? This category asks: What is the risk of exchange-rate volatility? What is the risk that the economy will

33



experience a recession or price instability during the next two years? What is the risk of crowding out as indicated by the domestic public debt/M2 ratio? What is the risk of interest rate volatility in the domestic financial markets?

Foreign trade and payments risk: Can inputs/money get into or out of the country? This category asks: What is the risk that the country will be subject to a trade embargo? What is the risk that a financial crisis could curtail access to foreign exchange for direct investors? What is the risk of discriminatory tariffs? What is the risk of excessive protection in the next two years? Can investors move money in and out of the country, make payments for goods and services and access foreign exchange without restriction?

Financial risk: What is the risk of a major devaluation? This category asks: What is the availability and depth of financing in the local market? Is there a liquid, deep local-currency-denominated fixed-rate medium-term bond market in marketable debt? What is the risk of a systemic crisis in the banking sector? How liquid is the stockmarket?

Tax policy risk: Are taxes low, predictable and transparent? This category asks: Is the tax regime clear and predictable? What is the risk that corporations will face discriminatory taxes? Is the corporate tax rate low (or is the prevailing rate of corporate tax actually paid low)? What is the risk from retroactive taxation?

Labour market risk: Are labour market factors likely to disrupt business operations? This category asks: How much power do trade unions wield? How common are labour strikes? How restrictive will labour laws be in the next two years? What is the risk that finding skilled labour will be a problem? To what extent are increases in wages directly related to productivity increases?

Infrastructure risk: Will infrastructure deficiencies cause a loss of income? This category asks: What is the risk that port facilities, air transport, the retail and wholesale distribution networks, the telephone network and the ground transport network will prove inadequate to business needs? What is the risk that power shortages will disrupt business activities? What is the risk that the information technology infrastructure will prove inadequate to business needs?

34

© Economist Intelligence Unit Limited 2008AppendixOverview of business environments


AngolaBusinessenvironmentrankings

Value of index Global rank Regional rank

2003-07 2008-12 2003-07 2008-12 2003-07 2008-12

Overall position 3.54 4.23 82 82 17 17

Political environment 2.0 2.6 82 82 �7 �7

Political stability 2.9 3.3 8� 80 16 16

Political effectiveness �.3 2.0 82 82 �7 �7

Macroeconomic environment 6.3 6.9 70 59 �4 �3

Market opportunities 5.� 6.1 70 47 �4 ��

Policy towards private enterprise & competition 2.0 2.5 8� 80 �7 16

Policy towards foreign investment 2.8 4.2 80 75 16 �5

Foreign trade & exchange controls 3.7 4.6 76 78 �3 �4

Taxes 5.0 5.7 68 64 �3 ��

Financing 2.5 3.6 76 80 �5 16

The labour market 3.4 3.4 82 82 �7 �7

Infrastructure 2.7 2.8 79 80 �5 16

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to Angola’s environment is detailed below.

InfrastructureMassive investment is set to transform Angola’s infrastructure. The first phase of reconstruction, involving rehabilitation of the three main railway lines, the north-south motorway, and the water and electricity networks, is due for completion by 20�0. This will be followed by a more ambitious second phase, including construction of a new railway line from Namibe to the enclave of Cabinda, the creation of a dozen new cities and the construction of 1m new houses. This should reduce transport costs and delays, and create new opportunities for investment in the Angolan interior. However, given the acute bottlenecks at Angola’s ports and the government’s weak capacity to execute capital expenditure, it will take decades before a fully functioning infrastructure is in place.

Labour force and immigration proceduresShortages of experienced professionals and skilled manual labour are set to continue, given the poor

Appendix 2: Overview of business environments

35



quality of education and the high labour demand of the national reconstruction programme. Although the government is investing heavily in improving education, it will be many years before this feeds through into the workforce. Reform of the emigration directorate, Direção de Emigração e Fronteiras de Angola (DEFA), should make it easier for firms to secure visas and work permits for foreign professionals, although it is expected to be some time before improvements are noticeable.

Privatisation and competitionThe government is set to revive its privatisation programme with the creation of Luanda’s stock exchange, Bolsa de Valores de Angola (BVA), which is due to start trading in late 2008. Parts of the state-owned oil and diamond companies, Sonangol and Endiama respectively, are expected to be floated on the exchange, along with the national telecoms company, Angola Telecom. The banking sector, which has expanded dramatically in recent years, could undergo major consolidation.

Key indicators 2008 2009 2010 2011 2012

Population (m) 17.5 18.0 18.5 19.0 19.5

Real GDP growth (%) 15.1 9.8 9.3 9.8 10.1

Consumer price inflation (av; %) 12.5 12.3 11.8 11.3 12.2

Exchange rate Kz:US$ (av) 75.7 76.4 78.7 81.7 83.3

Inward direct investment (US$ bn) 2.3 2.6 1.9 2.3 2.0

Risk rating

July 2008 score and change from 2002

Categories 2008 score Change from 2002

Overall evaluation 54 -7

Security risk 21 -11

Political stability risk 55 -15

Government effectiveness risk 89 -4

Legal & regulatory risk 80 0

Macroeconomic risk 35 -30

Foreign trade & payments risk 29 -7

Financial risk 50 -8

Tax policy risk 44 0

Labour market risk 57 0

Infrastructure risk 81 3

36



BrazilBusinessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12


Political environment 6.2 6.2 40 4� 3 4

Political stability 8.� 8.� 20 �8 3 2

Political effectiveness 4.5 4.5 52 59 4 8

Macroeconomic environment 7.5 8.0 47 22 5 2

Market opportunities 7.6 7.4 �3 �2 2 �

Policy towards private enterprise & competition 6.5 6.8 3� 37 2 3

Policy towards foreign investment 7.3 7.3 32 40 3 5

Foreign trade & exchange controls 6.9 7.8 49 5� 5 7

Taxes 4.7 5.0 7� 74 �� 0

Financing 7.0 7.8 27 29 3 2

The labour market 6.3 6.5 43 45 5 7

Infrastructure 5.4 6.2 48 47 4 2

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to Brazil’s environment is detailed below.

InfrastructureImproving Brazil’s physical infrastructure is one of the government’s main goals. Road concessions resumed in 2007 and more auctions are planned. In telecommunications, advances in regulation and private investment will continue to drive improvements. Ongoing public and private investment will increase energy supply in the medium term, but a small risk of power-rationing measures remains in the short term. Bottlenecks in air traffic will ease, but at a slow pace. New investment in private port terminals is expected to boost capacity and reduce delays.

Tax and labour The tax system will remain the major weakness of Brazil’s business environment. A tax reform bill sent to Congress in February 2008 aims to simplify Brazil’s burdensome tax regime and is likely to be approved by end-2009. But businesses will continue to face a high tax burden. Taxation on oil and mining operations are due to increase. Political will to reform the labour market, in order to ease cumbersome hiring and firing procedures, will remain weak. The education level of the workforce continues to rise but skills shortages persist.

