Can Asian Companies Secure Global Footprints?An interview with Chief Economist at Allianz & Euler Hermes
With much talk centered on the implications of globalization on countries’ economies and their citizens, something that often goes ignored is the effect the changing forces of international trade, finance and politics are having on businesses, and how they are coping.
In this second part* of the interview with Ludovic Subran, global head of macroeconomic research at Allianz, and chief economist at Euler Hermes, we touch upon the opportunities for Asian businesses arising from Asia’s growing economic clout, the challenges they face as they look to expand their wings overseas and the role of Asian governments in providing support.
BRINK Asia: How can Asian companies capitalize on Asia’s growing economic clout?
Subran: I think for corporations to benefit from Asia’s growing economic clout, there needs to be a bit more convergence in the business environment and backdrop—in terms of regulations, for example. Additionally, there needs to be a bit more depth in the financial sector. Only finance can really give the momentum to corporations because they need funding for seed investment, for land, for multi-currency trading and the like. A deeper financial sector enriches the toolbox at the disposal of a corporation when it comes to financial services and risk management. I think there is significant room for improvement in this regard so that corporations can make the most of Asia’s growth.
One other thing that is required is a healthy relationship with governments, because particularly in the industrial sectors today, governments want to be much more interventionist than they have been in the past. Therefore, companies need to focus on public affairs and need to manage public sensibilities if they want to grow in many of the Asian economies. This business diplomacy is critical when doing business in Asia. Often, corporations do this well in their home countries, but when they go outside, they need to create the same type of networks to develop social capital, which can be useful in withstanding political shifts or more difficult political environments.
BRINK Asia: Many national champions from Asian emerging markets that look to go global haven’t found it easy. What are the challenges they face?
Subran: National champions from smaller Asian markets have the odds stacked against them. We live in a time when the U.S., Europe and, increasingly, China, control much of the global economic and financial landscape. This particularly applies when it comes to the power wielded by their currencies, the size of their respective economies and depth of financial markets and also from a legal aspect. These economies are trying to dictate the rules, which often translates into a protectionist attitude.
In this context, multinational corporations from smaller markets can find it hard to spread their wings in developed markets. It is even harder because these companies’ access to the global market is more complicated. Moreover, it is also very easy for the bigger countries to change the rules when they want these emerging companies on their turf. And we are living in an increasingly protectionist world, which is making things more difficult for companies from emerging markets.
Additionally, developed markets have more stringent regulatory frameworks and often impose higher standards than are seen in emerging markets. And lastly, I would say that the management of companies can be a big challenge, in terms of hiring people in overseas markets.This is important because running companies overseas with just domestic, homegrown talent is challenging.
If the relationship between companies, sovereigns and banks is not healthy, it could become a long-term nightmare for governments.
BRINK Asia: Do you think lack of effective corporate governance is a problem, particularly when it comes to multinationals from emerging markets? Is that one reason why they find it difficult to enter other markets?
Subran: I think what is sure is that many of the businesses are family-owned. What we know now from prevalent literature is that when you have below average corporate governance standards (which, it is important to note, is often a function of the markets they are operating in), the companies can fall into a comfort zone, which makes it harder to grow outside. That also makes it harder for companies to withstand shocks.
So yes, I do think that making this almost cost-neutral evolution in business to adopt best practices is particularly beneficial for corporations looking to grow in scale and across geographies. This can also be about CSR (corporate social responsibility), or perhaps gender balance, or about having a supervisory board making sure that there are no negative spillovers from a company’s business. These things can have an effect—they lend to creating more transparency and make businesses more resilient. Most importantly, I think these practices make companies more competitive outside of their home countries where they may have strong political connections.
I think governments in emerging markets must push their private sector in this direction. Today, in their own countries, corporations are growing in very comfortable environments—where they have the right relationships, find it easy to navigate various regulatory hoops and have a history of operations, all of which give them “protection,” so to speak. In such a context, instead of using proven management and governance practices that will make them better in external environments, many companies can get by through taking the easy way out. This makes it particularly challenging for them overseas.
BRINK Asia: We’ve talked about companies. What role do you think Asian governments can play in supporting their companies when they look to go out?
Subran: I think you must play with the same rules the other countries are playing with. First, Asian countries need to have an industrial policy. Vertically, this means they need to decide which sectors they want to temporarily push. This is something the world disagrees with, and everyone basically says that industrial policy, subsidies and other such forms of support should not be used. However, I think it is normal for developing economies to think about pushing or propping up some sectors that they think they can develop an edge in, or sectors that could be critical for the countries’ economic future. But you also need to have the other part of industrial policy which is horizontal, wherein you create the best conditions for your companies to grow. So, for example, this could mean favorable tax policies, checking corruption and creating a conducive business environment. At the very least, companies need to have the right legal and regulatory set-ups and stability in policymaking so that they don’t feel threatened at home owing to international developments.
Second, governments need to support growth by making sure the right tools in the toolbox are available for their companies locally—this would include access to financial services and products, and business services and risk management tools, for example. This isn’t as easy to do as it sounds.
Lastly, governments in Asia must ensure that there is a healthy relationship between companies, sovereigns and banks. If this triangle is not healthy, it could become a long-term nightmare for all concerned. This means that the relationship between the government and companies should be such that while diplomatic moves do not adversely impact the prospects of their businesses, businesses too should not start relying on diplomatic maneuvers on the part of their governments to succeed. Similarly, countries must make sure that the public sector banks, the private sector banks and the regulatory bodies go hunting together, but they cannot become too reliant on one another. The relation cannot become incestuous, because while it can result in some good in the good times, the outcomes can be terrible in bad times.
* The first part of the interview can be read here.