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Mapping the Global Landscape

CEOs of multinationals must understand the ways in which governments in developing


countries are redefining their interests and drawing up new policies to further them. At one
extreme, sticking close to home may ensure lower political risk, but it could also mean ceding
market share to global competitors. At the other extreme, pursuing a strategy without
considering geopolitical dynamics could boost growth in the short term but heighten the risk
that politics could fatally undermine business operations in the future.
To factor globalizations new risks into strategy, executives must ask two questions: Is our
industry strategically important to the government of the country we wish to enter? Is our
industry strategically important to our home government?
Visualizing the answers in a two-by-two matrix can help a company determine its position on
the globalization landscape. Two no answers place a company in the upper-right quadrant,
where a globalization strategy generates little friction at home or abroad ( la Coke). Two
yes answers land it in the lower-left quadrant, where national security concerns dominate
its industry (Lockheed Martins reality).
Map Your Industry
To identify their globalization options, Western multinationals must assess the strategic
importance of their industries at home and in the countries they wish to enter. For example,
Western retailers may face challenges in India, where the industry is considered relatively
strategic, even though it is not strategically important at home.

Divergent answers to the two questions indicate that the company must make some nuanced
decisions; managers are likely to be exposed to political constraints and geopolitical
maneuvering from host governments or at home. The company can use its understanding of
how the host and home governments may prescribe its opportunities to develop the right
approach. To avoid conflict, it could find ways to align its strategy with the prevailing

policies. It could offer only products that are of little interest to the state. The company could
also decide to stay home.

Strategies to Manage Guarded Globalization


The multinational corporations likely to be affected most by the changes in globalization
must pinpoint strategies for managing the risks.
The New Risks
Governments monitor and dictate prices in key industries.

The government of the United Arab Emirates, eager to assure people that the staples of
everyday life will remain affordable, sets price ceilings for manufacturers and retailers.
Several consumer goods manufacturers, such as Unilever and Kraft, reported that some
vendors stopped supplying them when state-imposed prices rendered their businesses
unviable.
Many emerging market governments, worried about the flow of information, keep tech companies under their thumb.

Edward Snowdens accusation that U.S. intelligence officials use data gathered by tech
companies to spy on users has helped the Chinese government justify efforts to protect
consumers from American technology firms.
Telecommunications is seen as a highly strategic industry.

In some Arab countries, technology providers must make available data that governments
deem relevant for national security in return for market access. In 2010 the UAE and Saudi
Arabia threatened Canadian firm Research in Motion (RIM) with a ban because they were
unable to monitor messages sent on its BlackBerry Messenger system. Eventually, RIM
negotiated an agreement with state-controlled telecom operators and government regulators.
Many countries rely on the domestic banking system to finance budget deficits, so they fear deregulation will have a destabilizing effect.

In Indonesia, less than 30% of the countrys 240 million people have access to banks. Yet
officials have pressured the central bank to restrict the activities of foreign banks, and new
policies may require them to become locally incorporated entities.
Politicians may try to use multinationals to promote personal agendas or to deflect public anger.

Foreign participation in Indias retail sector is highly politicized because of the large number
of people employed in mom-and-pop stores. The government announced in 2011 that it
would allow foreign investment in multibrand retailing, but a backlash forced a policy
reversal a month later. In September 2012 the government did another backflip and opened
up the sector. Fierce political opposition will intensify in 2014, an election year.
Challenges to foreign companies can now come from state-backed investigative journalists.

A report filed in December 2012 by CCTV, Chinas state-owned television network, claimed
that chicken sold in China by Kentucky Fried Chicken was loaded with antibiotics. A public
outcry reverberated through Chinas social media, and in January 2013 KFCs month-onmonth sales fell by more than 40%. Volkswagen, McDonalds, and Carrefour have received

the same treatment, as have Mead Johnson, Danone, and Nestl for allegedly fixing the price
of baby formula.
The developed world poses similar risks. Chinese companies often complain about the hurdles they face overseas.

Telecom giant Huaweis bids to acquire U.S. companies 3Com in 2008 and 3Leaf Systems in
2011 were turned down. And when Shuanghui International, a Chinese food company, made
a bid (which ultimately succeeded) for Smithfield Foods, U.S. politicians urged Congresss
Committee on Foreign Investment in the United States (CFIUS) to treat food supplies as
critical infrastructure while evaluating the takeover.
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Companies in industries that are strategically important to the home government can consider
the following approaches:

Stay home.
While the importance of keeping out of foreign countries is obvious for companies in the
defense industry, the strategy is spreading to other sectors, such as retail, which has become
politically sensitive in many emerging markets. If a company enters a strategic sector in a
foreign country, it should develop a playbook that maps the policy changes that would force it
to leave and describes the possible exit options.

Become more strategic at home.


Some companies choose to boost their value to their home government instead of looking to
create value abroad. They campaign for the state to view their sector or products as strategic
so that they can keep out foreign competition or boost profits by striking a closer relationship
with the government. Ever since allegations surfaced last year that the U.S. National Security
Agency has been spying on Europeans, some French and German telecommunications
companies have started emphasizing their strategic value to local governments and
consumers. Two of Germanys internet giants announced a project in August 2013 called EMail Made in Germany, which automatically encrypts e-mail that goes through their servers.
As Neelie Kroes, the vice president of the European Commission, explained recently, If
European cloud customers cannot trust the U.S. governmentmaybe they wont trust U.S.
cloud providers either.there are multibillion-euro consequences [of spying] for American
companies.

Use the state to fight other states.