37



Privatisation and competitionPublic concessions in infrastructure have been awarded to companies that are committed to charging the lowest rates to end users, as opposed to the highest bidders as in the past. This model is likely to be maintained. Following the recent discoveries of large offshore oil reserves, the government may move from a model of concessions to the private sector to a production-sharing framework. A new model to attract private investment to port terminals is due to be unveiled. The Empresa Brasileira de Infraestrutura Aeroportuária (Infraero, the state-owned company in charge of airport infrastructure) is likely to be at least part-privatised in the next two years, but airport privatisation is also being considered.

Key indicators 2008 2009 2010 2011 2012

Population (m) �9�.9 �94.4 196.8 �99.4 202.�

Real GDP growth (%) 4.6 3.4 4.0 4.0 4.0

Consumer price inflation (%; av) 6.0 5.6 4.3 4.0 3.7

Exchange rate R:US$ (av) �.7 �.8 �.9 2.0 2.0

Inward direct investment (US$ bn) 34.0 28.5 30.0 3�.0 32.0

Riskrating

July2008scoreandchangefrom2002



Security risk 39 -4

Political stability risk 25 -�0

Government effectiveness risk 68 0

Legal & regulatory risk 45 -3


Foreign trade & payments risk 32 0



Labour market risk 50 -7

Infrastructure risk 59 �5

38



Chile

Businessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12


Political environment 7.8 7.8 �9 20 � �

Political stability 8.5 8.� 16 �8 � 2

Political effectiveness 7.� 7.4 20 �9 � �

Macroeconomic environment 8.9 8.6 7 �0 � �

Market opportunities 6.0 5.9 50 5� 6 4

Policy towards private enterprise & competition 8.8 8.8 7 9 � �

Policy towards foreign investment 9.� 9.6 6 3 � �

Foreign trade & exchange controls 9.� 9.6 9 4 � �

Taxes 7.4 6.9 �3 24 � �

Financing 8.5 8.5 �9 22 � �


Infrastructure 6.1 7.3 4� 32 � �

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to Chile’s environment is detailed below.

Foreign investmentA third capital market reform, known as MK3, was sent to Congress in August 2008. It includes administrative and legislative measures designed to facilitate foreign investment in the local financial market and position Chile as an exporter of financial services. This will help to achieve a more liquid and deeper capital market and widen access for small and medium-sized companies. An institutional change will involve transforming the securities and insurance watchdog, the Superintendencia de Valores y Seguros (SVS), into a more powerful and independent national commission, the Comisión Nacional de Valores y Seguros (CNVS). But it does not eliminate the stamp duty (Ley de Timbres y Estampillas) on financial transactions, which will be charged at 1.2% from 2009.

Labour Despite some increased rigidity in the labour regime under the current government—in 2006 a law was introduced that restricts indirect employment through subcontractors by making the subcontracting company responsible for the subcontractor’s obligations—there are signs that some liberalising steps might be taken. For example, the government talks of the need for more flexible working arrangements to enable unemployed mothers to work.

39



Energy infrastructureConcern over Chile’s energy security will continue until 20��. Cuts in gas exports from Argentina since 2004 exposed Chile’s dependence on imported natural gas, together with a drought that lasted from 2007 until mid-2008, which reduced hydroelectric capacity. Moreover, Chile was forced to import fuel for alternative diesel-powered plants at a time of soaring oil prices, heightening energy costs. Following a drive for new projects in 2005-06, significant new power capacity is due to be installed by 2011. Nevertheless, concerns remain for the medium term, particularly in the event of another period of low rainfall.

Chile 2008 2009 2010 2011 2012

Population (m) 16.8 16.9 �7.� �7.2 �7.4

Real GDP growth (%) 3.6 3.6 4.3 4.4 4.3

Consumer price inflation (av; %) 8.6 6.4 3.7 3.� 3.0

Exchange rate Ps:US$ (av) 495.2 57�.2 598.8 613.5 628.4

Inward direct investment (US$ bn) �8.5 15.6 16.6 �7.7 �9.0

Riskrating




Security risk 2� 3


Government effectiveness risk �8 0

Legal & regulatory risk �5 0

Macroeconomic risk 25 -�5


Financial risk �3 -8

Tax policy risk 3� 6



40



ChinaBusinessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12



Political stability 5.� 5.� 59 63 �3 �4

Political effectiveness 3.9 4.5 60 59 �3 �2


Market opportunities 8.7 8.5 � � � �

Policy towards private enterprise & competition 3.8 5.0 67 65 �5 �5

Policy towards foreign investment 6.4 6.9 52 5� �0 8

Foreign trade & exchange controls 6.0 7.8 62 5� �3 �2

Taxes 5.3 6.0 54 59 �3 �3

Financing 3.6 5.9 7� 60 �5 �3


Infrastructure 4.7 5.9 57 53 �0 9

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to China’s environment is detailed below.

InfrastructureNew infrastructure continues to be rolled out at an extraordinary rate, ranging from ports to refineries, from high-speed rail links to power plants. Energy fuel and distribution systems are also being upgraded, but bottlenecks will continue. Overcapacity in ports and power generation could emerge if growth slows. The local logistics sector is underdeveloped, causing problems in distribution for companies with chains, but it is improving rapidly. A major system to transport water from the wetter south to the arid north will be built over the next few years, but water shortages will persist.

Tax and labour Tax rates are unlikely to increase, but tax allowances for low-income earners are likely to rise in the period to 20�2 on the back of soaring revenue. In general, the tax system will be increasingly used to redistribute funds towards the less affluent. Labour issues will remain one of the biggest challenges for business. The government has a clear policy of enhancing labour rights (recent moves include a state-backed unionisation drive and a regulation-tightening labour contract law). Shortages of highly skilled workers will become increasingly acute. Although the quality of graduates should improve steadily, demand for qualified staff will outstrip supply. The number of foreigners working in China is likely to rise

4�



as companies seek skilled staff abroad.

Privatisation and competitionThe government recognises the private sector’s role in driving economic growth, and will continue to allow the sale of smaller state-owned firms. However, the government still sees a central role for the state-owned sector, especially in the “commanding heights” of the economy, such as aerospace and telecommunications. Competition is intense in China, even among state-owned firms, and this situation will continue. Nevertheless, the competition regime is likely to remain beset by problems. Regulators may continue to favour domestic firms; there are worries that a new anti-monopoly law may be used to hamper takeovers of Chinese enterprises by foreign competitors.

Key indicators 2008 2009 2010 2011 2012

Population (m) �,33�.� 1,336.7 �,342.5 �,35�.0 1,359.6

Real GDP growth (%) 9.8 8.5 9.� 9.� 8.4

Consumer price inflation (av; %) 6.7 4.5 4.0 4.2 4.�

Exchange rate Rmb:US$ (av) 6.9 6.7 6.5 6.3 6.1


Riskrating




Security risk 29 0



Legal & regulatory risk 63 -�0



Financial risk 25 -�3



Infrastructure risk 59 -7

42



Egypt Businessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12


Political environment 4.98 5.50 57 54 9 8

Political stability 5.�3 5.�3 59 63 6 8



Market opportunities 5.77 6.72 54 26 9 7

Policy towards private enterprise & competition 5.00 6.50 54 44 7 5

Policy towards foreign investment 6.85 7.30 4� 40 5 6

Foreign trade & exchange controls 5.05 7.30 66 61 9 8

Taxes 5.59 6.94 45 23 8 7

Financing 4.75 6.25 59 55 �0 8


Infrastructure 4.38 5.36 63 58 �� 9

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to Egypt’s environment is detailed below.

