EGS Global Business Blog

It has been some time since our last blog.

This has been due to a rush by European and Asia Pacific companies to acquire licenses from US franchisors - who are most of our Clients.

The economics are simple. A US$250,000 license from a US franchisor cost 200,000 Euros in the summer of 2006. Today it costs 155,000 Euros.

The news is also good for Australian companies. The same US$250,000 license cost $330,000 Australian dollars in mid 2006 and would cost $260,000 Australian dollars today.

For Chinese investors - who are strong buyers of US franchises these days - the cost of the license has dropped 15% over the past two years due to currency appreciation.

While this is good news for US franchisors as far as up front fees are concerned, there is a down side. Traveling to Europe and Asia Pacific for negotiations, training and support costs considerably more than two years ago.

And 36 years of international experience says the dollar will come back at least some of the way towards the exchnage rates of mid 2006.

Meanwhile, it is a peak time for US franchisors to license their business model into other countries.

One of the basic tenants of international development has always been an evaluation of the Rule Of Law in a country as a measure of the risk of doing business in a country.

Countries with a strong Rule Of Law have been perceived to be inherently less risky for foreign investors. A strong Rule Of Law has generally meant foreign investors were treated equally to local investors. And, economists have repeatedly found that the better the rule of law, the richer the nation.

A new set of studies show that the tie of the Rule Of Law to economic growth is not as simple as previously thought, as discussed in an article in the current issue of ‘The Economist‘ magazine (see link at right).

There is an “intrinsic difficulty of defining the rule of law, combined with the problems of knowing how specific laws work in practice.” What the new studies have “not yet shown beyond doubt is that the rule of law is a precondition for economic growth everywhere.”

New definitions of the Rule Of Law are emerging, as quoted from this article:

“(1)‘Thick’ definitions treat the rule of law as the core of a just society. In this version, the concept is inextricably linked to liberty and democracy.

(2) ‘Thin’ definitions are more formal. The important things, on this account, are not democracy and morality but property rights and the efficient administration of justice. Laws must provide stability. They do not necessarily have to be moral or promote human rights.

The existence of competing definitions of something may seem fatally to undermine its usefulness.”

After discussing efforts to improve the Rule Of Law in places such as Argentina, Chile, Eastern Europe and Russia, the article concludes as follows: “the more economists find out about the rule of law, the more desirable it seems—and the more problematic as a universal economic guide.”

All that having been said, my 36 years of experience working in over 60 countries from first to fifth world, says where there is strong Rule Of Law foreign investors are much more likely to get a good return on their investment and to be able to maintain control of their brands and business than in counties with weak laws.

Investor beware!

Bob Nordan, Senior Consultant with the Next Step marketing and strategy consulting group based in Northern California, has written a focused and detailed analysis of why companies should Go Global and why companies often fail when they try to Go Global.

Mr. Nordan says, “Many U.S. companies who are facing revenue struggles at home are being lured by the bright lights of international expansion and the vision of vast untapped markets of consumers or business buyers overseas.’

He goes on to say, “Unfortunately, many will make the same mistakes and suffer the same consequences as those who have gone before - international markets are strewn with failed (first) attempts.”

He gives a number of reasons why companies fail in their international development:

Expansion for the wrong reason
False assumptions about the nature of the international market
Underestimating the operating costs in an international market
Exporting your domestic operations to the local market
Deciding to become a global company too late
Failing to get expert advice

Mr. Nordan finishes by saying, “For international expansion, be cautious, be clear, be patient.”

This is probably the best advice I have heard on this subject in my 36 years of doing international business in over 60 countries.

Read the full text of this very important article at the link on the right side of this page.

Each year the Heritage Foundation and the Wall Street Journal publish the 160 country Index Of Economic Freedom rankings. The new rankings are now out.
This survey finds that the key to developing country growth is not World Bank infrastructure and education loans but good old entrepreneurship from its citizens.

Some emerging countries encourage new business growth at the grass roots. Egypt and Turkey are examples of recent rapid growth through releasing small business from bureaucracy.

Other countries stifle entrepreneurship and individuality. The low or negative economic growth rates of Venezuela and Burma are examples of this form of government control.

And some countries are improving year to year, moving up the Index of Economic Freedom, such as Vietnam and Mauritius.

The author of a 15 January 2008 Wall Street Journal editorial on this Index, Mary Anastasia Grady, sums things up this way, “Today’s entrepreneurs, across the globe, have similar aspirations and abilities. If only the politicians would let them be free.”

If you are considering doing business in another country, perhaps it would be worthwhile to find out whether new business development is encouraged or impaired by government regulations and controls.

There is a link to the Heritage Foundation web page in our link section. You can download the full 150+ country index and find out which countries are doing better and which you might want to give a pass.

With over US$1 Trillion in assets at the end of 2007, ETFs have become a major global investment tool.

Tom Lydon, the US-based Global Guru of ETFs, defines them as “a basket of securities that represents a specific sector, region or specific index. ETFs are like a mutual fund, yet trade throughout the day like a stock. They are priced and traded continually throughout the day, and provide transparency, liquidity, and cost efficiency.”

Tom, who is a regular on CNBC, MarketWatch and Bloomberg, sees ETFs becoming the way for investors - business people - to measure growth around the world. He also shows on his website how “Global markets will no longer be in sync with the U.S. market.” Hence, he believes monitoring ETFs is the way to know where the world’s economy is going.

