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Summit theme six - Dealing with the government

In recent years, there has been considerable progress in the liberalisation of markets in developing countries. Nevertheless, the relationship between business and the government remains a complex one. State capitalism is the dominant economic model in some markets, while in others, there continues to be tight regulation of many industries. Even in those markets that are dedicated to the principles of liberalisation, the role of the government has often become more central as a result of the global financial crisis. The interface between government and business therefore remains fraught with risks and companies must navigate these choppy waters with great care.

State intervention in business is nothing new in the emerging world. And according to one high-profile commentator at Globalisation Redefined, there is little prospect of it decreasing in importance. “Around 90% of the hydrocarbon reserves in the world are controlled by state actors,” said the speaker. “We see the rise of state-led investment funds. And we see the emergence of new economic models which are state-directed even if they call themselves capitalist.”

Running alongside this rise in state intervention is globalisation, which one speaker described as “a fragile creature”. As well as opening up previously rigid structures, globalisation has increased risks. Important among these are the risks to supply chains. These have become highly complex, with manufacturers liable to source parts from many different countries and companies, some of which may be state-led. Even a small disruption in one link in this supply chain can have serious consequences. Globalisation is also piling pressure on access to commodities. We have seen huge volatility in commodity prices in recent years, with oil prices, for example, rising extremely steeply on the back of increased demand. It seems unlikely that we will return to stable trading conditions – volatility in commodity prices looks like it is here to stay.

But while the relationship with government has become more complex in emerging markets, there are many examples where it has improved. Some speakers pointed to the greater willingness of governments in regions such as Africa to deregulate previously state-run industries, such as telecoms and financial services. “We wouldn’t have the opportunity to enter these markets if it wasn’t for government support,” said one investor.

Others pointed to difficulties entering markets in which a range of industries were still regarded as “strategic” and therefore closed to investment. One steel manufacturer at the conference highlighted the problem. “Steel is considered a strategic industry in China,” he said. “It’s very difficult for us to get in there. The question that lies ahead is how can foreign companies enter these markets, share knowledge and technology and be part of a country’s economic development.”

A common problem highlighted by some speakers was that sound policy could be offset by a weak judiciary. In areas such as intellectual property protection, governments may pay lip service to the need to clamp down on infringement, but cases where individuals have felt the force of the law are few and far between. “Good policies can be damaged by the failure to enforce them,” explained an investor.

One approach to this issue has been to build stronger bridges between the regulatory and judiciary systems. In some cases, local lawyers may not have experience of dealing with specific laws, and while there may be laws on the books, there have been no landmark cases to test them. To remedy this, one speaker described how her company sponsored a session for the judiciary system to give them a better understanding of the problem and its importance.

Many speakers spoke of a the need to foster a “partnership” between government and business when operating in emerging markets. Companies should take a broad view of their responsibilities when investing in emerging markets, some speakers believed. This should extend to getting involved in social and community projects, such as building schools or roads. Companies must also make it clear that they are there for the long term in order to build trust. “Business must demonstrate that it is a citizen, not a visitor,” as one speaker put it.

To fulfil their side of the bargain, governments in emerging markets must work to improve the climate for business and investment. “It’s incumbent on the government and business sector to work together,” said one speaker. Although the partnership may be rocky, and the relationship sometimes challenging, open lines of communication can be immensely helpful in enabling a fruitful and prosperous long-term investment.