Some companies may have the means to use government-to-government relations to sort out
problems. BP, which has operated in the United Arab Emirates since 1931, ran into trouble in
2012, when British politicians and officials publicly criticized the UAE for closing the offices
of prodemocracy groups and arresting political activists. The dispute undoubtedly contributed
to the July 2012 decision by the UAE government to exclude BP from the 2014 licensing
round of the largest onshore oil concession.

During a damage-control trip to the UAE in November 2012, Britains prime minister, David
Cameron, offered to dispatch RAF fighters to a base in Abu Dhabia sign that his
government understood the threats that Iran posed to the UAEs security and that it was
willing to ignore public criticism of this offer of help. A month later, Abu Dhabi quietly
invited BP to bid for another onshore oil concession. Such strategies will become more
important as politicians capitalize on public resentment in order to score points at the expense
of foreign companies.
Companies in industries that are strategically important to host governments face a different
set of challenges. Many of them have discovered that theres no such thing as free market
entry anymore. Choosing which carrot to offer the host government is what matters.

Strike alliances.
Although joint ventures havent been popular for some years, many companies will need to
partnerand share profitswith local players in return for safe passage. Partnerships can
help in many industries. Consider movies. China has become too big a market for Western
filmmakers to ignore, but the Chinese government allows a limited number of foreign films
into the country every year; in 2012 it increased the number of foreign-made movies that
could be shown on the mainland from 20 to 34.
A partnership with a Chinese film company can help shed the foreign label. Cloud Atlas, a
German-made movie, was launched as a locally produced movie in China because 20% of the
funding came from local investors. Of course, when the product involves intellectual and
artistic content, the state pays close attention. In China, the government ensures that all
scripts for radio, film, and television contain messages that are in harmony with state
directives and dont tempt the peoples degeneration. Local investors can also help Western
producers navigate the corridors of power.
To overcome its many challenges in China, Pfizer is taking a three-pronged approach to
alliances. It has teamed up with a local company, Zhejiang Hisun, to tap into low-cost
manufacturing capabilities and a generic drugs portfolio. It has also allied with Chinas
Jointown Pharmaceutical Group to extend its reach to hospitals in the countryside. And Pfizer
has invested $50 million in Shanghai Pharmaceutical Industry, which has vast R&D
capabilities. This strategy has helped Pfizer become the largest multinational pharmaceutical
company in China.

Add value to the state.


A single-product company must often find a new way to add value in the host country. Just a
few years after entering China, IMAX volunteered to help Chinas state-run media achieve
global production values. Its hard to imagine that Beijing doesnt remember that assistance
when deciding which foreign films can enter China and how many new theaters IMAX can
open. Avatar, a movie in which IMAX was involved, was a huge success in the country. And
IMAX has more than 150 theaters in China and another 400 in the works.

Become too diversified to fail.


Many developing countries offer so many opportunities that a multibusiness strategy can be
compelling for multinationals. GE, for example, has dozens of investments in China,

spanning different sectors and time horizons. In some instances, it is trading away its
intellectual property; the company knows it can sell certain products in China only if it allows
local partners to adopt its technologies. The company has no illusions: It makes new
investments as old ones become less attractive. Even if alarm bells go off in one sector, or for
a specific investment, constant diversification ensures that China remains one of GEs most
lucrative markets.

Build it so that you can stay.


Fast-expanding sub-Saharan African countries such as Nigeria, Ghana, and Kenya, which
continually deal with traffic congestion, blackouts, and other infrastructure failures, work
hard to attract private investment into infrastructure sectors. (Nigeria has almost as many
citizens as Brazil but produces just 5% as much electricity.) Many African governments have
launched flagship projects with well-known foreign companies, which have aligned their
operations to match government priorities.
Public-private infrastructure partnerships usually adhere to the build-operate-transfer model,
and so they generate profits for Western corporations only when projects require a level of
technical expertise that local competitors cant provide. Multinational companies would
therefore do well to offer their best technologies in such partnerships.

Capitalize on state capitalism.


Another useful strategy to withstand new levels of scrutiny by host states is to commit to
hiring local workers and using local materials. In many emerging markets, that has already
become a requirement. The Brazilian government expects large projects to source
components from local producers as much as possible, and it favors domestic manufacturers
in public procurement bids. In Africa, there are less stringent benchmarks for local jobs and
sourcing, but countries across the continent want their citizens to share in the gains from
foreign investment.
A governments skewed priorities can create business opportunities. Facing mounting social
pressure to deal with Chinas environmental crisis, Beijing announced in July 2013 that the
energy efficiency sector would receive greater fiscal and political support so that it could
meet the countrys environmental goals. Foreign companies could enter Chinas green
technology sector, the new policy stipulated, only if domestic state-owned companies were
allowed to absorb their technologies. However, the policys success will help the Chinese
government stay in power, so its unlikely that the state will forget the foreign companies that
investand those that dontin the industry.Anticipating risks in foreign markets and
developing creative strategies to manage them will become increasingly important
capabilities over the next decade. The pressures created by rapid social change and the failure
of governments to keep pace with the demand for a more secure way of life and higher living
standards help explain why protests over a commercial development in central Istanbul
quickly became a national crisis in Turkey in 2013, and why a nine-cent bus fare hike in So
Paulo sent a million angry Brazilians spilling into the streets across the country. Sure,
multinational companies will continue to find opportunities for expansion and will face new
obstacles to the sustainability of their investments. In this era of guarded globalization,
however, both are likely to be moving targets that will require constant strategic adaptation.