Doing Business in Risky Countries

Instructors:

Shabana Mitra (shabana.mitra@iimb.ac.in; D-108)

Debarati Basu (d.basu@iimb.ac.inc; D-207)

Course Objectives:

The course is designed with the following specific objectives:

1. Exploring internationalization choices and strategies of multi-national companies,

2. Evaluating global markets in the case of ’risky’ countries,
3. Understanding the role of institutions and history in defining stability of a country,
4.
5. Understanding how Indian firms have set up in ‘risky’ countries.

Course Outline:

This course is designed to discuss business decisions of entry and expansion into new regions that have
been considered ‘risky’. Through the course, we seek answers to the following questions: How do we
categorize a country as ‘risky’? Are all ‘risky’ countries alike and so not good for business? Do institutions
matter for economic development? Is Democracy necessary for business?

The idea is to go beyond the standard internationally accepted classification of nations into ‘risky’ markets.
We examine the socio-political and economic climates of nations with varying risk profiles to gauge
whether the countries are conducive for entry.

The investment climate of a country is considered ‘risky’ based on the following three components: (i)
Macroeconomic Stability, (ii) Institutional Structures - Ease of doing business, and (iii) Political Risk.
Based on these criteria, countries can be categorized into different risk levels. These parameters can also
help gauge which countries are suitable for entry despite being considered ‘risky’. We particularly talk
about how country risk levels are impacted by historical institutions, ethnic and social contexts and the
stability of nations (conflict and the existence of democracy) and how these in turn impact business
decisions.

We use a two-pronged approach to answering these questions. First, through cases from Latin America,
Middle East, Africa and East Asia we show entry and expansion strategies that have worked and those that
have not. We do so using examples of countries with varying levels of risk assessment. This shows that the
link between success and the ‘risk’ profiling is not linear. With this knowledge we delve deeper to
understand structural reasons for these successes and failures. Second, through examples of Indian business
groups that have entered these regions we analyze in depth their expansion objectives, strategies and
performance in these risky markets.

Doing Business in Risky Countries

Pedagogy:

The course consists of 6 modules. The first module lays down the basic theoretical foundations of analyzing
nation states with respect to their institutions, society and the stability of the government and finally their
investment attractiveness.

After laying down the foundations, we use cases to understand business strategies in the fragile states across
the world. The next four modules focus on the following regions that have several fragile states—Latin
America, Middle East, Africa and East Asia. We first discuss two cases from each region that cover the
entry, expansion, location choice and/or exit decisions of companies. In the third session in each module
we discuss an Indian business group that has a presence in the region. For each region we use countries
with varying international risk assessment. This assessment is marked in the course outline and color coded
as Red, Orange, Yellow and Green.

The last session of the course connects the dots and finds similarities in the success stories from across the
world and attributes of places where businesses did not succeed.

Course Evaluation & Grading Pattern:

There will be four components to the evaluation:

• Class Participation (15%)

• Project Presentation and viva (10% + 10%)
• Final Project Report (40%)
• Quizzes (25%)

The group project would require all groups to choose one ‘risky’ country and a particular company and a)
analyze whether it is a good idea for the firm to enter the market, or b) design an entry strategy for the firm
in the market.

Session-wise plan (Modules):

I. Theoretical foundations: Institutions, Conflict and Investment (5 sessions)
II. Working in the Middle East (3 sessions)
III. Working in Africa (3 sessions)
IV. Working in East Asia (3 sessions)
V. Working in Latin America (3 sessions)
VI. Connecting the dots: what matters? (1 session)
VII. Student presentation (2 sessions)

Doing Business in Risky Countries

Session Plan:

Session 1-2: Investment Profile of the World

First, we draw out the world investment map contrasting the areas that receive the most investment and the
areas where investments are scarce. We then undertake a risk-profiling exercise to categorize some of these
high and low investment countries based on riskiness. Next, we use a risk-return trade-off to understand
how firms decide on investing across different categories of risky markets. We then delve into individual
attributes of risk profiling in greater detail. We first discuss how the macro-economic environment impacts
investment-based decision making.

Readings:

• Euler Hermes Country Risk Maps. http://www.eulerhermes.com/economic-research/country-

risks/Pages/country-reports-risk-map.aspx#map
• Inform, Index for Risk Management:
http://www.inform-index.org/Countries/Country-profiles

Session 3: Why do institutions matter?

Second, we study how institutions like colonial structures have affected the long-term trajectory of
economic development both for the colonizers and the colonized. There will be some evaluation of history
and the lasting effects of institutions on current day development.

Later we will elaborate on the “resource curse” (the causes and some explanations for the phenomenon)
and also discuss how institutions can mitigate the effects of the same.

Readings:

• *"History Lessons: Institutions, Factor Endowments, and Paths of Development in the New
World," Sokoloff, K. and S. Engerman (2000), Journal of Economic Perspectives 14, 217--232.
• *"The Colonial Origins of Comparative Development: An Empirical Investigation," Acemoglu,D.,
Johnson, S. and J. Robinson (2001), American Economic Review 91, 1369--1401.
• *J. Sachs and A. Warner, “Natural Resources and Economic Development: The curse of natural
resources”, European Economic Review, 45 (2001), pages 827-838.

