China, India aren’t great markets for the United States

Hey, buddy, looking to sell some products abroad? Need to find the best new market for your pillow shams or maybe your shampoo? A new book, The $10 Trillion Prize: Captivating the Newly Affluent in China and India, purports to have the answer. Yet the hype about China, India and other big emerging economies glosses over the difficulties of doing business within their borders. Sure, size matters, but plenty of other factors should make companies look elsewhere, as well as make governments take a hard look at their policies.

Enormous populations make China and India obvious targets for business, but selling to their people is only half the battle. Once a multinational company has collected its revenue and paid its costs, it has to bring its profits home to shareholders. That’s not always easy in developing countries, where corruption, arcane tax and legal systems, changeable customs regimes, unscrupulous self-dealing and self-serving joint venture partners can eat away at the final take.

Just imagine you’ve arrived in a big emerging economy, and you’re hoping to sell to tens of millions of new consumers. If you work in, say, consumer products — toilet paper, soap and so on — your business might normally earn margins of 10 to 15 percent. But what if each of the problems above eats away a bit of your revenue, even just 1 or 2 percent? Pretty soon, your margins are down to zero — and that’s without considering other issues like exchange-rate fluctuations and capital controls.

All the BRIC countries — Brazil, Russia, India and China — suffer from a selection of these problems, and often to a much greater degree than some of their smaller neighbors. As a result, the consumers who are truly profitable for companies might be located in places with better economic institutions and friendlier business climates, such as Malaysia, Peru, South Africa and Turkey. These midsize countries are by no means perfect places to do business, but by several metrics they’re a lot better than the BRICs.

Of course, executives of multinationals are still under tremendous pressure from analysts and investors to come up with a “China strategy” and an “India strategy.” These markets’ size makes them hard to ignore, and they offer the potential to realize huge economies of scale. After all, you only have to pay the setup costs of entering the market once, and then you have access to almost unlimited consumers.

But companies have to balance the apparent savings — which may not be so large once you account for differences in regulations across 35 Indian states and territories and 32 Chinese provinces, municipalities and autonomous regions — with the costs of doing business in a difficult environment. For all but the biggest multinationals, serving several countries of 30 million, 50 million or 70 million people where doing business is relatively easy might be more profitable than fighting for a share of China’s market. Not every company should be in China, India and the other BRICs, just as not every company should be in the United States, or any other country for that matter.

The flip side of this conclusion is that China and India, even as their economies cool a bit, still offer fantastic opportunities to grow. The gradual opening of their economies over the past three decades has already lifted hundreds of millions of people out of poverty. It’s hard to imagine that China and India could repeat this feat, yet they just might by removing some of the obstacles outlined above. By fighting corruption, making legal systems more transparent and instituting better protections for investors, these countries could see a second, perhaps even bigger boom.

The possibility of these reforms has long seemed remote, like the advent of democracy in China or the resolution to India’s feud with Pakistan. Now, however, the economic picture has changed in a way that makes change more urgent.

The BRICs are still feeling the effects of the global downturn; the International Monetary Fund has predicted growth rates for this year that are just a shadow of what they were in 2007. Moreover, the BRICs can now begin to see the limits of their growth in the absence of reform. Wages are finally rising in China, along with the currency, making exports more expensive. Brazil is reaching peak urbanization. Russia’s energy-based influence will dwindle as substitutes and other sources come online, and India has been reluctant to lay out the welcome mat for foreign companies in many industries.

Soon enough, all the BRICs will need to find new ways to attract investment, create jobs, and raise living standards. Making their consumers a more attractive proposition to foreign companies would go a long way to achieving all three by laying the groundwork for new production facilities staffed by local workers making goods and services for local households.

India, the poorest of the BRICs, has finally started down this road. In the past few months, it has made industries ranging from insurance to supermarkets more open to foreign companies. Joint ventures with local players will still be required in many cases, but greater foreign ownership will be permitted. It’s not quite a multitrillion-dollar free-for-all just yet, but it’s a start.

Daniel Altman teaches economics at New York University’s Stern School of Business and is chief economist of Big Think.

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