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The World Financial Review July - August 2013

Contents Sustainability

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Fast Fashion, Luxury Brands, and Sustainability Annamma Joy

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Will Sustainable Development Stay With Us? Kees Zoeteman

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Wise up to Water Risks at the 2013 World Water Week in Stockholm Josh Weinberg & Maya Rebermark, Communications, SIWI

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Environmental Governance for Sustainable Development: An East Asian Perspective Akihisa Mori

Global Economy

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Eternal Economic Return: The Global Economic Crisis through the Lens of History Larry Allen

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Capital Flight and Global Crisis: In Search of a Barometer of Country Risk Michel Henry Bouchet

World Politics

Africa

Middle East

Business

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America’s Iran Policy and the Undermining of International Order Flynt Leverett & Hillary Mann Leverett

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Can Think Tanks Influence Public Opinion and Improve Policy?

Andrew Selee

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Synergising Western and Eastern Approaches: Facilitating Economic Development in Africa Snowy Khoza

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Eastern and Western Ideas for African Growth: Diversity and Complementarity in Development Aid Izumi Ohno & Kenichi Ohno

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EY’s 2013 Africa Attractiveness Survey: Getting Down to Business Michael Lalor

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Entry Strategies for Middle Eastern Markets Tim Rogmans

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Dubai Investments Park: The One-Stop Multi-Purpose Destination

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A Radically Different Innovation: Developing a Unique Business Model Michael Yaziji

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Smaller Cities Embrace Smart Specialisation - The Exeter Success Story Richard Ball

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Can Social Media Help Business-to-Business Companies to Learn from their Customers?

Hannu Kärkkäinen & Jari J. Jussila

“

How Washington deals with Tehran will show whether America is open to sharing the prerogatives of global governance with rising powers in the global South.”

World Politics

page 30

Editors Jane Liu Peres Kagbala David Lean Elenora Elroy Annabel Jacobs Commissioning Editors Rebecca Lord Nisha Khimji Natasha Scott Lily Niu Simon Rosenthal Business Development Editors Ian Love Marcus James Mellisa Ford Zara Hamilton Head of Production Saul Luckman Charlotte Godfrey Production Katia Stephanou Illustration Suya Zhang Mark Hithersay Vaan Cao Head of Finance Lynn Moses Editor in Chief The World Financial Review Publishing Oscar Daniel

READERS PLEASE NOTE The views expressed in articles are the authors’ and not necessarily those of The World Financial Review Authors may have consulting or other business relationships with the companies they discuss.

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America’s Iran Policy and the Undermining of International Order

By Flynt Leverett & Hillary Mann Leverett

Strategic competition between America and Iran will shape not only the Middle East’s balance of power, but also the dynamics of international order through much of the 21st century.

Determination to compel Iran's subordination is driving Washington and a coterie of European states to violate basic principles of rules-based regimes governing key dimensions of international security and commerce.

This renders productive negotiation with Tehran virtually impossible, and makes U.S. foreign policy the world’s biggest source of political risk. It also prompts backlash from rising nonWestern powers that could undermine the functioning of rules-based regimes for nuclear nonproliferation, trade, and other vital issues.

O

ngoing strategic competition between the United States and the Islamic Republic of Iran will affect the balance of power in one of the world’s most vital regions for many

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years to come. Beyond the Middle East, how America deals with Iran will also shape the dynamics of international order through much of the 21st century.

More particularly, how Washington deals with Tehran will show whether America is open to sharing the prerogatives of global governance with rising powers in the global South. Such openness would greatly enhance prospects for conflict resolution with Iran; as the balance of economic and political power shifts from West to East, it would also enhance prospects for more effective global governance by aligning responsibility and capacity more accurately. Furthermore, it would help sustain America’s influence even as its relative power declines.

But Washington and a coterie of

European states remain focused on forcing the Islamic Republic to abandon its nuclear program, accept open-ended American and Israeli military dominance, and acquiesce in its (Westernsponsored) secular liberal transformation. Determination to compel Iran’s surrender prompts ever more assiduous efforts by America and its partners to coerce other states into helping them press Tehran. In the process, Western powers violate basic principles of the rules-based regimes governing key dimensions of international security and global commerce.

This dynamic makes negotiating plausible solutions with Tehran, on the nuclear issue and other challenges, virtually impossible. It also makes U.S. foreign policy the biggest source of political risk in the global economy.

More broadly, hegemonic assertions

by America and a few European partners are increasingly at odds with the realities of relative clout in world affairs. If continued, these assertions will provoke backlash from rising nonWestern powers that will undermine the functioning of rules-based regimes for nuclear nonproliferation, trade, and other vital issues, and damage America’s long-term position in international affairs.

The Real Threat to the NPT Consider Washington’s approach to the Iranian nuclear issue, especially regarding Iran’s development of uranium enrichment and other fuelcycle capabilities. Fuel cycle hardware and know-how epitomise ‘dual use’

How Washington deals with Tehran will show whether America is open to sharing the prerogatives of global governance with rising powers in the global South.

technology—for the same material that fuels power, medical, and research reactors can, at higher levels of fissile isotope concentration, be used in nuclear bombs. But America’s insistence that Iran stop developing fuelcycle capabilities is at odds with—and risks undermining—the Nuclear NonProliferation Treaty (NPT).

Over 43 years, the NPT has been one of history’s most successful multilateral treaties, limiting the number of nuclear-weapons states and facilitating the dismantling of nuclear arsenals or weapons programs in several countries. Of the dozens of countries that joined it as non-weapons states, only one—North Korea—withdrew to test nuclear weapons. Of the four countries that have never joined—India, Israel, Pakistan, and South Sudan—75 percent acquired nuclear weapons.

Since the Cold War’s end, legal reality has been assaulted by America’s determination — supported by Britain, France, and Israel — to constrain distribution of fuelcycle capabilities to non-Western states. safeguards. During drafting of the NPT, U.S. officials testified to Congress that the treaty would permit non-weapons states to pursue the fuel cycle.

