Thoughts on the 2015 World Economic Forum

By Michael R. Czinkota

The World Economic Forum (WEF) convened in Davos, Switzerland for a four-day conference with more than 2,500 attendees, including government officials, politicians, and even some celebrities. With big names such as Angela Merkel, David Cameron, Jack Ma, and Bill Gates presenting their thoughts, the meeting is significant.

The WEF serves to expose new ideas and innovations and show “this is who we are, and that is what we need.” It highlights current and future issues and puts momentum behind sensitive international negotiations such the TTIP (Transatlantic Trade and Investment Partnership) and the TPP (Trans-Pacific Partnership).

This year, the theme of the “new global context” focused on the conflicts instability, in addition to political, economic, and technological changes that make the world a fragmented place. The conference lived up to its reputation for insights and surprises such as:

  •        The announcement that European Central Bank would purchase €60 billion a month to ward off deflation, encourage inflation and jumpstart growth across the 19 nations that are based off the Euro. Though many had expected smaller quantitative easing efforts, the annualized 720 Billion Euro was a reasonable comparison to the U.S. pumping in dollars in 2008 and 2009.
  •        After years of tying the Swiss Franc to the Euro, the currency appreciated rapidly to its highest valuation in 30 years following the Swiss National Bank decision to allow an unrestricted rally of its currency.
  • A study released by international group Oxfam projects that the world’s richest 1%, mostly from the U.S. and Europe, will soon own more than the rest of the world’s population put together. Li Keqiang Premier of the People’s Republic of China stated “we need to ensure a relatively high employment rate, especially sufficient employment for young people. And we need to optimize income distribution and raise people’s welfare.”
  • Terrorism and its effect on the global economy was brought up by French president Francois Hollande. He mentioned, “there cannot be prosperity without security.” Others called on the private sector to play a greater role in developing a global international response and addressing the root causes of terrorism.

Personally, these three items surprised me:

  • The lack of prepared plans and budgets for zero cost money. Having free money not only expands the tools but also changes the toolbox. This began in an era of mega trans-border problems, such as Ebola and climate issues, untold opportunities in space, and burdensome infrastructure reforms. All of these problems persist while the guests arrived in 1,700 private jets.
  • Former Mexican President Calderon’s claims that Mexicans in the US do not want a new country, just more money. What an opening for public discourse and dissent!
  • A lack of public pronouncements on the changing relationship with Cuba and its effect on all Caribbean competitors and their service industries. Just like Sherlock Holmes’ non-barking dog, the attention given to the problems in Nigeria was insufficient.

As the meeting drew to a close, some big questions remain:

  • With global problems in finance, growth and health – who will run the show and who will give up sovereignty?
  • What are the key trade-offs, and who will supply the money?
  • Are the key choices only between ‘feed, fund or fight’? Is there a new role for humility and humanity?
  • To what length should the daily ‘long term’ planning horizon of firms and government be re-calibrated?
  • Since trust is crucial, how can we encourage its growth and intensity, and which fields and endeavors should prioritize trust?
  • Are there really long term links between business and freedom?
  • Is it time to slow down systematically, perhaps starting with ‘slow food’?

 

Political cooperation on trade: necessary and possible

By Michael R. Czinkota and Charles J. Skuba

In his 2010 State of the Union address, President Obama set the goals of doubling U.S. exports over the next five years, supporting two million new American jobs. As we approach the terminus of that timeline, our analysis expects the completion of less than half the goal with exports of goods and services at approximately $2,350 billion in 2014, compared to $1,571 billion in 2009.

Although he did not hit the numbers, we credit President Obama for an ambitious trade agenda, including completion of previously negotiated free trade agreements with South Korea, Colombia, and Panama, and the pursuit of new trade agreements like the Trans Pacific Partnership (TPP), Transatlantic Trade and Investment Partnership (TTIP), and Trade in Services Agreement (TISA).

But why the failure in export growth? In 2009, total global trade decreased by 12%, while U.S. exports decreased by 14%. At the time it seemed reasonable to project stronger growth from 2010 forward. U.S. exports did grow at a robust annual rate of nearly 17% that year and 14% in 2011. Growth of only 4% in 2012 and 2.9% in both 2013 and 2014, however, did not help, since doubling exports requires annual growth of more than 15%.

President Obama’s export goal hinged on the strength of U.S. production, but even the best products require customer spending to generate sales. Europe has experienced disappointing economic growth while major emerging markets like China, India, and Brazil, all sharply declined. A strong U.S. dollar makes American products more expensive, further affecting demand.

One encouraging note is the transition of President Obama from a relatively protectionist U.S. Senator, in favor of trade barriers and subsidies for domestic industries, to a strong advocate of trade agreements.

