Role of Government

1. Role of Government Ingmar Björkman Swedish School of Economics Helsinki, Finland & INSEAD Euro-Asia Centre Fontainebleau, France 14.9.2004

2. ROLE OF GOVERNMENT • setting the rules • legal system, e.g. contract law, IPR, health & safety, labor law - but also the unofficial rules of the game • potential customer • potential competitor • provider of services Political risk??

3. WHAT GOVERNMENTS WANT • Foreign exchange • More exports than imports • New technology • Development of specific industrial sectors • Access to capital • Higher tax revenue • Local content and sourcing • Local ownership and control • Domestic control of national resources • Development of backward areas • Prestige and sovereignty

4. POLITICAL RISKS COMPETITIVERISKS ECONOMICRISKS RISKS OPERATIONALRISKS

5. HOW TO ADDRESS GOVERNMENT CONCERNS • Recognise and acknowledge governments as legitimate entities • View the process within a negotiation framework and aim for a win-win arrangement • Note that under most circumstances your bargaining power is highest prior to rather than after you make an investment • Note that your ability to drive a hard bargain weakens if there are more than two or so firms in your industry wanting to operate in a particular region or country • Split your operations vertically across regions keeping if possible the most critical stage out of reach of unreasonable or unstable governments

6. HOW TO ADDRESS GOVERNMENT CONCERNS (2) • Develop centres of competence in the major markets you operate in so as to be local as well as global • But in do doing, take steps to ensure that the network can operate flexibility in terms of shifting operations across countries • Build relationships with the home government so that they can bat for you • Support liberal multilateral trade and investment regimes (because they help make the business environment more predictable and less arbitrary) • Consider dealing with multiple actors, including local officials and opposition parties • Develop political competencies in your organization!

7. High Medium Low Good Poor Medium PREFERRED STRATEGIC POSTURE Minimum financialexposure Minority joint venture, licensing Maximum commitment wholly owned affiliate Own subsidiaries MARKET ATTRCTIVENESS Limited presence Joint venture High commitment Occasional exports Independent distributor Export sales agent Licensing POLITICAL INVESTMENT CLIMATE

8. COUNTRY/BUSINESS ATTRACTIVENESS Market Size/Growth Profitability Resources Natural ResourcesLaborInfrastructure Technology Competition Local/Reg./Global Competition/Co-operation

9. THE POLITICAL-LEGAL & ETHICAL CONTEXT: CASE INDONESIA • 1600s to 1942: Dutch East Indies Company • 1942-45: Japanese • 1945-66 declared independence, Sukarno • 1966-98: Suharto • Prioritized economic development and political stability • Strong executive, weak rule of law (like Sukarno regime)  state intervention in economy favoring friends & family of Suharto  “institutionalized corruption” • Crumbled by trigger of Asian financial crisis • Post –1998: Chaos • IMF imposes bankruptcy law, but no functioning legal system (ex., 30 judges had 1 month of training in bankruptcy proceedings) • Collusion, corruption, nepotism worse than under Suharto

10. “[During the Suharto era] there was a price for everything and everyone knew the price and knew what he was getting for what he paid… Nowadays, you see instead chaos.”Canadian businessman In spite of democratization, increased transparency, anti-corruption legislation… Corruption has become worse. And it has changed from ‘regulated’ to ‘anarchic’

11. Corruption “statistics” for IndonesiaVarious sources • 80% Supreme Court judges taking bribes • 75-80% of all judges corrupt • 95% Payments made to “influence” cases • 60% Official budget as share of spending by Attorney General’s office (40% from “unofficial payments”) • 62% Indonesians who would avoid going to court at all costs • 60% of Indonesians believe police must be bribed ‘to do anything’ • 6% Foreign firms’ win-rate out of 80 “high visibility” cases brought to the new Commercial Courts, “known as one of Indonesia’s most corrupt legal institutions” (Jakarta Post, May 2003) • No. 122/133 on the Transparency International Perceptions Index in 2003, China no. 66, and Finland no. 1.

12. Corruption: a problem?(Source: Professor Henri-Claude de Bettignies, INSEAD) • it has always existed • it exists everywhere • in this country, everybody does it • it’s the tradition in this culture: a “norm of reciprocity” • it’s very functional: the oil that makes the bureaucracy work • it’s a parallel distribution system • I have no choice if I want to keep my job • it’s tax-deductible in my country! • I don’t do it, I have Mr. Fix: he handles it very well! • it really helps to get contracts, so I create jobs (at home)

13. Corruption: some consequences(Source: Henri-Claude de Bettignies, INSEAD) • loss of government revenue • creates bias in decision making • increases(?) red tape and makes rules & regulations flexible • increases the price • de-motivates those who refuse to do it • deterrent for some foreign investors • maintains the incompetence of government • encourages capital flight • creates political instability • weakens the moral fiber of society and what are the consequences for you & your firm if you get involved?

14. Corruption: how to reduce it?(Henri-Claude de Bettignies, INSEAD) • individual level: • role of education, parental guidance • personal commitment, even “whistle blowers” • group level: • peer pressure & the leader’s role • emphasis on “transparency” • corporate level: • clear guidelines & occasional “policy reminders” • empty drawers AND “gifts” go to the company • work with other organizations and governments • society level: • the intervention and scale of the state in the economy • societal institutions and norms • management of transition periods • income distribution system • consistent punishment • freedom of the press and democratic elections

15. THE ROLE OF GOVERNMENT • setting the rules • legal system, e.g. contract law, IPR, health & safety, labor law - but also the unofficial rules of the game • potential customer • potential competitor • provider of services Political risk??

16. Corruption “statistics” for IndonesiaVarious sources • 80% Supreme Court judges taking bribes • 75-80% of all judges corrupt • 95% Payments made to “influence” cases • 60% Official budget as share of spending by Attorney General’s office (40% from “unofficial payments”) • 62% Indonesians who would avoid going to court at all costs • 60% of Indonesians believe police must be bribed ‘to do anything’ • 6% Foreign firms’ win-rate out of 80 “high visibility” cases brought to the new Commercial Courts, “known as one of Indonesia’s most corrupt legal institutions” (Jakarta Post, May 2003) • No. 122/133 on the Transparency International Perceptions Index in 2003, China no. 66, and Finland no. 1.