Institutions and policy trends There are significant constraints on Egypt’s institutional and political effectiveness. Legislative improvements are being made to the business environment, but enforcement is poor. Within a generally risk-averse framework, the political set-up remains a barrier to fundamental reform. However, steady, if unspectacular, progress is likely over the next five years.

Policy towards foreign investmentThe government will maintain its strongly pro-business policies over the forecast period. Inward foreign direct investment (FDI) has increased eightfold in three years. The government has removed most barriers to entry for foreign investors, streamlined the tax system, simplified customs procedures and, in 2004, established a one-stop shop (the General Authority for Investment and Free Zones) specifically to promote and manage inward FDI. The procedures involved in establishing a business and registering property have been greatly simplified.

TaxationTax reform will remain a crucial element of the government’s economic strategy. Tax administration has been improved and tax and customs procedures have been simplified. The government also plans to

43



reform the sales tax by moving towards a comprehensive VAT system. However, there is uncertainty to what extent this will be an improvement from a commercial perspective, given the government’s need for more tax revenue. In fact, in May 2008 the government withdrew the tax-exempt status of 39 energy-intensive firms.

InfrastructureEgypt’s physical and communications infrastructure will continue to improve on the back of a long-term government programme to expand airports and upgrade the road and rail network. However, progress has been slow in some areas, given years of underinvestment. In addition, the quality of basic infrastructure, such as water treatment, electricity supply and the communications technology network, remains inadequate. The state-owned monopoly on fixed-line phone services is due to end, with the National Telecommunication Regulatory Authority planning to offer a second fixed-line licence through a public auction in 2009.

Key indicators 2008 2009 2010 2011 2012

Population (m) 77.� 78.6 80.� 81.6 83.2

Real GDP growth (%) 7.� 6.7 6.3 5.6 5.8

Consumer price inflation (av; %) �7.� 9.7 5.9 5.4 4.7

Exchange rate E£:US$ (av) 5.3 5.4 5.5 5.6 5.7


Riskrating




Security risk 29 0





Foreign trade & payments risk 25 -2�

Financial risk 33 -2�

Tax policy risk 3� -7


Infrastructure risk 44 -�9

44



IndiaBusinessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12


Political environment 5.3 5.7 50 5� �0 9

Political stability 5.9 6.3 52 50 �� 9

Political effectiveness 4.9 5.2 45 47 �0 9

Macroeconomic environment 7.5 7.5 47 39 ��

Market opportunities 7.6 7.5 �� 0 3 3

Policy towards private enterprise & competition 5.3 5.8 49 57 �0 ��

Policy towards foreign investment 5.5 6.9 62 5� �4 8


Taxes 5.� 6.3 62 44 �5 �0

Financing 4.8 6.6 59 50 �2 �0

The labour market 5.8 6.6 5� 44 �� 0

Infrastructure 3.4 4.5 76 7� �5 �3

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to India’s environment is detailed below.

InfrastructureOne of the government’s main priorities is to improve the state of India’s infrastructure. Although significant progress has been made in some areas (notably telecoms, roads and ports) in recent years, the scale of investment required means that the average state of infrastructure will be poor for many years. Infrastructure is improving most rapidly in sectors where the private sector believes it can make a profit (such as telecoms and ports) and lags in areas where the ability to generate revenue is less evident (such as water and rural roads).

Tax and labour India’s taxation system will be substantially modernised during the forecast period, but will still perform poorly in international comparisons. The main problem is the small size of the formal sector (coupled by low rates of compliance), which makes direct tax revenue a much smaller proportion of revenue than in other countries. Value-added tax (VAT) is growing in importance, but the government remains reliant on taxes on trade, so further reductions in tariffs will proceed only slowly. Out of a total labour force of over 500m, India’s entire formal sector employs only around 40m people, of whom 25m or so work in the private sector. Although informal sector employment is growing, low average standards of education

45



mean that there is often a mismatch between the skills available and the demands of employers.

Privatisation and competitionThere is little difference between the main political parties towards economic liberalisation. Both believe that the gradual but steady reforms made since the early �990s are vindicated by India’s economic boom since 2003. However, there is widespread public indifference towards structural economic reform, with a much greater interest in day-to-day issues such as rising prices and poor infrastructure. It is unlikely that reforms will speed up dramatically over the next five years.

Key indicators 2008 2009 2010 2011 2012

Population (m) �,�25.4 �,�40.2 �,�55.0 1,169.7 �,�87.0

Real GDP growth (%) 7.5 6.8 7.5 7.6 8.�

Consumer price inflation (av; %) 7.� 6.2 5.3 5.0 5.2

Exchange rate Rs:US$ (av) 4�.0 40.0 39.0 38.0 37.0


Riskrating




Security risk 46 0




Macroeconomic risk 30 0




Labour market risk 61 -3


46



Mexico Businessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12



Political stability 7.0 7.4 37 33 4 5


Macroeconomic environment 8.3 8.0 24 2� 3 2

Market opportunities 7.7 7.2 9 �5 � 2



Foreign trade & exchange controls 8.7 9.6 �5 4 2 �

Taxes 5.7 6.3 43 46 5 4

Financing 7.8 7.8 2� 29 2 2



The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to Mexico’s environment is detailed below.

TaxationA corporate flat tax (called the IETU) was introduced at the start of 2008. It is levied at 16.5%, rising to 17.5% in 2010. Businesses face some short-term costs in adapting to the new system, which in the early stages will run in parallel with the existing 28% corporate income tax minus exemptions (businesses pay the higher of the two taxes).

Policy towards private enterprise and foreign investmentThe passage of a watered-down hydrocarbons reform is expected in September 2008, but it is unlikely significantly to widen opportunities for private investment in the oil sector. However, even a mild reform will set an important precedent that should pave the way for a more ambitious reform in the medium term.

InfrastructureThe IETU and other tax reforms, along with above-budget fiscal oil revenue, will underpin increased investment expenditure in the remainder of 2008-09. Investment will also be boosted by a fund to support a National Infrastructure Plan for 2007-12 and corporate tax breaks for investment. These trends will help advance the upgrade of the physical infrastructure. However, for the next few years Mexico

47



will remain burdened by relatively high-cost logistics. Improvements will require progress on politically sensitive reforms affecting utilities. Even assuming a good performance for the government in mid-term legislative elections in July 2009, this may be difficult to achieve before its term ends.