Where are we now and where do we go from here? Jobs supported by exports now represent 13% of the U.S. economy, up from only 5% in 1990. Yet, the US is still behind on a global scale. Exports represent half of Germany’s economy, 30% of Canada’s, and one quarter of China’s. These key trading partners export more than twice the value per capita than the United States.

U.S. free trade agreements can play an important role in lowering trade barriers, boosting exports, and creating jobs. In 2014 exports to the 20 countries with which the United States has a free trade agreement received almost half of U.S. exports and grew by almost twice the overall rate. Free trade agreements allow U.S. companies to compete on a more even playing field. The Trans Pacific Partnership does that in the strategically important Pacific Basin. It also will include labor and environmental provisions crafted to the highest standards in the world.

Opponents of free trade agreements often claim that previous accords like NAFTA sent American manufacturing jobs abroad. We disagree. A global economy imposes competitive pressures and requirements on all industries. American manufacturing and services companies cannot escape from the competitive realities of globalization but they can benefit from free trade agreements.

Our outlook for 2015 trade policy and politics: the Administration and Republican majorities on Capitol Hill must collaborate on International Trade. In his 2014 State of the Union address, President Obama asked for bipartisan support for Trade Promotion Authority (TPA) allowing Congress to vote yeah or nay on trade bills, but not on individual provisions. This would allow U.S. trade negotiators to deliver meaningful industry and regional commitments. TPA is a crucial negotiating tool and deserves bipartisan support.

There should also be strong domestic support for free trade agreements like TPP and TTIP, which can restore and perhaps even kick start further global progress in the World Trade Organization.

For both Republicans and Democrats, the key trade policy objective of increasing jobs requires policy assessments of the jobs affected by new laws, regulations, and executive orders. It also means linkages between investment and job outcomes, and specific rewards for employment success and help for those hurt by trade. A successful economy requires new measures in technology oriented education availability, and greater international awareness through global outreach and language training for students.

It is time for Congress and the Administration to develop and share credit for progress in international trade. Past failures and shortcomings prove the need for collaboration in the seeking of success. The State of the Union address of 2015 offers an excellent opportunity for the President and Congress to showcase such a new beginning. The United States and the world will benefit from such joint leadership.

Related articles:

Trust: A tool to defeat corruption

By Michael R. Czinkota and Courtlyn Cook

Trust bridges are increasingly emphasized in business relations and partnerships. They not only help to fight corruption, but also establish a sense of community that binds people together. Corruption continues to be a hot issue in business and is more prevalent than most people acknowledge.

The baseline standard of corruption, defined by the non-profit Transparency International, is an “abuse of entrusted power for private gain”.  The group sees corruption as the pursuit of selfish, individual gains and the desire to get ahead. Of course, corruption is an individual, as well as a corporate choice. Transparency International’s latest study reports that 25% of people used a bribe in the past year, which means that corruption infiltrates a significant portion of business transactions, which is crucial to take into consideration.

Corruption interrupts corporate culture because it destroys previously established trust that has been earned on a long-term basis. Trust is a valuable corporate asset since it typically translates into fulfilled expectations, which allow for better forecasts, less uncertainty in the future, and more realism.

Trust bridges, developed by shared expectations and experiences, allow people to get to know each other quicker, and help establish fair business practices on global terms. Thus, trust is one of the best ways to combat corruption. Connections that bring people together and lead to greater trust can be built upon a shared alma mater, military service, same work experience, sports fans for the same team, and even practicing the same religion. People are more likely to bond over these personal preferences and organizations because they already share a similar interest; therefore they expect to share similar values.

If two companies operate in similar environments and share values, they are more likely to connect and establish warm and trusting relationships. This ultimately establishes credibility and allows business to select patterns based on trust rather than strictly on proximity or financial measures. Trust is developed through interaction, although there are other spillover effects that come into play. An example would be two organizations that are led by former sports champions might be more likely to trust each other, particularly when it comes to sports. This may also connote, but does not necessarily require trust in financial matters.

It is important to note that trust is an extension of confidence, so high expectations often accompany trust. One such trust enhancing activity is especially present in the German model for developing trust, which due to its reliance on standardized training and internships, focuses on keeping processes flowing due to confidence in and reliance on other’s work. In contrast, less training in the US often leads to a lack of trust and little confidence in work. Therefore trust bridges may not as visible in the American corporate world.

Political connections often have a greater impact on communities that experience very little corruption. This means that people are not relying on bribes or other forms of under the table compensation to make business and personal decisions. Also, this may partially explain research on municipalities, which found that established trust bridges led to government growth and increased profitability of firms.

Relationships that are rooted in trust discourage people from engaging in dishonest behavior. One can therefore argue that corruption inhibits the foundation of relationships. When discovered, corruption can ruin a reputation. Once trust bridges are destroyed, they are difficult to rebuild.

