Wall Street Journal / MIT Sloan

Global Business

 

In Emerging Markets, Know What Your Partners Expect

By Garry D. Bruton, David Ahlstrom, Michael N. Young and Yuri Rubanik

December 14, 2008

Many companies from mature economies are looking for strategic partners in hot emerging markets—places like Brazil, Russia, India, China, Eastern Europe and Turkey. The kind of alliance they’re looking for is well known: They want local partners who can help them obtain access to distribution and production in the emerging markets, as well as political and business connections and cultural credibility.

Illustration by Christophe Vorlet

Illustration by Christophe Vorlet

They’re often unprepared, however, for things that the partners want in return—such as better relations with corrupt government officials, and help paying bribes and protection money.

Companies put in this position often are unwilling—and unable—to handle such requests. Conflicts then are bound to erupt as the partners move forward with widely different expectations. If a company doesn’t make clear its unwillingness to engage in corruption at the outset, it can be caught by surprise or agree to things that, in hindsight, it clearly shouldn’t have. Local companies, meanwhile, are likely to feel shortchanged if their partners refuse to give them the kind of help they thought they were going to get.

What follows are some of the expectations that local companies in Russia and China have when suitors from more-developed nations come looking for partners. The results are based on several years of interviews and field studies.

Assistance with market entry: Local government officials still control much of the real estate in both countries. Thus, forming an alliance with a firm that has relationships with key officials can help secure a good business location. Once in the facility, the entrepreneur can use the same connections to obtain other favors, like discounts on utility bills.

Regulatory agencies pose challenges for start-ups as well. In Russia, entrepreneurs in some industries said they must visit more than two dozen agencies and have as many as 90 documents signed. This can take as long as six months. An alliance partner that has relationships with regulatory agencies can ease these difficulties. Some local entrepreneurs will ask their alliance partners to put relatives of key city officials on its payroll to facilitate licensing and help avoid fines and government interference.

Running interference with law-enforcement authorities: Chinese entrepreneurs expressed concern about the lack of laws, which they say allows bureaucrats and powerful individuals to interfere with operations. As a result, Chinese entrepreneurs told us that they would like an alliance partner to manage such interference.

Russian entrepreneurs complained about excessive and vague regulations that require them to engage in numerous unofficial negotiations to conduct business and to get paid for services. They seek alliance partners with cash to help with such negotiations and with enforcement.

Assistance in alleviating bribes: Bribes, kickbacks and other under-the-table payments can add as much as 50% to operating costs in each country, according to the entrepreneurs we interviewed. Such payments are made to prevent administrative interference, as well as buy privileges and state contracts.

In China, because the pressures for bribes affect all firms, the size of a potential alliance partner is of less importance than the partner’s ability to control those fees and expenses.

The Russian entrepreneurs, meanwhile, said the kind of partners they tend to like are large, mature firms that they believe will have the political connections and social capital to be able to control the pressure for such bribes.

Protection money: Extortion is a big problem in both countries, according to the entrepreneurs we interviewed. About half of the Russian entrepreneurs said they have been subjected to threats. Entrepreneurs thus seek to have key government or police officials on their alliance partner’s payroll, or they ask the partner to hire costly legal or quasi-criminal organizations for protection services. Such payments can absorb 10% or more of an entrepreneur’s revenue.

Dr. Bruton is a professor of management at M.J. Neeley School of Business, Texas Christian University, Fort Worth. Dr. Ahlstrom is a professor of management at the Chinese University of Hong Kong. Dr. Young is an associate professor of management at Hong Kong Baptist University. Dr. Rubanik is a professor at Kuzbass State Technical University, Kemerovo, Russia, and director of the Moscow-based consulting firm Center for Contemporary Management Technologies.

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