Since the Cold War’s end, though, legal reality has been assaulted by America’s determination—supported

by Britain, France, and Israel (effectively no one else)—to constrain distribution of fuel-cycle capabilities to nonWestern states. These four countries have sought, in effect, to rewrite the NPT (of which Israel isn’t even a signatory). They argue that non-weapons’ states commitment to eschew nuclear

Since the Iranian Revolution, Iranian leaders have, on strategic and religious grounds, rejected nuclear weapons in their national security strategy.

The NPT’s effectiveness flows from its integration of three bargains: • Non-weapons states — like Iran — commit not to obtain nuclear weapons.

• Countries recognised as weapons states (America, Russia, Britain, France, and China) commit to nuclear disarmament.

• All agree that signatories have an ‘inalienable right’ to develop and use nuclear technology for peaceful purposes ‘without discrimination’—and an obligation to facilitate the exercise of that right by others, especially non-weapons states.

The NPT’s negotiating history and subsequent state practice—with at least a dozen non-weapons states establishing fuel-cycle infrastructures potentially able to support weapons programs—show that the right to peaceful use encompasses indigenous development of fuelcycle capabilities under international

July - August 2013

weapons trumps those by weapons states to disarm and by all to the acquisition and peaceful use of nuclear technology. They claim—against history, law, and state practice—that there is no treaty-based right to pursue fuel-cycle capabilities, and that weapons states and their allies with nuclear industries should decide (under U.S. leadership) which non-weapons states can have fuel-cycle technologies.

Non-weapons states have long resented weapons states’ poor compliance with their disarmament commitment. But non-Western states are even more concerned about Western efforts to constrain diffusion of fuel-cycle capabilities, which they consider a bigger threat to the NPT’s integrity than Iran’s nuclear activities. Among rising powers, Brazil and South Africa—both nonproliferation exemplars for joining the NPT as non-weapons states after forsaking weapons programs during

democratisation (including, in South Africa, six fully fabricated nuclear bombs that Israel helped the apartheid regime assemble)—have been especially adamant in defending nonweapons-states’ right to the fuel cycle.

The primary motive for trying to constrain non-Western states’ fuelcycle capabilities has been to maximise America’s freedom of unilateral military initiative and, in the Middle East, that of Israel. Over the last decade, this campaign has focused with ever-greater intensity on Iran’s nuclear activities.

One of the more inflammatory pieces of Western conventional wisdom about the Islamic Republic is that it is working to develop nuclear weapons. U.S. and Israeli intelligence services have claimed since the early 1990s that Iran is three to five years away from acquiring nuclear weapons; at times, Israel has offered more alarmist projections. But twenty years into this constantly resetting forecast, no one has come close to producing hard evidence that Iran is trying to fabricate nuclear weapons; U.S. and Israeli intelligence now admit Tehran has not decided to do so. Mohamed ElBaradei-the Nobel laureate under whose leadership the International Atomic Energy Agency correctly assessed Iraq's lack of WMD when every intelligence agency got it wrong--has said on multiple occasions that there is no evidence the Islamic Republic is trying to build nuclear weapons.

Since the Iranian Revolution, Iranian leaders have, on strategic and religious grounds, rejected nuclear weapons in their national security strategy. The Islamic Republic’s founders stopped the weapons-related aspects of the nuclear program they inherited from the last Shah—but proceeded with its civil aspects, which now include indigenous enrichment of uranium.

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Western intelligence services claim Iran has done at least theoretical work on aspects of the design and construction of nuclear weapons. None of the claims are substantiated by hard evidence, or contradict the IAEA’s affirmation of Iran’s non-diversion of nuclear material.

Western intelligence services claim Iran has done at least theoretical work on aspects of the design and construction of nuclear weapons. None of the claims, though, are substantiated by hard evidence, or contradict the IAEA’s continuing affirmation of Iran’s nondiversion of nuclear material. Even if some or all of the claims were accurate, the NPT does not prohibit the research Iran has been accused of conducting; Baradei has said that developing nuclear weapons capability—not weapons, but competencies needed to make them—is ‘kosher’ under the NPT. Given these realities, the outlines of a nuclear deal between the P5+1 and Iran have long been obvious: Western recognition of Iran’s nuclear rights—especially to enrich under safeguards—for more intrusive monitoring and verification of its nuclear activities. But the Obama administration, like the Bush administration before it, is unwilling to countenance this.

American and Israeli leaders are not focused on Iranian enrichment from fear of a nuclear holocaust. Critical masses of Israeli as well as U.S. national security professionals judge that, even if the Islamic Republic were to obtain nuclear weapons, it would not use them against Israel, much less America. As former Israeli Defense Minister Ehud Barak said publicly last year, ‘I don’t think the Iranians, even if they got the bomb, [would] drop it in the neighborhood. They fully understand what might follow’.

In American and Israeli calculations, perceptions that the Islamic Republic had achieved even just a ‘breakout’ capability—not nuclear weapons, but sufficient mastery of the competencies needed to build them that it might be able to do so in a relatively short timeframe—are problematic because they could begin constraining U.S. and Israeli freedom of unilateral military initiative.

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In other words, U.S. or Israeli decisionmakers might have to think twice about initiating armed conflict in the Middle East. As Barak put it, ‘Imagine if we enter another military confrontation with Hezbollah…A nuclear Iran announced that an attack on Hezbollah is tantamount to an attack on Iran. We would not necessarily give up on it, but it would definitely restrict our range of operations’.

That’s what Washington’s insistence on Iran’s abandonment of the fuel cycle is really about: preserving a hegemonic option for America—or Israel—to initiate military action in the Middle East.

the Non-Aligned Movement (representing nearly two-thirds of the UN)—have unequivocally recognised Iran’s right to safeguarded fuel cycle capabilities.

Brazil and Turkey brokered the Tehran Declaration in May 2010, whereby Iran accepted U.S. terms to swap most of its then stockpile of enriched uranium for new research reactor fuel. Brazil, though, made sure the Declaration explicitly highlighted Iran’s right to enrich; for this reason, the Obama administration rejected it. While China and Russia, the Security Council's nonWestern permanent members, acquiesced to resolutions directing Iran to suspend enrichment, they also note

The ‘BRICS’ and the Non-Aligned Movement (representing nearly two-thirds of the UN) have unequivocally recognised Iran’s right to safeguarded fuel cycle capabilities.