In today’s global economy that is ruled by rapid, if not constant, communication and connection through technology, global trust standards can converge where people hold each other to the same standards. This makes international business easier because it reduces the necessity of local standards, which often results in greater costs for companies since they have to meet different standards in every country of operation.

If a global standard were in place, every country would more likely partake in international business interactions, and therefore would have a better chance of establishing trust bridges. Additionally, companies and managers making crucial decisions based on current trust bridges need to exercise less oversight. All this translates into more effective and efficient use of resources. Thus, trust bridges not only reduce the likelihood of corruption, but also lead to more efficient and profitable business transactions.

Prof. Michael Czinkota (czinkotm@georgetown.edu teaches international business at Georgetown University in Washington D.C. Courtlyn Cook is an undergraduate student at Georgetown, working on a degree in international business. is maimCCC

 

THE U.S. SENATE REPORT ON TORTURE: Curative international marketing is a remedy

 

Michael R. Czinkota and Thomas A. Czinkota

The U.S. Senate report on the treatment of Islamic extremist captives has dealt a major blow to the reputation of American exceptionalism. “Curative International Marketing” can help restore the brand equity loss of the United States.

The report recounts the torture employed, with interrogation results which were insubstantial in the war against terrorism. Directly and indirectly, the use of repellant interrogation techniques has soiled Americans with terrorist muck.  The use of intermediaries or a stump in the chain of command, do not provide plausible deniability. “Stomach slaps” and “rectal re-hydration”, gnaw on the tree of freedom. But remorse alone is insufficient.

At Georgetown University’s McDonough School of Business we have worked for several years on the concept of Curative International Marketing as a new direction for countries and businesses, very apropos to the current ingloriousness. We use the term “curative” to connote restoration and development of international societal health. ‘Restoring’ indicates something lost which once was there. ‘Development’ refers to new issues, new tools and new frames of reference. ‘Health’ clarifies the importance to overall welfare, all of which marketing can address and improve. International carries the concept across borders.

Some may be distracted by the term ‘marketing’. Yet one needs to consider that any complaints, accusations and malfeasances will, in the first place, affect businesses in their public efforts around the globe. Firms will be shunned, deserted and even attacked. It this their marketing efforts which will dissipate hatred.  Also, when troops, interrogations and drones become insufficiently effective, business activities are the action sector which can most quickly and clearly communicate and display high morals. Particularly with focused education and training, managers can emphasize that not all that can be done, should be done. Since firms know that they will be the first to pay the price of hatred abroad, they also need to be the ones to dedicate themselves most rapidly to the restoration of a reputation symmetry.

Curative international marketing takes responsibility for problems which a society and its members have generated. Marketing can help set morally wrong actions right and  rebuild the wellbeing of individuals and society globally. Curative marketing determines what wrong has been wrought and then initiates future action to make up for past errors.

Moving on is not enough !  Mistakes inflicted on society cannot be swept under the carpet. Errors fester like a destructive virus culture. One needs the spirit of “Wiedergutmachung” or restitution. A curative marketing approach is instrumental for governments, managers, and firms in their work on five pylons crucial for a renewed shining position on the hill: Truthfulness, simplicity, less pressure, more participation and personal responsibility.

Truthfulness: Citizens have either been actively mislead, or been left with a sense of substantial ambiguity. Curative actions must be based on fact and insight rather than emotions within the context of societal change. One must restore a presumptive burden of honesty.

Simplicity: Simplicity adds value and is crucially linked to truthfulness, learning,  and making sure that one knows and understands the implications of decisions. More knowledge and training makes it easier to be truthful.

Less pressure: To soar is only one mode of behavior, even for eagles. Sometimes there is too much effort aimed to expand too fast. It may be time for a slow food era.

More participation: A new international outlook must make allowances for others. Inclusiveness helps with future change when power waxes and wanes. One tendency is to focus on and celebrate winners. But when the rising tide arrives, leaking vessels, untrained crews, and flaccid sails will only lead to hostile refugees.

Personal responsibility: Distance does not remove responsibility. One can no longer use intermediaries and, later on, be suitably astonished, surprised and mortified about their actions. Realistically, locals take even distant actions quite personally. Though there is frequent talk about mutual understanding, the actual overlap between societies remains miniscule. The average Chinese person understands as much about Columbus, Ohio as the average American knows about Tianjin, China.

Governments again assert a growing role. New global regulations and restrictions are not always free from fault and ambition. Global discord is growing. Conflict it is not resolved by simply moving on. One needs to invest the time and effort to systematically rebuild trust and admiration to which the United States used to be accustomed.