Key indicators 2008 2009 2010 2011 2012

Population (m) ��0.0 ��.2 ��2.5 ��3.8 ��5.0

Real GDP growth (%) 2.3 1.6 3.4 3.8 3.6


Exchange rate Ps:US$ (av) ��.3 11.6 ��.9 �2.0 �2.�

Inward direct investment (US$ bn) �8.0 16.0 24.0 25.0 26.5

Riskrating




Security risk 61 �8

Political stability risk 35 5




Foreign trade & payments risk 2� -4

Financial risk 42 -�2



Infrastructure risk 4� -6

48



NigeriaBusinessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12


Political environment 3.� 3.� 80 78 �5 �5

Political stability 4.0 3.6 75 79 �3 �5



Market opportunities 6.7 6.5 30 37 5 9


Policy towards foreign investment 5.� 5.5 66 70 �� 3


Taxes 5.6 5.2 45 7� 8 �3

Financing 4.0 5.9 66 60 �� 9


Infrastructure 2.0 3.� 8� 79 �7 �5

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to Nigeria’s environment is detailed below.

InfrastructureImproving Nigeria’s dire infrastructure is at the centre of the government’s plans. Largely financed by surging revenue from the oil sector, these planned improvements mean that infrastructure should benefit noticeably during 2008-12. In spite of the failure of the preceding administration to increase power supplies after spending billions of dollars building new plants, improvements are expected on the current deplorably low level of electricity supply. However, the extent of improvement in services during the forecast period will depend on whether the government is able to push ahead with the stalled privatisation of the power sector against opposition from the unions. Also crucial will be the establishment of a viable regulatory framework for the smooth operation of private power providers.

Tax regimeOn paper, Nigeria’s tax regime will continue to compare favourably with that of other countries. This partly reflects the fact that general taxation is not a particularly important source of income for the government, which is overwhelmingly dependent on oil revenue. As such, it has historically set low tax rates. However, in practice there is still a huge range of problems. In particular, corruption within the tax authorities, coupled with ineffective policing and enforcement, means that tax compliance rates remain

49



low. Given these problems, Nigeria’s global position is expected to deteriorate, particularly as other countries aggressively push ahead with tax reform.

Foreign direct investmentAlthough the government will continue to welcome FDI, the overall level of investment outside the oil and gas sector will remain low compared with the potential size of the market. This reflects the complexities of the local business environment, combined with bureaucracy, corruption, low productivity, poor infrastructure and the low income levels restricting the potential market. The majority of investment has been made by multinationals with existing operations in the country, but potential remains in sectors as diverse as tobacco, telephone services, the national airline, retailing and financial services.

Key indicators 2008 2009 2010 2011 2012

Population �49.5 �52.2 �55.4 �58.4 160.3

Real GDP growth (%) 6.5 6.7 6.9 6.7 7.�


Exchange rate N:US$ (av) ��7.8 �2�.0 �24.0 126.5 �28.0

Inward direct investment (US$ bn) 2.� 2.� 2.� 2.3 2.�

Riskrating




Security risk 75 -4





Foreign trade & payments risk 68 ��

Financial risk 54 0




50



Poland Businessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12





Macroeconomic environment 6.9 6.9 63 59 �� 0

Market opportunities 7.7 7.3 7 �4 2 2




Taxes 5.5 6.1 48 52 8 �2

Financing 7.0 7.4 27 36 2 4

The labour market 6.3 6.9 36 3� 6 5


The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to Poland’s environment is detailed below.

InfrastructureThe current poor quality of Poland’s road network should finally begin to improve as EU funding starts to flow in significant amounts and the need to complete key projects before hosting the Euro 2012 football tournament injects some urgency. These factors will also lead to faster rail links and improved service at Poland’s congested airports. Rising energy demand will gradually absorb some of the current surplus in electricity-generating capacity, increasing the need for investment in new power stations. The EU’s limits on CO2 emissions will lead to an increase in energy prices. More effective competition in telecommunications will lead to improved services and bring down costs.

Tax and labour The overall burden of taxation is set to fall gradually. The system of personal income tax will shift from the current three-rate system (�9%, 30% and 40%) to a two-rate structure (�8% and 32%) in 2009. The government hopes to move to a single (“flat”) tax system, but this is unlikely before 2011. Sharp cuts in corporate taxes or in social security contributions are unlikely. There may be some moves to liberalise the labour code but opposition from the president means that these are likely to be limited. The gradual return of Poles who have been working abroad will help to ease some skills shortages, but shortages in

5�



some sectors are likely to continue.

Privatisation and competitionThe recently formed integrated electricity groups are likely to be privatised, but this will be a gradual process and the role of foreign strategic investors will initially be limited. The state is likely to reduce its holdings in a bank, PKO BP, and an insurance firm, PZU, but it is likely to retain significant influence in PKO for the next few years. Further consolidation of the mostly foreign-owned banking system is likely but will depend on the strategies adopted by the banks’ west European parents.

Key indicators 2008 2009 2010 2011 2012

Population (m) 38.� 38.� 38.� 38.� 38.�

Real GDP growth (%) 5.3 4.2 4.0 4.4 4.3


Exchange rate Zl:US$ (av) 2.2 2.3 2.5 2.6 2.7

Inward direct investment (US$ bn) 2�.0 �9.0 �5.5 �4.5 �4.8

Riskrating




Security risk �4 0





Foreign trade & payments risk �8 -3


Tax policy risk �9 -6



52



RussiaBusinessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12


Political environment 4.� 4.5 69 70 �4 �3

Political stability 5.� 5.� 59 63 �4 �4


Macroeconomic environment 8.0 8.0 29 22 2 �

Market opportunities 8.6 8.4 2 2 � �



Foreign trade & exchange controls 6.9 7.8 49 5� ��

Taxes 5.3 6.2 54 50 �� 0

Financing 4.4 5.9 64 60 �2 �2


Infrastructure 5.2 6.1 50 5� �� 2

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to Russia’s environment is detailed below.

InfrastructureAlthough the government has started to spend a significant part of the oil windfall on infrastructure, improvements will be slow, given prolonged underinvestment. One area where important progress will continue to be made is the power sector, which has undergone extensive reforms to put it on a market footing through the separation of the sector into generation, distribution and supply assets, with only distribution to stay under state control. An estimated US$40bn needs to be invested in the telecoms network over a decade to remedy past deficiencies and meet new subscriber needs. However, the fragmentation of the sector, price caps on local calls and poor regulation will continue to deter investment.

Tax and labourThe introduction of a lower rate of VAT is under discussion. Many politicians have advocated a sharp cut in the VAT rate, currently set at 18%. The Ministry of Finance has expressed its willingness to consider a delayed cut in VAT to 16%, at most. There are also moves to cut the tax burden on oil producers, amid fears about declining oil output. Overall, Russia’s labour market will remain an attraction for investors. However, labour shortages will become an increasingly significant problem. Demographic developments

53



will have a negative impact on the labour market, as the size of the labour force starts shrinking and the average age of workers rises.