In a quixotic quest to preserve this option, the Bush and Obama administrations pressed the UN Security Council to adopt seven resolutions telling Tehran to suspend uranium enrichment, even though it is part of Iran’s ‘inalienable right’ to peaceful nuclear technology. The first, from 2006—on which all subsequent resolutions on Iran’s nuclear activities are based—reflects an assessment of Tehran’s intent to build nuclear weapons that America’s intelligence community repudiated in 2007. Notwithstanding this repudiation, which effectively nullifies the legal basis for the subsequent resolutions, Washington and its European partners continue demanding that Iran adhere to these ‘international obligations’.

Non-Western states have supported Iranian resistance to U.S. demands, and seek to steer Washington in a more constructive direction. The ‘BRICS’ (Brazil, Russia, India, China, South Africa) and

regularly there will be no diplomatic solution that excludes Western recognition of Iran's nuclear rights.

But it is unclear whether U.S. policy on the nuclear issue is, in fact, correctible.

Barring a sea-change in America’s position, there will be no positive outcome in the P5+1 talks with Iran. Washington will intensify pressure on other states to tow its line on Iranian enrichment, deepening non-Western resentment at American high-handedness and bringing Western and non-Western states closer to a crisis point for global governance.

To understand how this will happen, it is revealing to examine America’s Iranrelated sanctions policy.

The Unraveling of America’s Iran Sanctions Notwithstanding Washington’s drive to enact ever more sanctions against Tehran, the edifice of U.S. sanctions policy is collapsing. In June, Britain’s

supreme court ordered the Treasury to lift sanctions imposed

by Her Majesty’s Government on the Iranian Bank Mellat.

Earlier this year, Europe’s General Court overturned European sanctions against Bank Mellat and another Iranian bank. More banks and other pillars of Iran’s economy, like the National Iranian Oil Company, are now contesting their sanctioned status in European courts. These cases directly challenge European sanctions against Iran (whether imposed nationally or by the EU). They also threaten the whole web of U.S.-instigated sanctions that has expanded dramatically since Obama’s accession in 2009.

America has, for three decades, put unilateral sanctions on the Islamic Republic—over its alleged pursuit of WMD, support for groups that Washington labels terrorist organisations, and its domestic governance. Six of the seven Security Council resolutions on the nuclear issue authorize multilateral sanctions against Iran. But neither unilateral nor UN measures have had decisive impact on Iran’s economy or decisionmaking: even a superpower’s unilateral sanctions don’t work if other countries won’t replicate them, and China and Russia ensure that UN sanctions don’t impinge on their most important interests with Iran.

Besides unilateral and multilateral measures, America has, since 1996, threatened to impose ‘secondary’ sanctions on third-country entities doing business with Iran. Secondary sanctions now cover most commercial activities, including investment in and provision of services to Iran’s hydrocarbon and shipping sectors, buying Iranian crude oil, and virtually all financial transactions. The penalties that can be levied now include being cut off from the U.S. financial system.

America’s increasing reliance on secondary sanctions in its Iran policy is ultimately self-defeating in at least three significant ways.

First, secondary sanctions are a legal house of cards. The UK and EU sanctions challenged by targeted Iranian entities reflect American policy parameters. By extension, court decisions invalidating some of these sanctions highlight a major legal defect in U.S. secondary sanctions: they cannot survive scrutiny as focused measures targeting entities directly involved in alleged nefarious activities. They are broad-brush instruments meant to shut down as much Iranian economic activity—and inflict as much hardship on Iranians—as possible. Besides its inhumanity, such an approach is bound to impinge on increasingly important interests of more and more states, setting the stage for backlash.

Moreover, secondary sanctions violate U.S. commitments under the World Trade Organisation, which allows members to cut trade with states they deem national security threats

but not to sanction other members over business conducted in third countries. If challenged on this in the WTO’s Dispute Resolution Mechanism, Washington would surely lose.

Meanwhile, America’s accelerating resort to the threatened application of secondary sanctions boosts non-Western cynicism not just about the real objectives of U.S. Iran policy, but also about the universal applicability of WTO rules and norms, thereby eroding confidence in the existing trade regime.

Second, secondary sanctions are a political house of cards.

American officials are well aware of their presumptive illegality. Successive U.S. administrations have been reluctant to impose them on non-U.S. entities transacting with Iran, precisely to avoid formal challenges at the WTO. U.S. secondary sanctions are, in effect, an enormous bluff, leveraging the specter of legal and reputational risk in America to bully companies and banks in third countries to stop transacting with Iran, but without pulling the trigger on the threat to punish those that continue doing business in Iran.

The UK and European sanctions now facing legal challenges are a product of this bullying campaign. For over a decade, the EU has condemned America’s threatened ‘extraterritorial’ application of national trade law, warning it would go to the WTO if Washington ever sanctioned European companies over Iran-related business. Over the last several years, though, enough British and European businesses stopped transacting with Iran that the EU was no longer under pressure to defend European commercial interests and could begin subordinating its Iran policy to American preferences.

By last year, it has imposed a nearly comprehensive economic embargo against the Islamic Republic.

While Europe has surrendered on having an independent Iran policy, the U.S. bluff on secondary sanctions will soon be called, most likely by China. To be sure, Beijing does not seek confrontation with America over Iran, and has sought to accommodate Washington in many ways—e.g., by not developing trade and investment positions in the Islamic Republic as rapidly as it might have, and by shifting some Iran-related transactional flows into renminbi to help the Obama administration avoid sanctioning Chinese banks. While China’s imports of Iranian oil appear, in the aggregate, to be growing, Beijing reduces them when the administration is deciding about sixmonth sanctions waivers for countries buying Iranian crude.

The Obama administration, for its part, continues giving China sanctions waivers; the one Chinese bank barred from America for Iran-related transactions is a Chinese energy company subsidiary with no U.S. business. But as Congress legislates more secondary sanctions, Obama’s room to maneuver is shrinking.