The sad conditions are a clarion call for international curative marketing. Nobody is perfect, but a fair compensatory effort can restore many opportunities. A strong international and moral presence by the U.S. and its businesses can well be a carrier and agent of positive change. At the front line they can mend broken dreams and fears of America.

 

Professor Michael Czinkota (michaelczinkota.com) teaches international business and trade at Georgetown University in Washington D.C. He has served in the Ronald Reagan and George H.W. Bush administrations. Thomas Czinkota Thomas@czinkota.de) advises international companies from Frankfurt, Germany

ANTI-CORRUPTION WAR: WESTERN WAYS DOOMED TO FAIL IN DEVELOPING NATIONS

by Michael R. Czinkota and Anna Astvatsatryan*

In November of this year, leaders of the Group of Twenty (G20) vowed to implement an anti-corruption action plan. Although the proposed strategies might improve the situation for G20 member states, using the same toolkit will not work in the developing world. One needs to take into account culture, traditions and historical circumstances, when crafting anti-corruption strategies for the developing world.

It has been more than a quarter century that industrialized countries began their anti-corruption crusade. International organizations and developed economies offer a standard toolkit of programs to fight corruption such as: changing education systems; enforcing legislation against domestic and foreign bribery, increasing transparency of the government, and combating money laundry. Every year, Transparency International produces the Corruption Perception Index (CPI). The latest report indicates that a one-generation effort dedicated to the reduction of corruption and bribery has, unfortunately, not led to major changes. Countries where bribes and corruption were acceptable twenty-five years ago have not shifted their positions in the ranking today. In these countries people still perceive bribery as a routine transaction. The top ten corrupt countries remain the same. These findings were based on the Global Corruption Barometer – a Transparency International survey that includes 114,000 people in 107 countries.

It is important to understand that countries with high levels of corruption are more likely to be governed by corrupt officials. Many businesses are either owned by government officials or their family members, or have other personal connections to the government.

According to a study at University of Texas, corrupt connections can negatively affect export capacity of a country. Major government connected companies in transition economies, are less likely to export, as they get more preferential treatment and artificial competitive advantage at home. In addition, these companies are used to the business practices specific to their home market and like to know all the major players. These biased conditions make them less competitive in the international trade; which therefore reduces their volume of exports.

High-level government corruption will also affect the outcomes of the majority of international projects. When in the early 2000’s, the Turkish Parliament investigated allegations of corruption of two former prime ministers, it looked like the beginning of a serious anti-corruption campaign. However, soon a decision of the Parliament cleared them of charges. This news raised eyebrows in the global community.

Some countries are not ready to participate in wide ranging anti-corruption actions and prefer to act on their own. China’s latest anti-corruption campaign has been criticized for being more of a weak attempt rather than а structured anti-corruption effort. The arrests of key members of the Communist Party have so far not been followed by deeper investigation. In addition, China raised a last-minute objection to the G20 anti-corruption plan by refusing to support the principles of transparency that would help fight against shell companies engaged in tax evasion and money-laundry. In 2014, China ranked 100th according to Transparency International, a drop of 20 places from last year.

In systems, where corruption is firmly established, it is oftentimes dangerous to be the whistleblower. For example, in the Czech Republic, 95% of citizens believe that corruption is prevalent at all levels of the government. However, there are no whistleblower protection laws, so many people are actually afraid of being persecuted for exposing cases of high-level corruption.

Culture and history can also represent big obstacles for fighting corruption. In India and Hungary, it is widely accepted to bribe a doctor or an official in order to skip the line and get better service. According to a study at the KOF Swiss Economic Institute in Zurich, in heavily regulated and burdensome entry markets, entrepreneurs often use bribes to facilitate the start of operations. Bribes are considered a greasing mechanism that helps accelerate business processes rather than do harm. De Jong and Bogmans of the University of Amsterdam found that in some countries, bribes are triggering imports, as they allow companies to bypass the waiting times and paperwork at customs. A study by Fisman and Miguel has found that diplomats from corrupt countries are usually getting more parking tickets, but are less likely to pay them. This is another illustration of how deeply rooted a cultural and historical mindset can be, and how it can manifest itself internationally.

Post-industrialized countries are still struggling with corruption and bribery within. In 2013, multiple organ transplant centers across Germany were placed under criminal investigation over allegations of wait list manipulation. This revelations of bribery and dishonesty staggered public trust towards the health care system. Can developed countries expect to defeat corruption worldwide, when they still have very serious bribery cases domestically?

When crafting strategies to defeat corruption both in developing countries and domestically, leading economies should focus more on culture, traditions and historical circumstances of each country. Building trust relationships between the businesses and individuals will create internal capacities to fight corruption, and develop understanding of the negative effects of corruption within developing economies.

Anna Astvatsatryan is a graduate student working on a degree in Communications. Her professional work is in the fields of marketing and international business.