Privatisation and competitionThe president, Dmitry Medvedev, is believed to hold market-friendly views and has pledged to reduce state interference in the economy and business. But it is unclear to what extent he is willing or able to achieve this. Having assumed control of more than 40% of energy output, the state will continue to assert itself in other strategic sectors. In telecommunications, the state will continue to play a significant role through Svyazinvest, the state holding company. The company has undergone consolidation and restructuring, but further privatisation continues to be postponed.

Key indicators 2008 2009 2010 2011 2012

Population (m) �4�.8 �4�.4 �4�.0 �40.5 �40.0

Real GDP growth (%) 7.5 6.8 6.1 5.5 5.0

Consumer price inflation (av; %) �4.0 ��.0 9.2 7.6 7.�

Exchange rate Rb:US$ (av) 24.0 24.5 25.5 26.2 26.5


Riskrating




Security risk 50 -�4





Foreign trade & payments risk 54 �5


Tax policy risk 63 �3

Labour market risk 54 ��


54



Saudi Arabia Businessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12


Political environment 4.3 4.3 65 72 �� 2

Political stability 4.8 4.4 66 7� 8 ��

Political effectiveness 3.9 4.2 60 65 �� 2

Macroeconomic environment 8.6 8.3 �7 �5 4 �

Market opportunities 7.7 7.9 7 6 � 2

Policy towards private enterprise & competition 4.3 5.3 64 60 �� 9

Policy towards foreign investment 5.� 6 66 66 �� 0


Taxes 6.9 7.9 20 �2 4 4

Financing 5.5 5.9 5� 60 8 9

The labour market 4.7 5.2 76 73 �2 ��


The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to Saudi Arabia’s environment is detailed below.

Taxation Economic growth is forecast to remain robust, with high oil prices expected to keep the current account and government budget in surplus. As a result, no changes in tax policy are expected. There may be some debate about introducing a sales tax or increasing water or power tariffs, but the government will probably avoid taking any of these politically sensitive actions while high oil prices ensure large fiscal surpluses.

Labour Inflationary expectations have risen and will lead to higher wage demands throughout the forecast period. The labour market is one of the weakest elements of the business environment, partly reflecting severe skills mismatches, which mean that wage pressures will be particularly intense in skilled jobs in fast-growing sectors (such as finance and construction). More generally, wages for expatriates are likely to rise gradually as demand booms and as leading supplier countries (such as the Philippines, India and Bangladesh) push for minimum wages and better treatment for their nationals. An increasing number of women will enter the workforce, but will remain a small minority. Expatriates will continue to make up most of the private-sector workforce, although the government will maintain its “Saudiisation” policy of

55



setting quotas for employing nationals.

InfrastructureThe government will support large-scale investments in infrastructure, some of which will be carried out by the private sector, although all projects will be subject to delays and cost overruns given strong demand combined with supply bottlenecks. The Shuaibah-3 independent water and power project will improve water supply to Jeddah from 2009. Internet penetration is forecast to rise from 26.3% of the population in 2007 to 46% by 2009. New entrants to the landline market are likely to reduce tariffs in the underdeveloped broadband subsector and invest in better broadband infrastructure.

Key indicators 2008 2009 2010 2011 2012

Population (m) 25.0 25.8 26.6 27.4 28.2

Real GDP growth (%) 7.2 6.7 5.9 5.4 6.0

Consumer price inflation (av; %) ��.7 �0.8 �0.0 9.8 9.5

Exchange rate SR:US$ (av) 3.8 3.8 3.8 3.8 3.8

Inward direct investment (US$ bn) �.9 2.3 2.5 2.6 2.7

Riskrating




Security risk 50 ��





Foreign trade & payments risk 2� 3

Financial risk 38 0

Tax policy risk 44 -6


Infrastructure risk 4� �0

56



South Africa Businessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12



Political stability 5.� 6.6 59 46 5 2

Political effectiveness 4.9 5.2 45 48 8 �0

Macroeconomic environment 7.5 7.5 44 4� 8 9

Market opportunities 7.� 7.3 �9 �4 3 3

Policy towards private enterprise & competition 5.8 6.5 43 4� 4 5



Taxes 6.4 7.0 28 26 6 6

Financing 6.6 8.� 3� 27 3 3

The labour market 4.0 5.6 8� 64 16 8

Infrastructure 6.6 8.0 3� 24 2 2

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to South Africa’s environment is detailed below.

InfrastructureEskom, the parastatal power generator (and monopoly buyer), is investing a massive US$45.1bn over five years to boost power capacity, but shortages are likely to persist until new coal-fired base-load capacity starts in 2012. Telecommunications will continue to benefit from rising demand, liberalisation and investment in new submarine fibre-optic cables, opening in 2009-10, which will potentially reduce high charges. The build-up to the 20�0 World Cup will be a particular spur to development, which will leave a permanent legacy. Heavy investment in the development of roads, rail and ports will dramatically improve current infrastructure constraints.

Tax and labour Modest reductions in corporate tax rates are expected to continue, with the intention of stimulating business at a time of weaker growth. However, the top rate of income tax is likely to remain unchanged, at 40%. Labour market reform will be slow and skills shortages will persist. Strike action is likely to decline, as pay deals negotiated in 2007 typically covered two to three years in advance, although high inflation could spark some protests. Another key challenge for firms will be to meet employment equity legislation (the labour side of black economic empowerment, BEE), which will be exacerbated by the HIV/AIDS

57



epidemic and skills shortages.

Privatisation and competitionPolicy will remain supportive of private enterprise and free markets. However, the state’s dominant role in infrastructure projects will restrict opportunities for private business, although public-private partnerships and independent operators will be sought in some cases. Private business is dominant in most other sectors, but the entrenched position of some long-established players will pose a challenge to new entrants. The private sector will need to meet the requirements of BEE in recruitment, training and ownership (although multinationals will remain exempt from equity transfer). A new companies law will ease business start-up and improve corporate governance, while competition policy will become stricter in order to tackle cartels.

Key indicators 2008 2009 2010 2011 2012

Total population (m) 47.8 48.0 48.2 48.3 48.4

Real GDP growth (%) 3.5 2.8 5.0 4.6 3.7


Exchange rate R:US$ (av) 7.8 8.2 8.5 8.8 9.0


Riskrating




Security risk 46 0







Tax policy risk 3� -7



58



Thailand Businessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12


Political environment 6.4 5.5 39 54 9 �0

Political stability 7.8 5.9 26 55 4 ��



Market opportunities 6.4 6.4 38 4� �� 0


Policy towards foreign investment 7.3 6.9 32 5� 6 8


Taxes 7.5 7.5 �2 16 6 7

Financing 6.3 7.4 4� 35 8 7


Infrastructure 4.9 5.6 54 55 9 �0

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to Thailand’s environment is detailed below.

InfrastructureThe government is keen to move ahead with several large rail projects, but these are still at the planning stage and will not be completed for another few years. Suvarnabhumi Airport, the new international facility serving the capital, Bangkok, commenced operations in September 2006, in a much-welcomed development. However, there are fears that capacity constraints at the airport will become evident sooner than expected. The quality and availability of telecoms services will improve, but the issuance of new licences will remain slow. Energy supplies continue to cause concern. Despite increasing supplies, the potential for energy shortages remains, as demand could easily outstrip supply in the next few years.

