Leveling The Field: How The Rule Of Law And A Free Press Are Crucial In Interna onal Business

Leveling the fi eld: how the rule of law and a free press are crucial in international business

Expanding a business into new international markets can be a complex challenge as companies grapple with differing regulations, wildly varying cultural norms, and must o en communicate and market in mul ple languages. S ll, the rewards are legion – a much larger consumer popula on, exposure to new and innova ve products and a diversifi ca on of overall risk as a fi rm moves away from a single market. The world is a large, dynamic place and massive growth (especially in the global middle class) is expected in Asia, the Middle East and Africa in the next decade. What businesses quickly discover, however, is that much of what companies take for granted in the U.S. or UK as far as legal protections and transparency are weakened or en rely absent in the countries into which they might want to bring their business. How do companies determine where they can safely manufacture their products or source their goods? What tools are available to help judge this risk? Every year, a plethora of global rankings are published by various organiza ons to help explain the rela ve risks and ease of inves ng in a given country. An alphabet soup of organiza ons from the OECD to WIPO as well as bodies such as the World Bank and companies like A.T. Kearney compile lists to rack and stack the various na onal markets. But there are other indices that are crucial to interna onal business leaders and are usually overlooked as quants focus on comparing easily-iden fi able sta s cs such as consumer spending habits or labor costs. The overlooked concerns of the rule of law w and press freedom, however, determine the true cost and risk of an interna onal investment, and a close examina on of these will help companies to steer clear of serious pi alls before commi ng me, energy and personnel to a new market.

The importance of a free press to business

In the last few years, the concept of a ‘free press’ has had a rough ride, especially in the United States, as poli cal fac ons point fi ngers at what they see as par san repor ng, and other (unprofessional, unchecked) social media-based organiza on have started to dominate how many people get their news. However, professional inves ga ve journalism is a crucial, irreplaceable ally to business investors. A free professional press is one of the most important tools to ensure transparency in a market. A great example of this is the exposure of Wirecard in Germany (and the Philippines) by intrepid Financial Times reporters. Despite both the firm’s auditor (EY) and the German government’s own watchdog failing to detect any problems, theFT reporters con nued to dig into an apparent disconnect in Wirecard’s accounts and eventually exposed a billion dollar fraud which led to the fi rm’s collapse. In the absence of a free press, this fraud would not have been discovered. When you are working with foreign partners, the free press is a strong and cri cal ally on checking any sort of fl agrant fraud and company shenanigans. This important role in the press - monitoring governments and businesses for misconduct - is why the Reporters Without Borders (RSF) ‘World Press Freedom Index’ is a key component in assessing a foreign market and understanding what checks and balances poten al future business partners from these countries may face. The U.S. is ranked 45th and the UK 35th out of 180 countries, neither of which are par cularly impressive, but at least give a baseline from which to start a compara ve survey. Interested in doing business in Russia? Their ranking is 149th out of 180. China? 177th out of 180. Companies must think twice before engaging in business here, as a fi rm enters these countries without the helpful assistance of a free, inquisi ve press to help iden fy and bring down fraud, bad prac ces, gra and other major concerns for businesses opera ng in the country. This is especially crucial for foreign businesses who are

entering the market – everyone else who operates locally and is part of the system may already know through experience and word of mouth which companies are actually reliable and which are shell companies to support the money-laundering ac vi es of the local elite. In the absence of a free press, a foreign company is on its own and opera ng at a signifi cant disadvantage.

Corrup on fl ourishes in the absence of scru ny

Not surprisingly, the rankings of Transparency Interna onal’sCorrup on Percep ons Index generally track along the same lines. Although they use diff erent methodologies to establishing their rankings, corrup on generally thrives in a country with limited or no press freedoms. The reasons for this are fairly obvious – with no inves ga ve repor ng or shaming in the press, offi cials and agencies are able to engage in corrupt ac vi es with impunity. Even countries that a empt to ‘root out’ corrup on with death sentences and criminal investigations have limited effectiveness. China, for example, embarked on a major anti-corruption campaign in 2012 that included the inves ga on of several poli cal fi gures and could even carry thedeath penalty, but they s ll rank 80th out of 198 countries. The United Kingdom is ranked 12th in the most recent Index, the Unites States is ranked 23rd , and Russia is…137th . Denmark is number one. Their ranking in press freedom? 3rd a er Norway and Finland. The connection between a free press and corrup on is strong.