Regular readers of this blog and companies we help go global will know that we are always seeking new tools to rank countries as places to do business. Country ETFs provide, we believe, a window on how well the local economy is doing. A growing economy - with appreciating stock indiex ETF - could be a place for foreign companies to invest.

In his 2007 Year End Report, Tom Lydon makes 10 ETF predictions that should be read and understood by all business people doing global business. Check out Tom’s predictions at the link on the right side of this page.

According to Dr. Alan Rudi, “Success in business depends upon your ability to understand the “big picture”, referring of course, to the long term macro trends and changes that determine the future business environment.”

We often get mired in the everyday micro trends and do not realize the impact on our lives and businesses that major, global trends can have.

Dr. Rudi, who has had a successful career as both a senior corporate executive and as the Executive Vice President of a major university, sees 12 major trends that we as global business people should be aware of and should monitor for their potential impact on our ability to run profitable companies.

These macro trends range from technology (change may be faster in the future than in the recent past) to demographics (the Boomer generation aging impacts us all) to the economy (capitalism is still the only system that actually improves lives).

To learn more about these and Dr. Rudi’s other macro trends, please go to the link on the right side of this page.

You may not have heard of Robert O. Anderson, who died last week at 90 years of age. But if you have lived in the US since the late 1960s your life was changed by a risk this man took in the mid 1960s on a remote stretch of beach on the north coast of Alaska.

At the time, Mr. Anderson was head of the Atlantic Richfield oil company and his Alaska Manager, Mo Benson and Geologist, Harry Jameson, had drilled a very, very expensive dry hole (no commercial oil) far from civilization and conventional wisdom said abandon this immensely risky cause.

Robert O. - as we knew him - trusted his people and gave Mo and Harry another chance to drill one more hole. As a result, the largest oil field in the US - Prudhoe Bay - was found. Billions of barrels of oil have flowed from Alaska to the Lower 48 States since the 1970s, helping replace foreign oil and making the US a safer place.

Another result was that Atlantic Richfield, known in the industry as ARCO, went from a small regional oil company to become the 8th largest oil company in the US, the first US company to drill for oil in China and a real innovator on a global basis.

About the same time as Robert O. gave Mo and Harry that second chance at Prudhoe, I was finishing my Geology/Geophysics degree at St. Louis University and looking for a job in the oil business. In 1969, I accepted an entry job with Sinclair Oil, which was then bought by ARCO. During my 18 year career with ARCO, I was privileged to work for Harry Jameson and to work for the company in Iran, Indonesia, China, Alaska (twice) and Turkey.

My Wife, Nancy, and I adopted our Daughter, Heather, while we lived in Jakarta, Indonesia and I explored for ARCO in the Java Sea. Three years later Nancy gave birth to Amy while we lived the second time in Anchorage, Alaska as I managed ARCO’s geophysical exploration on the North Slope and offshore in the Beaufort Sea. And then I got the chance to help in the exploration in Zhanjiang, China arriving on Thanksgiving Day in 1982.

In the mid 1980s, we moved to Ankara, Turkey where I was honored to work with an exceptional team of people for ARCO. Our close relationship with Turkey and its people remains strong today.

Robert O. Anderson’s calculated risk taking and his immense faith in the people who worked for him positively changed the lives of our family and that of thousands of others families around the world. Thank you, Sir!

Read more about this Giant of industry - who understood his most important corporate asset was his employees - at the link on the right side of this page.

Dr. Pankaj Ghemawat, who teaches at the Harvard Business School, has written a new book on global strategy that uses many case histories and lots of data to make the case for the right way for businesses to Go Global.

Despite almost 5,000 books on globalization over the past 5 years (!?!), Dr. Ghemawat says globalization is really only at about 10% of what it could be.

He suggests that ’semiglobalization’ is best and proceeds to document many cases where major companies have gone global the most expensive way possible with very mixed results.

A regional strategy is perhaps the best strategy because, “nobody has figured out the optimal way to orgnaize a complex global economy”, according to Dr. Ghemawat.

The case histories alone make this a good book to read and learn from. A link to Amazon is given on the right side of this page.

The U.S. Department of Commerce Department calculates that America’s service sector had a $3.7 billion trade surplus with China last year. In 2005 the surplus was $2.4 billion, up from $515 million in 1992. And by one measure, America’s service-trade surplus could reach $15 billion a year by 2015.

China is now the ninth largest purchaser of American services.

Service exports cover a wide range of economic activities, from parcel shipping to investment banking. Education is one of America’s top service exports with a $1 billion surplus. Advertising, technology, legal services, industrial engineering and other “business, professional and technical services” account for just over a third of the U.S. surplus. Financial services account for another $480 million.

Chinese payments of royalties and licensing fees to U.S. companies, generated a surplus of $1.4 billion in 2006.

Click on the Wall Street Journal article link to see the full story.

BBC Business reports that East Asia is set for strong growth in 2008 as domestic demand offsets high crude oil prices according to the World Bank says. China’s economy will grow by 10.8%, down from 11.3% in 2007.

East Asia, excluding Japan, is seen growing 8.2% in 2008 from 8.4% in 2007.

East Asia includes China, Indonesia, Japan, Malaysia, the Philippines, Thailand, Vietnam, Hong Kong, South Korea, Singapore and Taiwan.