Tax and labour The tax regime is not expected to change much over the next few years as it is not overly complex, and remains reasonably consistent and fair. Any adjustments to the country’s tax structure are likely to be implemented with the aim of boosting the competitiveness of the private sector. Labour market conditions in Thailand are more than adequate in terms of supporting the operations of foreign-invested enterprises. Labour costs adjusted for productivity are low, but the availability of skilled labour is poor, reflecting the relatively ineffective education system. Strikes are uncommon.

59



Privatisation and competitionNo significant progress will be made on the privatisation front over the next few years, owing to the fact that such moves would attract intense opposition from labour organisations and consumer-advocacy groups. Neither will there be any major improvement for foreign investors in terms of investment protection schemes, as the government will now find it tougher (under the 2007 constitution) to conclude new trade and investment pacts with other countries.

Key indicators 2008 2009 2010 2011 2012

Population (m) 67 67.5 67.9 68.4 68.8

Real GDP growth (%) 4.8 4.5 4.6 4.2 4.4

Consumer price inflation (av; %) 8.� 6.5 3.6 2.9 2.4

Exchange rate Bt:US$ (av) 32.9 33.4 33.2 33.2 33.�

Inward direct investment (US$ bn) 9.5 9.9 �0.� �0.5 �0.5

Riskrating



Overall evaluation 52 7

Security risk 57 46

Political stability risk 65 �5

Government effectiveness risk 75 �8

Legal & regulatory risk 58 �0




Tax policy risk 3� 0



60



TurkeyBusinessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12



Political stability 5.9 5.9 52 55 �8 �8



Market opportunities 7.4 6.5 16 36 4 �0


Policy towards foreign investment 6.4 6.9 52 52 �8 �8

Foreign trade & exchange controls 6.4 7.8 54 5� �8 �7

Taxes 5.2 6.1 58 54 �4 �4

Financing 5.5 6.6 5� 50 �8 �8


Infrastructure 4.9 6.1 54 5� �8 �8

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to Turkey’s environment is detailed below.

InfrastructureThe problem of occasional power black-outs and brown-outs is likely to become more acute, owing to an overall shortage of generating capacity and insufficient improvement in transmission and distribution. In telecommunications, ongoing liberalisation will contribute to a noticeable improvement in the services available, and to lower prices. In transport, there will be only piecemeal improvements: the Bosphorus rail crossing may be completed and some roads will be improved. Ports, airports and customs facilities will in general continue to improve, owing to private management and/or recent/ongoing investments.

Tax and labour No major change is expected in the overall level or pattern of taxation, or in most tax rates. However, there may be some improvements in tax collection and a modest reduction in evasion and avoidance, which would be positive for existing taxpayers. Legislation on strikes and lock-outs and the severance pay system may be approved. Any such legislation will involve a compromise between broader rights for workers and employers’ demands for lower costs. The education level of the workforce will rise but shortages of skills will persist. Flexible working practices may start to become more commonplace.

61



Privatisation and competitionPower distribution networks, the national lottery and rights to operate toll roads and bridges are likely to be privatised. Sugar refineries, some power generation plants and some or all of the state’s remaining shares in Turk Telekom, the former telecommunications monopoly, may also be sold off. A new round of consolidation may commence in the banking sector, where foreign ownership may rise above 50%—the privatisation of state banks could be the trigger.

Key indicators 2008 2009 2010 2011 2012

Population (m) 76.2 77.2 78.� 79.� 79.9

Real GDP growth (%) 4.5 3.7 5.� 5.0 5.0

Consumer price inflation (av; %) �0.5 9.6 7.� 6.7 5.3

Exchange rate YTL:US$ (av) 1.236 �.37� �.372 �.372 �.372

Inward direct investment (US$ bn) �5.0 16.0 28.0 32.0 35.0

Riskrating




Security risk 46 -8







Tax policy risk 38 -�8



62



United Arab Emirates Businessenvironmentrankings


2003-07 2008-12 2003-07 2008-12 2003-07 2008-12




Political effectiveness 6.1 7.� 3� 24 3 2

Macroeconomic environment 8.6 7.8 �7 33 4 7

Market opportunities 7.7 8.2 �0 3 2 �

Policy towards private enterprise & competition 5.3 6 49 52 6 7


Foreign trade & exchange controls 8.7 9.� �5 �7 � 2

Taxes 9.� 9 2 2 � �

Financing 6.6 7.4 3� 35 3 4


Infrastructure 6.6 7.3 3� 32 2 3

The Economist Intelligence Unit’s Country Analysis team provides ongoing updates on the state of the business environment within all major economies. A brief summary of key anticipated changes to the United Arab Emirates’ environment is detailed below.

Policy towards private enterprise and foreign investmentThe UAE has created an enabling environment to encourage foreign investment, although restrictions have remained to give preference to domestic firms. The companies law is likely to be amended to permit majority foreign ownership in sectors where domestic firms are deemed to lack sufficient expertise, and there will be an expansion in the number of free zones. The pressure of compliance with World Trade Organisation (WTO) requirements, along with ongoing negotiations on free-trade agreements with the US and EU, will promote further liberalisation in the economy. Opportunities for financing will increase as the UAE’s stockmarkets improve their infrastructure, the bond market deepens and the banking sector matures.

Infrastructure The petrodollar surplus will fuel investment in infrastructure to meet the needs of a rapidly growing population. There will be significant expansion in power generation and water-desalination capacity, as well as in transport such as the Dubai Metro and the giant new Al Maktoum International Airport. There will also be an ongoing effort at diversification away from hydrocarbons, for example through Masdar, a carbon-neutral city that is designed to become a global hub for environmentally sustainable technology.

63



On the taxation front, indirect revenue-raising measures such as road tolls and property levies will be extended and a VAT rate of 3-5% will be phased in during 2009 to replace the current import duty.

Key indicators 2008 2009 2010 2011 2012

Population (m) 5.5 5.8 6.2 6.6 7.0

Real GDP growth (%) 8.4 7.6 7.2 6.6 6.1

Consumer price inflation (av; %) 16.0 �3.0 9.0 6.0 5.5

Exchange rate Dh:US$ (av) 3.7 3.7 3.7 3.7 3.7

Inward direct investment (US$ bn) ��.2 ��.8 �0.� 9.3 8.8

Riskrating



Overall evaluation 33 4

Security risk �8 ��




Macroeconomic risk 20 �0

Foreign trade & payments risk �� 4

Financial risk 46 4

Tax policy risk �9 6


Infrastructure risk �9 0

64

© Economist Intelligence Unit Limited 2008AppendixSurvey results


Appendix 3: Survey resultsThe Economist Intelligence Unit conducted a survey of �,323 senior executives around the world during June,

July and August of 2008. Our sincere thanks go to all those who took part in the survey.

Please note that not all answers add up to �00%, because of rounding or because respondents were able to

provide multiple answers to some questions.