Neither unilateral nor UN measures have had decisive impact on Iran’s economy: even a superpower’s unilateral sanctions don’t work if other countries won’t replicate them, and China and Russia ensure that UN sanctions don’t impinge on their most important interests with Iran.

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Strategic recovery will also entail reversing Washington’s reliance on secondary sanctions—not because of Iranian surrender (which won’t be forthcoming), but because they delegitimize America’s claim to continuing leadership in international economic affairs.

Obama will soon be in the position of demanding that China cut Iranian oil imports in ways that would harm its economy, and that Chinese banks stop virtually all Iran-related transactions.

Beijing will not be able to accommodate such radical demands; it will have to say ‘no’, putting Obama in a classic loselose situation.

Obama could retreat. But then the world will know that secondary sanctions are a bluff, undercutting their

This trend will diminish Western influence in myriad ways—e.g., reducing the dollar’s role as a transactional currency, lowering the share of crossborder commodity trades on New York and London exchanges, and shrinking the global near-monopoly of Westernbased reinsurance companies and P&I clubs. Add the cost of a U.S.-instigated trade dust-up with China, and the selfdamaging quality of America’s dysfunctional Iran policy becomes even clearer.

If America wants a nuclear deal grounded in the NPT, Hassan Rohani is an ideal interlocutor. But this would require Washington to bring its own policy in line with the NPT. deterrent effect. Alternatively, he could sanction major Chinese firms and banks.

But that will force Beijing to respond— at least by taking America to the WTO (where China will win), perhaps by retaliating against U.S. companies. At this point, Beijing has more ways to impose costs on America for violations of international economic law impinging on Chinese interests than Washington has levers to coerce Chinese compliance with U.S. policy preferences. America and its partners will not come out ahead in this scenario.

Third, U.S. secondary sanctions accelerate the shift of economic power from West to East. As non-Western economies surpass more Western countries in their relative importance to the global economy, America has a strong interest in keeping non-Western states tied to established, U.S.-dominated mechanisms for conducting, financing, and settling international transactions.

Secondary sanctions, though, push in the opposite direction, incentivizing emerging powers to speed up development of non-Western alternatives to existing transactional platforms.

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of all alleged WMD activities, cutting all ties to those Washington deems terrorists, and political transformation.

Overcoming this will require Obama to do what President Nixon did to enable America’s historic breakthrough with China—going to Tehran, strategically if not physically, to accept a previously demonised political order as a legitimate entity representing legitimate national interests.

None of this is particularly likely.

But if America doesn’t do these things, it condemns itself to a future as an increasingly failing, and flailing, superpower—and as an obstacle, rather than a facilitator, of rules-based international order.

Finding a New Approach

About the Authors

Putting America on a better strategic trajectory will take thoroughgoing revision of its Iran policy. In this regard, the election of Hassan Rohani—who ran the Islamic Republic’s Supreme National Security Council for sixteen years, was its chief nuclear negotiator during 20032005, and holds advanced degrees in Islamic law and civil law—as Iran’s next president is an opportunity. If America wants a nuclear deal grounded in the NPT, Rohani is an ideal interlocutor.

But this would require Washington to bring its own policy in line with the NPT—first of all, by acknowledging Iran’s right to safeguarded enrichment.

Strategic recovery will also entail reversing Washington’s reliance on secondary sanctions—not because of Iranian surrender (which won’t be forthcoming), but because they delegitimize America’s claim to continuing leadership in international economic affairs. This, however, is even more difficult than revising the U.S. position on Iranian enrichment—for Congress has legislated conditions for lifting sanctions that stipulate Iran’s abandonment

Flynt Leverett and Hillary Mann Leverett are authors of Going to Tehran: Why the United States Must Come to Terms with the Islamic Republic of Iran (New York: Metropolitan, 2013). They had distinguished careers in the U.S. government before leaving their positions on the National Security Council in March 2003, in disagreement with Middle East policy and the conduct of the war on terror. They teach international relations, he at Penn State, she at American University.

"There is a whole slew of highly dubious assumptions and narratives about Iran and the US's relationship to it that are rarely challenged in any meaningful way in standard media circles. The Leveretts and Going to Tehran are vital to thinking critically about these claims….

Both because of their expertise and their long immersion in these issues, they (and their data-filled book) deserve a prominent voice in all serious debates about Iran."

— Glenn Greenwald, The Guardian

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Can Think Tanks Influence Public Opinion and Improve Policy?

By Andrew Selee

Think tanks have sprung up throughout the world, trying to generate ideas and analysis that can be useful in public debate and in policymaking. Some think tanks have political or ideological aims; some want to raise attention to a particular issue; and others simply try to throw light on complicated issues in their field. Below, Andrew Selee considers how organisations invest in ideas about public policy, and outlines the steps they can take to enhance their possibilities of success.

T

hink tanks have sprung up throughout the world, trying to generate ideas and analysis that can be useful in public debate and in policymaking. Sometimes affiliated with governments, political parties, or universities, but often as independent organisations, think tanks work in the moving terrain of public ideas and in the belief that ideas can help drive better policies. Planning for impact in the world of think tanks is hardly an easy effort. How does an organisation dedicated to analysis and idea-generation decide what it should prioritise and then measure the success of its efforts? At best, think tanks can point to an occasional success when an idea or an argument gets picked up in the media or in policy decisions, but more often than not their efforts are one part of a broader public conversation on policies and current events.

In a new book, What Should Think Tanks Do? A Strategic Guide to Policy Impact

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(Stanford University Press, 2013), we look at how organisations invest in ideas about public policy and suggest a five-step process through which these organisations can enhance their possibilities of success. It all begins with the first step of understanding the organisation’s main purpose and what it wants to achieve, and then setting achievement-oriented goals around that. Some think tanks have political or ideological aims; some want to raise attention to a particular issue; and others simply try to throw light on complicated issues in their field. Whatever their purpose is, however, understanding how to translate that purpose into a set of concrete goals is the foundation of success.

distribution if they were successfully produced. Pulling together an impressive array of stakeholders and researchers, the Center was able to do the foundational research to get an idea of what sort of commitments were needed and then to get a series of governments to make the needed commitments to buy the vaccines once they were produced. Today, millions of children are now protected by these vaccines which have since been invented, produced, and distributed in low-income communities around the world. Success rested on knowing up front what the think tank wanted to achieve and then building its strategy around that goal.

