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Risk Profiles of Emerging Markets

Each emerging market has its own economic, political and social climate. Risk consultancy Control Risks Group offers a view into the workings of the countries identified as emerging offshoring markets.

Monday, October 16, 2006
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Profiled below are some of the conditions employers will face should operations be established in Costa Rica, Czech Republic, Hungary, Indonesia, Mexico, Russia or Vietnam.

COSTA RICA

Low security risks and long-standing political stability make Costa Rica one of Latin America's most attractive locations for foreign businesses. The business environment is investor-friendly and offers adequate legal safeguards. In addition, the country's well-regarded education system has ensured there is a large pool of highly skilled and qualified professionals available.

On the negative side, companies have to deal with an often slow legal system, bureaucratic delays, deficient infrastructure in some areas and occasionally, overzealous government controls, particularly on environmental issues and, given recent scandals, corruption.

Security risks are low by regional standards, but are gradually increasing, particularly in the capital, San José. Petty crime -- including violent muggings and robberies -- poses the main risk to businesses and their personnel. Nonetheless, violent crime remains rare, and crimes against property (robbery, house burglary, vehicle theft and theft from cars) remain the most common offenses. 

CZECH REPUBLIC

The Czech economy is open to foreign investments and entry to the market is fairly easy. The labor market is rather flexible, which makes hiring and firing workers relatively easy. While bureaucratic procedures take longer and costs are relatively higher than in some Western-developed economies, there are no major obstacles to setting up operations.

The business environment is generally good, but legal shortcomings and corruption are troublesome. The judiciary is slow and inefficient, and legal procedures can be very lengthy.

This is a particular problem in bankruptcy and commercial courts, where there are significant backlogs. Enforcing commercial contracts could therefore prove difficult, and due diligence is advisable on prospective business partners to avoid any inconvenience later on.

Corruption is still a serious problem, especially in the public sector, where investors may face bribe demands to obtain permits, licenses and business registration documents. Corruption is also very visible in everyday life such as traffic policing, customs and health care.

HUNGARY

Hungary remains one of the most mature economies of all the transition states in eastern and central Europe. Starting a business is fairly easy, and foreign investors are welcomed into the country.

However, the economy has significantly weakened in recent years and the austerity package put in place to tackle the problem is likely to trigger higher taxes. Moreover, annual average labor costs have increased significantly in recent years, with Hungary now having the highest labor costs in central Europe.

The operating environment is generally favorable to business, but the inefficient and excessively bureaucratic judiciary, red tape and petty corruption may still create obstacles for companies operating on the market. The problem with the judiciary is particularly conspicuous in commercial cases, which can last several years.

At the same time, dealing with zealous officials remains a problem for business and foreign personnel could encounter requests for bribes in everyday dealings with public officials, though the level of corruption is believed to be considerably lower than in other countries in the region.

INDONESIA

Corruption is a serious problem in all walks of life in Indonesia; foreign companies can expect to be asked for bribes. Corruption fuels court and police inefficiency and makes it appear that the law can be bought. The situation is made worse by many of the laws originating from the Dutch colonial period, while courts also recognize a non-codified local customary law, which varies widely throughout the country.

Troubled relations between central government and provincial administrations further confuse the regulatory framework. The operating environment is heavily bureaucratic and tendering processes often opaque. Trade unionists are also increasingly using strikes as a political weapon to prevent foreign takeovers or to influence government policy. Many companies attempt to hire a mixture of social and ethnic groups to avoid charges of bias, but this is not always possible as most of the better skilled and educated workers are ethnic Chinese.

Crime poses the most consistent and likely security risk to business. Criminals sometimes target expatriates because of their perceived wealth and organized crime is a problem. Kidnap-for-ransom is almost entirely confined to the local ethnic Chinese community.

Secessionist campaigns and Islamic extremism raise more concerns. Aceh is an area of high security risk and there is a low-intensity secessionist conflict in Papua. Islamic extremism, though largely unrepresentative of the moderate Islam espoused by most of Indonesia's Muslims, poses a risk to foreign companies. There remains a credible risk of further terrorist attacks in Jakarta and other main cities against both official and soft targets, such as entertainment venues, tourist sites, diplomatic missions, churches or other areas frequented by foreigners. There have been fatal cases of bird flu, but transmission is limited and isolated and the risk to personnel is very low.