In which country are you personally located?

India

Brazil

Turkey

United Arab Emirates

Russia

China

South Africa

Mexico

Nigeria

Egypt

Chile

Poland

Saudi Arabia

Thailand

Angola

209

156

98

96

95

94

84

81

73

64

58

58

56

53

48

Which of the following best describes your company’s status in that country? (% respondents)

Domestic organisation

Foreign organisation with operations there50

50

How would you rate your company’s financial performance over the past two years compared to that of your peers?(% respondents)

Ahead of its peers

On par with its peers

Behind its peers

Don’t know/Not applicable

46

41

9

4

Very successful

Revenue growth

Profitability

Growth in market share

How successful has your company been in this market over the past two years, in terms of each of the following? (% respondents)

Somewhat successful Neither successful nor unsuccessful

Somewhat unsuccessful Very unsuccessful Don't know/Not applicable

58 32 6 1 1 2

46 37 10 3 1 2

35 39 32417


65



Revenue growth

Profitability

Market share growth

46 41 9 3 1

34 44 14 5 1 1

32 41 19 4 1 2

Very optimistic

How optimistic are you about your company’s prospects within this market over the next two years, in terms of each of thefollowing? (% respondents)

Somewhat optimistic Neither optimistic nor pessimistic

Somewhat pessimistic Very pessimistic Don't know/Not applicable


High quality products/services

Competitively priced products/services

Ability to move and adapt rapidly

Good local contacts and relationships

Ability to attract and retain the best local talent

Strong brand appeal

Appreciation of local consumer culture/values

Flexibility and innovation in structuring deals/offers

Appreciation of local business/regulatory norms

Selling through appropriate sales channels

Good appetite for risk

Highly efficient supply chain

Willingness to share knowledge with local partners

56

41

32

26

24

24

17

16

14

11

11

10

3


In your view, which of the following factors are most important to your company’s success in this market? Select up to three (% respondents)

66



Which of the following are your company’s key means of attracting and retaining executives and other top talent (eg, specialist engineers) in this market? Select up to three(% respondents; Top 10 of 16 options shown)

Association with our brand/reputation in the market (ie, prestige of working for highly rate firm)

Clear career development path

International training and development

Higher salaries than rivals

Clear autonomy/decision-making powers

Bonus scheme

Local training and development

Potential for overseas travel/job rotation

Share options/share incentive scheme

Healthcare insurance/benefits

45

43

31

30

27

24

19

15

12

8


How important has it been for your company to collaborate with other companies in this market in order to succeed here (eg, for product development, sales)? Rate on a scale of 1 to 5, where 1=Very important and 5=Not at all important (% respondents)

1 (Very important)

2

3

4

5 (Not at all important)

28

31

21

13

8


When seeking to choose an organisation to partner with in this market, which of the following criteria do you believe are most important to ensuring a good strategic fit? Select up to three (% respondents)

Good cultural compatibility between our organisations

Financial strength

Relationships with local business/government contacts

Brand/reputation

Customer network/reputation for customer service

Reputation for sustainability and/or ethical behaviour

Sales and marketing resources

R&D and technology resources

Logistics/distribution network

Production/manufacturing resources

Risk analysis capability

40

39

39

35

34

25

18

16

16

11

9


67



Today

5 years ago

Which of the following best describes the kinds of consumers your company primarily targets within this market? Who did ittarget five years ago?Select all that apply (% respondents)

29 40 38 26 1

26 32 32 28 2

The wealthy elite The middle class The mass market Not applicable Don't know

What is the annual rate of staff turnover your firm is currently dealing with in this market? (% respondents)

0%

5%

10%

15%

20%

25%-50%

More than 50%

3

25

22

15

14

18

3

What does your company consider to be an acceptable level of gross margin on the products/services it sells in this market? (% respondents)

Less than 10%

10%

11-15%

16-20%

21-25%

26-30%

31-35%

36-40%

41-50%

51-100%

Margins in excess of 100%

Margins in this industry are pre-defined by the country’s government

Not applicable, as we don’t seek to sell to local consumers

10

8

9

11

10

10

9

8

9

9

1

3

5

68



How much of a barrier to growth to your business are the following operational issues in this market?Rate from 1 to 5, where 1=Major barrier and 5=No barrier(% respondents)

2 6 17 23 40 12Strong local trade unions

4 7 18 23 36 12Local cartels/monopolists

7 10 19 22 34 7Poor security/threat of crime

8 11 25 23 25 8High levels of corruption/bribery

6 11 21 19 35 7Limited access to capital

17 17 23 18 18 7Rising energy and raw material prices

14 20 30 15 17 4Price competition from local firms

10 11 19 19 34 6Poor and/or expensive electricity supply

6 11 21 24 34 4Poor and/or expensive communications infrastructure

9 12 23 19 30 6Poor physical infrastructure (eg, roads, rail)

7 17 30 23 19 4High rates of staff turnover

8 16 36 19 19 2Cost of available labour

23 23 11 1130 2Lack of sufficiently skilled/experienced labour

Major barrier 1 2 Moderate barrier 3 4 No barrier 5 Don't know/Not applicable

How much of a barrier to growth to your business are the following state-related issues? Rate from 1 to 5, where 1=Major barrier and 5=No barrier (% respondents)

Major barrier 1 2 Moderate barrier 3 4 No barrier 5 Don't know/Not applicable

15 21 30 15 16 3Tax and regulatory pressures

10 17 26 25 19 3Political uncertainty/instability

5 12 30 27 22 4Trade and investment barriers

13 23 31 19 10 3High levels of bureaucracy/red tape

9 18 29 22 18 4Poor rule of law / weak regulatory regime

7 16 28 25 19 5Restrictive business policies (eg, economic empowerment)

3 7 22 29 33 6Required social commitments in market (eg, provision of medical care, etc)

69



An economic slowdown across developed markets will have a major impact on our business in this market

Difficulties in enforcing legal contracts is a significant problem we are forced to deal with in this market

This country has become significantly more “Westernised” over the past two to three years, in terms of how business is conducted

We tend to use informal “social” contracts in this market (eg, one-to-one agreements made outside of a formal legal structure)

For many businesses, paying bribes is a standard part of doing business in this market

We tend to achieve better margins in home market than in other markets

To what extent do you agree or disagree with the following statements? (% respondents)

19 41 19 17 3 1

8 26 26 28 9 2

16 45 26 10 2 2

5 21 25 31531

6 22 24 26 17 5

11 30 24 21 7 8

Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree Don't know

Access to the domestic market (eg, sell goods/services)

Using this market as a base for regional expansion

Ability to reduce manufacturing/production costs (eg, low labour costs)

Access to skills/talent (eg, to conduct R&D, business process outsourcing)

Access to other resources (eg, minerals, oil)

71

52

28

28

13


Which of the following represent your company’s main reasons for operating in this country? Select all that apply (% respondents)

Less than one year

1 to 3 years

3 to 5 years

5 to 10 years

More than 10 years

1

9

8

18

64

For how long has your company been operating in this market? (% respondents)