The rule of law is another crucial ally for foreign businesses

But one other ranking is crucial for businesses looking to expand into the interna onal market. Although businesses may not want to turn to the law for assistance over an issue (contract dispute, violation of a non-disclosure agreement, intellectual property protec ons) at least it is a reliable op on in the U.S. and the UK for companies that find themselves in a bind over certain business issues. America and the United Kingdom are compara vely li gious socie es, and companies from these markets o en think in terms of legal solu ons (or resolu ons) when facing a business problem. But what if there is no reliable legal system to turn to at all? Or what if the local legal system is subject to corrup on or even governmental manipula on in favor of the ‘home team’ when a company is opera ng overseas? This is a substan al concern when working in the interna onal arena, and they have a ranking for this issue as well – the World Jus ce Project’sRule of Law Index. The rule of law is defi ned briefly as a legal system which is just, accountable, accessible and fosters an open government. The U.S. is ranked 21st

Comparison of indices

Press Freedom

Rule of Law

Corruption 200 180 160 140 120 100 80 60 40 20 0

USA RUS CHN DEN BRA NLD

and the UK is ranked 13th out of 128 countries. Russia and China come in at 94th and 88th respec vely. Once again, the number one country is Denmark. The chart above shows the rela onship between these indices. For the sake of comparison, Brazil (BRA) and the Netherlands (NLD) have been added to the mix. The connection between the relative strength of press freedom and the rule of law with corrup on is striking. The absence of a strong rule of law and professional free press clearly create condi ons in which corrup on will thrive. For business leaders, the key concern is risk – if they invest in a country with a weak rule of law and no press freedom (which has its own ESG concerns for stockholders) they are highly likely to face corrup on concerns. The U.S. Department of Jus ce and the Security and Exchange Commission are very aware of this and focus the majority of their Foreign Corrupt Practices Act investiga ons into countries such as China, Brazil and Russia. Historical prosecu on sta s cs for the UK Bribery Act are similar, with an addi onal focus on the Middle East and Africa. Additionally, a company needs to weigh its legal concerns very carefully before inves ng in countries at the bo om end of the scales, as their ability to dispute business confl icts in court are drama cally weakened. Crucial intellectual property is at risk (as many have discovered to their dismay in China) and a company’s ability to rely on outside sources (such as the press) to vet and inves gate poten al partners or upcoming regulatory change drops for every point on the scale. The smart (and safe) money is to locate key business components in countries where these issues are absent. International business is risky enough without the added burden of a corrup on concern or loss of key technology. Chasing cost savings may look wise in the short term, but paying extra to work in a country free of corrup on, with a robust professional press and strong legal system is the clear winner in the longterm. The playing fi eld is substan ally more level for foreign businesses that invest in countries such as the Netherlands or Denmark. There is a price to pay in higher wages for local staff and potential corporate taxa on, but one will be able to compete on fair terms, keep abreast of developments and revela ons thanks to a free press and avoid the risk that the company will be pulled into a corrup on scandal such as Brazil’s infamous ‘car wash’. Beyond the obvious concerns of opera ng in these countries, there are secondary impacts that are important to consider – a loca on with a strong rule of law allows a business to (properly) infl uence the government and help avoid regulatory changes that may impact the company’s ability to compete on the local market. In the event of cybercrime or other related malfeasance, a foreign company can approach the local law authori es with confi dence instead of trepida on. With a free press, companies can expect scru ny of their ac ons, but also those of their suppliers and competitors as well as the government. Building a produc on facility in a country that has a miserable press freedom score and major corrup on concerns will also invite stakeholder scrutiny from an ESG perspec ve. Inves ng in a country where these issues do not exist allows businesses to generally sidestep concerns over social and governance concerns. In the end, choosing where to do business is a numbers-based decision, but all too often, the number crunching does not look to secondary costs that come from ‘running to the bo om’ on these issues. A company is far be er off paying a bit more to play on the level playing fi eld that comes from a site that has press freedoms, posi ve rule of law and less corrup on. The advantages far outweigh the price of admission. Kirk Samson is the owner of Samson Atlantic LLC, a Chicago-based international business consulting company focused on market research and political risk assessment. Mr. Samson is a former U.S. diplomat and international law advisor.