Understanding the Policy Cycle

Utilising Comparative Expertise and Unique Focus

To do this, organisations need to understand where in the policy cycle they are most effective. Are they best at providing a general analysis of the issue, developing new ideas for policy, or suggesting specific action-steps for policy? Few organisations can do all of these things equally well. And once they know which of these activities they do best, they need to know the state of play on their issues and think through what research would have the greatest impact. While it is almost impossible for think tanks to actually plan to change the world, they are best served when they plan as if they could and when they visualise what total success would look like.

One outstanding example of this is the Center for Global Development, which set out to create a market mechanism to incentivise research and production of vaccines that could prevent pneumococcal diseases that kill over a million children each year in developing countries.

They realised that the best way to do this was to get countries, international organisations, and foundations to agree to put money on the table for medical research and also agree to buy the vaccines for

The second stage for impact-oriented think tanks is determining what they do best; in other words, what their lanes of excellence are. For some think tanks, their comparative advantage may have to do with the issues they address, their particular ideological orientation, or their geographical reach. Chatham House, the venerable London-based think tank on foreign policy, has established a reputation that allows it to work on multiple international issues, as has the Brooking Institution in the United States. But most think tanks are far more compact and focused, and they develop their reputation around a handful of issues where they develop particular expertise and often a unique focus. Fundar, a small think tank in Mexico, for example, has established its reputation based on its single-minded focus on transparency and accountability issues. Over time it has moved into questions of social policy, education, and public security, but always with an angle around transparency and accountability.

Meanwhile, organisations like the Pacific Council for International Policy and the Chicago Council on Global Affairs may not be able to compete with Chatham

House or Brookings in size or reach, but they have carved out key niches within important regions of the United States in which they have become preeminent forums for international issues.

Strategies to Reach Target Audiences The third step for successful think tanks is to have a clear idea of their target audiences and how to reach them. In the age of social media, multiple strategies, many of them quite inexpensive, are available to get a message out. However, not all work equally well with each audience. Often the best research needs to be tailored in specific ways to reach different audiences.

Indeed, a single piece of research may well turn into a book, a policy brief, an op-ed, and a series of short memos to policymakers, as well as Facebook postings and Twitter feed, each targeting slightly different audiences. The Woodrow Wilson Center’s Science and Technology Innovation Program, for example, converts its work on synthetic biology, nanotechnology, and crowdsourcing into articles in scientific journals, short policy briefs and op-eds for decision-makers, and sometimes even into articles in popular magazines like Parade, Elle, and Family Life that reach general audiences.

The most challenging tasks that think tanks, like all non-profits, face are how to raise funds and hire the right people to get their work done, which is the fourth step to success. In the case of think tanks, the people and the product are actually interwoven, since so much of what they produce is tied to the expertise of those they employ. Think tanks have multiple strategies for getting the right people to work for them, and it often involves creative combinations of full-time staff, part-time researchers, visiting scholars, and outside consultants. In many cases, think tanks combine in-house expertise with outside experts who become affiliated with the institution and contribute some of their time to work on joint projects. Fundraising, as in all nonprofits, involves finding stakeholders who share the organisation’s commitment to the same issues, whether these are foundations, individuals, companies, unions, or government agencies.

The Migration Policy Institute, based in Washington, DC, New York, and Brussels, has developed a stakeholder-focussed strategy of fundraising in which it is both a recipient of foundation and individual giving and contributes to the knowledge production of the foundations that support it, and actively engages those who contribute financially as partners in its efforts.

Evaluating and Benefiting from Experience Finally, think tanks like all businesses and non-profit organisations, need ways of evaluating their success and learning from experience. It turns out that this is a particularly difficult process for most think tanks, since the bottom line has to do with whether they have succeeded in changing the landscape of policy or public ideas in some way through their work. However, in most cases, changes in public debate or policy decision-making have more than one single influence.

Has the Peterson Institute for International Economics, a think tank dedicated to trade and global economic analysis,

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A single piece of research may well turn into a book, a policy brief, an op-ed, and a series of short memos to policymakers, as well as Facebook postings and Twitter feed. influenced the outcome of economic decisions around the world in an appreciable way, when there are so many other influences on these decisions? Has the International Crisis Group, based in Brussels, actually resolved any crises, when these outcomes always depend on multiple factors, usually outside of the control of any single organisation? Rarely can a think tank claim sole credit for solving a problem, notwithstanding the rather exceptional example from the Center for Global Development above. However, it turns out that organisations like the Peterson Institute and the International Crisis Group, which are rigorous about following the outcome of their efforts, can often claim credit for raising an issue before others did and placing it on the public agenda or developing data or analysis that finds its way into serious discussions on how to address an issue. Strict correlations between a single publication or event and a policy outcome may not always be possible, but long-term commitment to an issue can breed a lasting imprint on how others think about that issue.

Much of the challenge for evaluating success lies in tracking the organisation’s outputs rigorously – data on publications, media citations, and speeches – and systemically collecting evidence on outcomes. To do this, think tanks need to return to their original purpose. To the extent that they started out with achievement-oriented goals, they can look back and see how close they have gotten to their goals and what other steps they might take to get closer. In many cases, the terrain of policymaking or public discussion may well have shifted, so they need to rethink how they can best contribute to the conversation in a way that produces the greatest impact moving forward. Well-managed think tanks, including those mentioned above, almost always devote time to tracking their footprint in policy and public dialogue in an effort to learn from their successes and their failures.

At their best, think tanks are only one input into how policymakers and the general public understand critical policy issues.

However, these organisations, when committed to producing an impact, can play a vital role in enhancing the public discussion of ideas, providing alternatives for people to choose from, and shedding new light on how to understand the world around us.