Responses from foreign multinationals only

70



Which of the following best describes how your company entered this market? (% respondents)

Set up a greenfield investment

Acquired a local company

Established a joint venture with local company

Licensed a local company or set up a local franchise system

Established a partnership or alliance with local company

Set up a contracting/sub-contracting arrangement


29

23

15

11

10

3

10


Do you feel that this entry approach was largely successful or unsuccessful? (% respondents)

Very successful

Somewhat successful

Neither successful nor unsuccessful

Somewhat unsuccessful

Very unsuccessful

54

37

6

2

1

In which country is your company headquartered? (% respondents)

United States of America

United Kingdom

France

Germany

Netherlands

Switzerland

Italy

Spain

Belgium

Japan

India

United Arab Emirates

Rest of world

34

14

5

5

5

4

2

2

2

2

2

2

13

7�



Branding and marketing

Approach to HR

Management and leadership style

Product R&D

Product pricing

Channels to market

Has your company had to change its operating strategy to adapt to working in your market, compared with how it operates in itshome market? (% respondents)

14 40 39 7

24 48 23 4

27 43 28 2

11 32 36 20

26 43 20 10

20 45 26 9

Significant changes Some changes Little or no change Don’t know/Not applicable

How well positioned do you believe your company is to overcome competitive threats from domestic firms in this market (ie, the market where you are personally based)? (% respondents)

Very well positioned

Somewhat well positioned

Neither well positioned nor poorly positioned

Somewhat poorly positioned

Very poorly positioned

Not applicable, we don’t face any local rivals

40

43

10

5

1

2

72



How much advantage or disadvantage does your company hold over domestic rivals in this market? (% respondents)

Strong advantage Some advantage No advantage

Some disadvantage Strong disadvantage Don't know/Not applicable

12 17493325Distribution channels

20 30 24 14 22Intellectual property/patent stock

7 8 35 6 2 42Access to natural resources

15 29 31 17 4 4Local contacts/relationships

34 38 16 5 7Product development

44 39 12 3 2Management experience/expertise

28 43 20 4 1 4Customer service

1132 4 2 447Brand strength

7 18 50 18 4 4Labour costs

48 38 9 2 2Depth of skills/experience

40 33 14 3 1 8Access to capital

To what degree has your company customised the products/services that it provides in this market?(% respondents)

Heavily customised (eg, redesign products/services, extensive product modifications)

Partly customised (eg, language localised, some product modifications)

Superficial customisation (eg, different packaging)

No customisation at all (identical product/service is as sold in other markets)

Not applicable, we don’t sell products/services into this market

18

47

13

16

5

Local employee Expatriate worker Don't know/Not applicableCEO

CFO

Head of marketing

Primary technical role (eg, head engineer)

Head of HR

Head of IT

Head of procurement

Head of R&D

In the market where you are based, are these roles within your company’s management team held by local employeesor expatriates? (% respondents)

45343

93952

132859

172955

81874

121969

201664

392140

73



Which of the following best describes your company? (% respondents)

Privately-held company (owner/managed)

Privately-held company (family owned)

Publicly-listed company (on local stock exchange)

Publicly-listed company (on international stock exchange)

State-owned company


28

10

34

11

12

5

How well positioned do you believe your company is to overcome competitive threats from foreign companies in this market? (% respondents)

Very well positioned

Somewhat well positioned

Neither well positioned nor poorly positioned

Somewhat poorly positioned

Very poorly positioned

Not applicable, we don’t face foreign rivals in our market

41

40

11

3

1

4

Strong advantage Some advantage No advantage

Some disadvantage Strong disadvantage Don't know/Not applicable

How much advantage or disadvantage does your company hold over foreign rivals in this market? (% respondents)

30 39 17 4 1 9Distribution channels

10 23 40 7 2 19Intellectual property/patent stock

16 19 34 3 1 26Access to natural resources

48 38 10 2 3Local contacts/relationships

15 33 29 12 3 7Product development

30 45 15 6 2 4Management experience/expertise

23 42 23 7 1 4Customer service

35 34 18 6 3 4Brand strength

16 39 34 6 2 3Labour costs

28 39 17 10 3 3Depth of skills/ experience

23 30 27 10 6 5Access to capital

Responses from domestic firms only

74



Does your company see benefit in collaborating with foreign companies in this market? (% respondents)

Yes, we already do collaborate with foreign companies

Yes, we might consider collaborating in the future

Yes, we are now considering collaborating

No

Don’t know

55

18

13

11

3

What are, or would be, your company’s main motives in collaborating with a foreign firm in this market?Select up to two (% respondents)

Access to management skills/experience

Ability to grow business faster in international markets

Access to R&D and technology

Access to products/services

Access to capital

Ability to grow business faster in local market

Ability to leverage their brand


Not applicable—we would not consider collaborating with a foreign firm

32

31

30

28

23

17

13

2

6

Branding and marketing

Approach to HR

Management and leadership style

Product R&D

Product pricing

Channels to market

As foreign rivals have entered into this market, has your company had to change any aspects of its operating strategy in orderto compete? (% respondents)

22

17

20

17

15

14

39

41

42

36

43

40

10

9

8

15

10

12

29

34

30

32

32

33

Significant changes Some changes Little or no change Don't know/Not applicable

CEO

CFO

Head of marketing

Primary technical role (eg, head engineer)

Head of HR

Head of IT

Head of procurement

Head of R&D

Which of the following roles within your management team are currently handled by local employees, repatriated employees(ie, local citizens who’ve worked abroad but returned to this market), or foreign workers? (% respondents)

78 8 12 2

78 8 11 4

75 8 11 6

67 9 14 10

85 4 6 4

77 9 9 5

79 4 7 10

66 7 7 20

Local employee Repatriated employee Foreign worker Don't know/Not applicable

75



What is your primary industry? (% respondents)

Financial services — Banking

Manufacturing

Energy and natural resources

Financial services — Other

Professional services

Consumer goods

IT and technology

Construction and real estate

Transportation, travel and tourism

Telecoms

Chemicals

Healthcare, pharmaceuticals and biotechnology

Automotive

Retailing

Financial services — Insurance

Government/Public sector

Agriculture and agribusiness

Entertainment, media and publishing

Logistics and distribution

Education

18

10

8

7

7

6

6

5

5

5

4

4

3

2

2

2

2

2

2

2

Approximately what proportion of your company’s annual revenues is generated in markets outside of its home market? (% respondents)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

15

17

9

9

7

9

10

8

6

8

2

What is your title? (% respondents)

Manager

SVP/VP/Director

CEO/President/Managing director

Head of Department

Other

CFO/Treasurer/Comptroller

Head of Business Unit

Other C-level executive

Board member

CIO/Technology director

21

15

13

13

12

8

8

6

3

2

Demographic data

76



28

16

21

10

26

$100 to $500m

$500m to $1bn

$1bn to $5bn

$5bn to $10bn

$10bn or more

What are your company's annual global revenues in US dollars?(% respondents)

Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper.

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