Session 4: Fragile states: Intensity and duration of conflict

Third, we examine how conflict shapes economic development and impacts business entry decisions and
eventually economic growth. Civil wars and other events of ethnic conflict are a reality today. We undertake
a discussion of the causes and effects of such incidences of violence including the economic motives for
conflict and its potential to be used as a tool to gain access to markets.

Readings:

Doing Business in Risky Countries

 • *Blattman, Christopher and Edward Miguel. 2010. "Civil War." Journal of Economic Literature,
48(1): 3-57.
• *Collier, P., and A. Hoeffler. 1998. “On Economic Causes of Civil War.” Oxford Economic Papers,
50: pages 563 –73.
• *Joan Esteban and Debraj Ray (2016) "Conflict and Development", October 2016, forthcoming,
Annual Reviews of Economics.

Session 5: Institutions and stability: Are they connected?

Finally, with the growing role of the private sector in global politics come increasing challenges
and opportunities, an example of which is conducting business in pre- and post-conflict
environments. Can businesses study institutions to see how stable the country will be? What will
be the stress points? In this context we overlay the three parameters to understand how they are
correlated. Doing so, we are able to create a comprehensive picture of the theoretical risks that
define investment attractiveness globally.

Readings:

• Molly M. Melin (2016). Business, peace, and world politics: the role of third parties in
conflict resolution. Business Horizonz, 59, 493-501.
• Jamie Anderson; Constantinos C. Markides; Martin Kupp (2010).The last frontier: market creation
in conflict zones, deep rural areas, and urban slums, California Management Review, Vol.53,
No.4.

Session 6-8: Working in Middle East

In this module we examine working in the part of the world that has as of now not been explored much by
business. We first look at a case from Israel [Green] and the decision taken by a firm to stay on even in a
period of conflict. When is this a good strategy? Where is this a risk worth taking? In the next case we look
at the decision to enter a market in a country with a recent war, Iraq [Red], and how internal conflict is
something that will also be salient in the business decision.

In the third session in the module, we see how Asian Paints traverses the middle-eastern landscape through
joint ventures.

Readings:

• Dov Frohman (2006). Leadership Under Fire, Harvard Business Review, December 2006.
• Annual Reports for Asian Paints.

Case: Pratima Bansal, Natalie Slawinski (2009). Talisman Energy Inc.: The Decision to Enter Iraq,
Case No. 909M35.

Reading: Website and Annual Reports of Asian Paints.

Doing Business in Risky Countries

Session 9-11: Working In Africa

The interest in Africa has been growing with countries like China making significant investments in the
region. However it also a region of high conflict and low prevelence of democracy. How do you engage in
this areas? We first see a case from Kenya [Yellow], a successful business model. We see how public-
private partnership was able to create a profitable business model. In the second case, we see when and how
should one exit from a market.

In the third session, we see how Bharti Airtel has explanded its business in Africa.

Cases:

• Oana Branzei; Michael Valente (2007). Honey Care Africa (A): A Different Business Model, Case
No. 907M22.

• Meaghan Conway; Mark Hartmann; William F Meehan (2015). Exits In Emerging

Markets: Actis' Investment In Umeme, , Case No. F311.

Reading: Website and Annual Reports of Bharti Airtel.

Session 12-14: Working in East Asia

This region has attracted large investments from across the world, but it has not been distributed uniformly
across countries. Some countries like Indonesia [Green] get large amounts of investments but on the other
hand countries like Combodia [Orange] are less popular investment destinations. In the context of India,
the “Look East” policy of the current government there has been increases interest in the East Asian region.
With this in mind we first look at a joint venture in three countries in the region and then see how entry can
be tricky in a high risk country in the region. We wrap up the module by discussion on Tata group
investments in the region.

Cases:

• Paul W. Beamish and Liu Su (2017) Hisense-Hitachi Joint Venture: Expanding in Southeast Asia
Case No. W16862
• William F. Meehan III; Paul Pfleiderer; Michael Kennedy; Debra McCoy; Sheila Melvin (2013).
Leopard Capital: Private Equity in Cambodia Case No. F279

Reading: Website and Annual Reports of Tata Motors.

Session 15-17: Working in Latin America

Doing Business in Risky Countries

We examine two cases, one from Puerto Rico [Orange] and the other from Argentina [Orange]. These two
countries have had different historical experiences. Through the two cases we look at the different
institutional and societal context and see how two business ventures one in Real estate and the other-a
privatization measure of water- did not succeed.

In the last session in the module, we discuss how the Aditya Birla Group has become the largest Indian
investor in the region.

Cases:

• Gwendolyn Toro; Julia Sagebien; Victor Quinones (201)). Trouble In Paradise: Stakeholder
Conflict In The Paseo Caribe Project. Case No. 910M18.
• Lourdes Casanova; Vanessa Strauss-Kahn (2005). Aguas Del Aconquija S.A.: Privatization In
Troubled Waters. Case No. INS552.

Reading: Website and Annual Reports of Aditya Birla Group.

Session 18: Summary and conclusions

We use a case from India to bring together the learnings from the course, and how they can apply to internal
conflict as well as to cross-country conflict.

Case: Tulsi Jayakumar(2013), Hindustan Unilever Ltd.: Creating Shared Value In A Vuca World.
Case No. W13539

Session 19-20: Student Presentations

Doing Business in Risky Countries