About the Author Andrew Selee is is the Vice President for Programs at the Washington, DC-based Woodrow Wilson Center, which promotes independent research, open dialogue, and actionable ideas on global policy issues. He is the author of What Should Think Tanks Do? A Strategic Guide to Policy Impact (Stanford University Press, 2013), the first strategy and management book for policy research organizations.

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Sustainability Global Economy World Politics Africa Middle East Business

EY’s 2013 Africa Attractiveness Survey: Getting Down to Business

By Michael Lalor There is therefore good reason to pause and celebrate the progress that Africa has made. At the same time, though, individual countries and the region as a whole still need to address significant challenges in order to sustain this progress, and to emulate the kind of developmental path we have seen in places like south east Asia over the past 30-40 years.

The critical role of foreign investment

Africa’s rise over the past decade has been very real, and the evidence of the continent’s clear progress is irrefutable; however, there are significant challenges ahead. Below, Michael Lalor from Ernst & Young outlines the critical role of foreign investment in Africa, and the necessity of focussing on believers in the Africa growth story.

Africa’s rise is real Africa’s rise over the past decade has been very real. While skeptics still abound, and there are people who still seek to debate the point, the evidence of the continent’s clear progress over the past decade is irrefutable. The reality is that a diverse range of African countries have now experienced consistent and robust growth for over a decade – certainly the longest period of sustained growth since most countries attained independence in the early 1960s. In the period since 2002, the size of the overall African economy has more than trebled (and grown at twice the population growth rate) – over this period, the size of the Sub-Saharan African (SSA) economy has grown well over 3 ½ times.

What makes this economic performance all the more remarkable is that half of that decade has been marked by a deeply troubled global economy. Although many African economies have been negatively impacted by the situation in key trading partners in Europe and North America, most have remained remarkably resilient. The immediate outlook also appears positive, with many parts of the region forecast to continue experiencing relatively high growth rates, and a number of African economies predicted to remain among the fastest growing in the world for the foreseeable future.

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We believe that foreign direct investment (FDI) can play a critical role in supporting the sustainability and even acceleration of the growth and development we have seen across Africa over the past decade. As we look ahead to the ongoing challenges of job creation, skills development and ultimately significant reduction in poverty and inequality, foreign investment can play a critical direct and indirect role. Besides being a source of longer term capital, as well as tax revenues, arguably more important is the broader impact of these investments across African economies. The specific category of FDI that we analyse – new greenfield investments and significant expansions of existing projects, all of which must create direct jobs – is particularly relevant in the context of Africa: • Greenfield FDI has created almost 1.5 million new direct jobs in Africa over the past decade; this does not count the many indirect jobs that would be created as a result of this employment.

• Foreign multinationals are increasingly playing a proactive role in the development of local suppliers, with local sourcing policies helping to create extended supply chains of domestic providers.

• Systematic local skills development and transfer are integral to the longer-term approach of an increasing number of multinationals doing business on the continent. Besides being a responsible approach to doing business, local skills development is actually a business imperative for these companies, because the cost of staffing with expatriates is simply unsustainable.

• Over the longer term, it is not only the skills but also the technologies and innovations that foreign companies introduce into local economies that act as catalysts for development of local capabilities in transformative sectors such as manufacturing and value-adding services.

A key point is that FDI is not only an important contributor

In the period since 2002, the size of the African economy has more than trebled (and grown at twice the population growth rate).

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to growth and development in and of itself, but that it will continue to be a driver of broader private sector development across the continent. This is critical, because it is the private sector (both foreign but increasingly domestic enterprises) that will ultimately lead the structural transformation required to sustain and accelerate Africa’s growth. It is the private sector that will invest in transformative sectors like agri-processing, manufacturing, ICT and tradable services, such as tourism, business process outsourcing and off-shoring of certain business functions. It is ultimately the private sector that will drive accelerated economic expansion and sustainable job creation.

It is the private sector that will ultimately lead the structural transformation required to sustain and accelerate Africa’s growth.

The perception gap remains a barrier for new investors Our 2013 Africa attractiveness survey shows some progress in terms of investor perceptions since our inaugural survey in 2011. The majority of respondents are positive about the progress made in and the outlook for Africa. Africa has also gained ground relative to other global regions: whereas in 2011 it was only ranked ahead of two other regions, this year it was ranked ahead of five other regions, (the former Soviet states, Eastern Europe, Western Europe, the Middle East and Central America).

However, the big take away for us from this year’s survey is the stark and enduring perception gap between those respondents who are already doing business in Africa versus those that have not yet invested in the continent. Those with an established business, who understand the real rather than perceived risks of operating in Africa, who have experienced the progress made and see the opportunities for growth, are overwhelmingly positive. Some 86% of these business leaders believe that Africa’s attractiveness as a place to do business will continue to improve, and they rank Africa as the second most attractive regional investment destination in the world after Asia.

In contrast, those with no business presence in Africa are far more negative about Africa’s progress and prospects. Only 47% of these respondents believe Africa’s attractiveness will improve over the next three years, and they rank Africa as the least attractiveness investment destination in the world – many of these potential investors continue to base their perceptions on an image of Africa fixed in a time and space 20 or 30 years ago.

Focus on enabling those already doing business in Africa However, the fact that there are a number of companies with an already established presence in Africa that are very positive about the continent’s growth prospects and are getting down

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to business is crucial. These are believers in the Africa growth story, who do not need convincing; they are growing their investments, creating new jobs and focusing on long term, sustainable growth opportunities across the continent.

The numbers also indicate that these companies, many of which have been doing business on the continent for decades, are expanding their operations in Africa, increasing their investments in greenfield projects, reinvesting their local earnings, strengthening local supply chains and enterprise, developing local skills, and generally focussing on long term growth in Africa. These are the believers in the African growth story, who do not need convincing and are already deeply committed to the future of the continent both financially and emotionally.

We believe it is therefore time for a shift of emphasis and mindset away from trying to persuade the skeptics toward promoting the believers; from trying to sell the ‘why’ of investing in Africa toward the ‘how’ of driving successful growth of private enterprise across the continent; from debating the merits of the African growth story toward simply getting down to business.