MEXICO

 

The political climate remains tense following the disputed July presidential election. Andres Manuel Lopez Obrador's refusal to concede defeat, together with his plan to inaugurate a 'parallel government,' will exacerbate political tensions, deepen polarization and undermine incoming President Felipe Calderon's legitimacy, raising the risk of political violence.

 

The government is committed to orthodox free-market economic policies that the business community generally supports. However, the legal environment can be complex because the enforcement of laws is subject to corruption, and foreign companies need to enlist extensive local legal representation to protect their interests.

Corruption is endemic throughout society and is commonly encountered in most areas of business and daily life. Possible situations in which businesses may encounter corruption and demands for bribes range from the issuing of business licenses and permits by government offices, to the 'negotiation' of parking tickets with police officers. Recent government efforts to counter the problem have largely failed.

 

Crime rates are high. The police are largely ineffective and officers may be involved in crime themselves, while the judiciary is beset by corruption and inefficiency. The principal concerns for business, particularly in major cities, are street crime, break-ins, armed hijacks of trucks and hold-ups of commercial establishments.

Foreigners are often victims of short-term 'express' abductions in taxis, in which victims are robbed or forced to withdraw money from automated-teller machines. Car theft (both of and from cars) remains a significant problem.

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RUSSIA

Top of the list of concerns for foreign investors entering Russia is the growing level of corruption. This is fuelled by expanding state control over the economy and over media and civil society organizations.

A changing regulatory environment is also a major headache. The state is suspicious of foreign expansion in the economy, especially in strategic sectors (defense, energy, mineral resources), but also in all highly lucrative sectors (such as telecommunications). It has used regulations to attack investors in these sections (for example, by withdrawing their environmental permits).

The risk of adverse legislative change is compounded by uncertainty over the 2008 presidential elections. While policy continuity is widely expected beyond the elections, it is not clear who can succeed Putin (he cannot legally run for a third term himself).

It cannot be excluded that a successor will be from the "hardliners" camp (the "siloviki") and that he will adopt an even more authoritarian and nationalist stance, discouraging foreign investments.

Wise foreign companies spend a lot of resources checking the past or current criminal ties of local potential business partners. From an HR perspective, the importance of background checking of prospective local employees cannot be overemphasized. New employees can bring reputational problems, but also major risks of fraud and information theft. In sensitive economic sectors, the state security forces are alleged to try to infiltrate companies.

In terms of security risks for foreign personnel, the most likely threat is from petty crime. Western business travelers or expatriates are not normally targeted by violent criminals, although a high-profile company representative may be targeted for extortion or worse if the company gets involved with shadowy local businessmen. Racist attacks are on the increase and may target black foreign travelers or those whose appearance may suggest Central Asian or Caucasus origins.

VIETNAM

The ruling Communist Party and its security apparatus maintain tight control over political and economic activity. A process of economic reform has attracted considerable foreign business interest but the pace of reform has been erratic and foreign companies continue to face obstacles. Furthermore, restructuring has exacerbated social tensions, particularly in rural areas, where corruption, land disputes and the abuse of authority have sparked unrest.

There is no tested, codified body of commercial law, and new laws and regulations are sometimes contradictory or unclear. The contract negotiating process can be long. Local party 'godfathers' and their patronage networks often dominate provincial administrations, and have extensive powers to help or hinder projects in their areas. Customs procedures appear opaque and even arbitrary.

There is a large, relatively well-educated and inexpensive labor force, but a shortage of managerial talent and skilled workers, and the income-tax system makes such employees two or three times more expensive than their counterparts in other parts of Asia. Most labor strikes involve labor-management disputes over health, safety or late payment of wages, and are usually resolved quickly.

Crime levels are low. The main risk to foreigners is pick-pocketing though there are occasional reports of pedicab drivers holding foreign passengers for short periods to extort money. Areas bordering Cambodia are at higher risk, mainly because of banditry and smuggling. Kidnapping and extortion attempts are confined to the local population or to Vietnamese who have returned from abroad. There have been isolated fatal cases of the deadly H5N1 strain of bird (avian) flu, but there is no evidence of human-to-human transmission. 

Control Risks Group is a London-based independent, specialist risk consultancy with 18 offices on five continents.  The company provides advice and services that enable companies, governments and international organizations to accelerate opportunities and manage strategic and operational risks. http://www.control-risks.com/

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