African governments should engage in more collaborative and productive partnerships with these companies already doing business across the continent. There also needs to be greater focus on creating an enabling environment for doing business by more actively addressing the priorities highlighted in our research this year, namely, implementing anti-bribery and corruption initiatives, accelerating the execution of critical infrastructure projects, addressing customs and border management inefficiencies, and driving the regional trade and integration agenda.

With a critical mass of us pulling in the same direction, and with committed leadership from government, business and civil society, Africa will continue its rise in the decades to come.

African governments should engage in more collaborative and productive partnerships with these companies already doing business across the continent.

About the Author Michael Lalor is a partner in the Europe, Middle East, India and Africa (EMEIA) practice of Ernst & Young, now known as EY, and is responsible for the firm’s Africa Business Center.

He has a background in political science, economics, and literary studies. Michael’s areas of focus include strategy and business development. His responsibilities include the firm’s thought leadership initiatives on Africa, such as the flagship Africa Attractiveness publication. He has also worked with a number of companies from various countries and across a range of sectors to assist them in developing, stress-testing and executing their Africa growth strategies.

© 2013 EYGM Limited. All Rights Reserved.

Having lots of dots on the map doesn’t mean anything if they’re not connected In today’s world, where you are should never get in the way of where you need to be. We have the highest performing teams wherever you need them. ey.com/betterworkingworld @EY_Africa

Sustainability Global Economy World Politics Africa Middle East Business

Entry Strategies for Middle Eastern Markets

By Tim Rogmans Despite political turbulence, Middle Eastern markets provide great opportunities for international investors. The region’s advantages include its location at the crossroads of three continents, vast energy reserves and rapidly growing populations. Political risk is the main factor making multinational companies stay away from the region or limiting their involvement in licensing and franchising deals. This article outlines ways in which companies can enter and grow in this region, while managing political risk.

Middle Eastern Megatrends The Middle East is experiencing a number of fundamental shifts, each with a great impact on foreign investors. Although every industry sector will have its own specific developments shaping its future, here is a brief overview of the eight trends that are transforming the region’s overall business environment: 1. Political instability and improving business regulations. The sources of political instability in the region are wide-ranging and generally well known. Foreign investors looking at the region will quickly think of the Israeli – Palestinian conflict, the Arab Spring, the conflict in Syria and Lebanon, the aftermath of the Iraq war and the tensions over Iran’s nuclear programme. What is perhaps less known is that many countries in the region, particularly the Gulf countries, have been making steady progress in improving the business environment through the introduction of new investor friendly legislation. As a result, the UAE and Qatar both rank in the top 10 most competitive nations according to IMD’s World Competitiveness rankings. Both political instability and increasing openness to foreign investors look set to continue

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for the foreseeable future.

2. Energy resources. The recent shale gas boom in the United States, softening energy prices and rapidly increasing energy use inside the Middle East, have served as a warning for governments who rely heavily on energy exports to balance their budgets. However, energy reserves still provide a massive cushion for government spending in Saudi Arabia, Kuwait, Qatar, and the UAE, underpinning growth in spending on education, healthcare, infrastructure as well as the energy sector itself. In these countries, energy reserves are projected to last at least another 50 years at current production rates.

3. The rise of women. Although many obstacles remain to the professional advancement of women in the Middle East, women now represent the majority of students enrolled in higher education in the region. They are making up an increasing proportion of the workforce and, at least in some countries, are rising to levels of seniority in government and business unheard of just ten years ago.

4. Turning East. Trade and investment links between the Middle East and other emerging markets are growing far more rapidly than with Europe and North America. The reinvigoration of links with Asia has been referred to as The New Silk Road, reviving trade routes that existed centuries ago. At the same time, the region is becoming a transit hub for the rapidly growing business links between Asia, Africa and Latin America.

5. Regional integration. Although regional integration is not developing rapidly at the political level, it is happening in many other areas of relevance to investors. Intraregional migration (especially from the Levant region to the GCC countries), Free Trade Agreements, improving transport and

communication links, the emergence of a regional media market and the regional expansion of companies in a variety of sectors, all contribute to greater economic integration in the region.

6. Value based consumption. Middle Eastern consumers are increasingly purchasing according to their values and beliefs, leading to rapid growth in Islamic Finance and to a slow but robust emergence of more environmentally friendly practices in industries such as food, construction and transport.

7. Demographics. The region’s population is projected to grow by over 80% over the next four decades. The influx of young people into the workforce and continuing urbanisation will put great pressure on societies to provide jobs and adequate living conditions.

8. The rise of Middle East multinationals. Foreign investors are facing increasingly tough competition as local companies expand internationally across the region and beyond.

They have become serious competitors in a range of industries, including in air transport (e.g. Emirates, Etihad, Qatar Airways), logistics (Agility, Aramex, DP World), tourism (Jumeirah), telecommunications (Etisalat, Orascom), petrochemicals (SABIC) as well as in finance and construction.

Middle East multinationals benefit from a lack of legacy, enabling them to adopt best practices quickly, low cost labour, low taxes and a favourable location for transport, tourism and energy intensive industries.

Companies looking to enter the region will need to consider the impact on their business of these and other trends.

For most industries, the general picture that emerges is one of rapidly growing markets coupled with high political risk.

Within this context companies will need to define their entry strategies, starting with which markets to enter and which entry mode to use.

Location Choices The choice of which countries to enter in a region is first of all determined by the attraction of a particular market. Reliable market data can be hard to obtain in countries where the collection of statistics by government agencies is still under development. As a result, companies are forced to rely on macro level data followed by custom research in order to assess the attractiveness of specific product and geographic markets.

Once attractive markets are identified, other factors come into play. Case studies of successful investors in the region have pointed to infrastructure and quality of life as being major elements in the investment location decisions of multinationals. As most investors have regional ambitions and look for one hub location from which to coordinate all activities in the region, the availability of airport facilities and international flights are important considerations. In this regard, Dubai has long ago overtaken Bahrain’s lead, while Abu Dhabi, Doha and Istanbul are also expanding quickly. Other infrastructure considerations include a country’s availability of quality housing and office space and the quality and cost of

July - August 2013

telecommunications. Quality of life is another important decision-making element, as investors will often rely on expatriate managers and workers that need to be attracted to relocate to the region with their families. The availability of international schools, safety and entertainment options are important factors in making location choices. The key for investors is to choose a location that is not only appropriate for a particular manager who may be heading the region for a limited time, but whether a pool of talent can easily be attracted to live and work in the chosen location.

Taxation and cost of business considerations always play a role in location decision-making and in the Middle East the picture is more complicated than it appears at first. Most Gulf countries operate a ‘no tax’ policy, making them look attractive at first sight. However, investors need to do a careful analysis of the total cost of running a business, including rent, various license fees, import duties and telecommunications. In some countries with protected telecom operators, the cost of telecommunications can exceed that of office rent.

Probably the most important location choice determinant for investors in the region is the quality of a country’s institutions and level of political risk. A whole industry of ranking and rating providers has emerged to assist managers in their assessment of the institutional and political environment.

Although the ratings can be a useful starting point, investors need to carry out their own analysis of the risk factors that will have the greatest impact on their particular investment project. A country with a high level of overall political risk may still provide great opportunities in specific regions and industry sectors, with Erbil in Iraq providing a good example of a booming region in an unstable country.

In the end, companies may decide to locate in countries that are adjacent to the most attractive markets and serve these markets remotely. Although this can be a sensible entry strategy, the pressure to have an operation in the country of the client is increasing rapidly. Suitcase bankers and other remote operators are only tolerated if they bring something truly unique to the table.

A country with a high level of overall political risk may still provide great opportunities in specific regions and industry sectors.

Entry Mode Options The usual entry mode options for investors include exporting, licensing/franchising, joint ventures and wholly owned subsidiaries. These entry modes differ in their level of commitment to a market, the level of control they offer and the investment required. Traditional theory suggests that multinationals start with a low commitment entry mode such as licensing or franchising and gradually move to greater levels of ownership and control as they develop the requisite local knowledge. In

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practice, many investors have discovered that if they enter a market through a partnership agreement, it is very difficult to adapt the terms of the arrangement in the light of changing circumstances.

The need to change ownership structure can arise as companies find that legislative changes allow them to have a greater ownership stake than before or that the partnership has outlived its usefulness as local knowledge has been built up.

Legislative changes which relax foreign ownership restrictions are continuously being implemented and offer new opportunities to investors. The expansion of free zones in which foreign investors can maintain 100% ownership is another mechanism used to attract investment.

Therefore, the motive for entering into partnerships should be for more lasting reasons than the need for local knowledge or to satisfy a local ownership requirement. In practice, local knowledge and contacts can be built up without giving up an equity stake in the business, by hiring local staff and potentially through the use of consultants.

Durable partnerships are based on a true bundling of complementary capabilities that goes beyond local expertise and contacts. The retail sector is an example where many durable partnerships have been established successfully, as the foreign retailer provides the brand,

In a time of increasing pressure for workforce nationalisation and a growing supply of well-educated young people across the region, it makes sense to build local knowledge and cultural awareness through local staff.

Establishment Modes The usual establishment choices of greenfield investment versus mergers and acquisitions apply in the Middle East.

Acquisitions provide greater speed than greenfield projects, but are accompanied by several challenges. First, finding acquisition targets and determining their value can be difficult in countries with relatively small stock markets and few reporting requirements for private companies.

In terms of valuation, given the relatively undeveloped M&A market, there are unlikely to be similar transactions against which a valuation can be benchmarked, requiring investors to analyse carefully what benefits and future cash flows an acquisition will bring. Integration challenges arise especially when acquiring family owned companies with a great dependence on the founder/owner. The relationships this person holds with key customers, suppliers and authorities must be transferred smoothly. One way to achieve this can be to start with a minority stake and agree up front the conditions for a full acquisition later on.

Legislative changes which relax foreign ownership restrictions are continuously being implemented and offer new opportunities to investors. product and retail concept and the local operator secures access to mall space, quality staff and efficient operations.

Another reason for a strong involvement in Middle East operations is to ensure compliance with the US Foreign Corrupt Practices Act and the UK Briberies Act extends, which apply to all companies with operations in either the US or UK. These laws make it imperative that the foreign investor represents itself to host country governments and does not subcontract this activity to local agents.

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Implementation When implementing their strategies, successful investors have shown a deep commitment to the region, regardless of any short term setbacks. One way to demonstrate commitment is through the recruitment of local staff. Particularly in the Gulf countries, many multinationals underutilise the opportunities to employ local managers. In a time of increasing pressure for workforce nationalisation and a growing supply of well-educated young people across the region, it makes

sense to build local knowledge and cultural awareness through local staff.

In terms of risk management, companies considering investment in the region should not wait for some wishful landscape of political stability to arise.

Instead, investors need to analyse which political risks matter most to their business and tailor their projects and risk mitigation strategies accordingly.

Successful investors realise that risky environments can lead to high returns and even provide valuable options to expand an investment once initial success has been achieved.

Once an investment has been made and the external environment takes a turn for the worse, companies need to think twice before closing down an operation.

Local stakeholders tend to remember who stuck with them during difficult times.

Authorities look unfavourably towards foreign companies looking to re-enter after a retreat, as Citibank found out in Saudi Arabia after it closed its operations in 2004 and re-applied for a license several years later. Companies may scale down their operations during difficult times, but a continuous presence will result in increased customer loyalty and better stakeholder relations all round.

About the Author Dr. Tim Rogmans is an Assistant Professor at the College of Business at Zayed University in Dubai. He previously worked in the UK, the Netherlands and France as a strategy consultant for LEK Consulting and Gemini Consulting, and as a senior manager with Atradius Credit Insurance. In the Middle East, he has worked as Department Chairman at the Rafik Hariri University in Lebanon and as Director of Zayed University’s Executive Education activity. He is the author of the book The Emerging Markets of the Middle East: Strategies for Entry and Growth.

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