After months of turmoil and civil war, the precipitous fall of the government of Muammar Gaddafi has re-ignited the momentum behind the so-called “Arab Spring.” Escalating violence in Syria, transitions in Egypt and Tunisia, and tensions throughout much of the region will ensure political uncertainty for the remainder of 2011 and quite possibly well into 2012.
Amid all of the ambiguity, one fact remains certain: more change is on the way and global companies need to prepare for it. Outcomes will vary from country to country, as will the groups impacted, and timelines for transition. Years of endemic corruption that benefitted small segments of the population have led to a pervasive sense of injustice and huge gaps in employment and education. For many years, governments have been unwilling or unable to 1) control high food and fuel prices; 2) curb unemployment and underemployment especially among young people; and 3) establish viable and forward-leaning education systems. The governments must address these root causes of societal conflict while also trying to attract FDI— a tough balancing act. All of this will lead to an unpredictable manner in which citizens will interact with their government and in the way that governments interact with external actors, including foreign MNCs.
Given the shifting landscape, foreign MNCs see potential for new challenges in the region. In a poll that Frontier Strategy Group conducted at the end of July, nearly 80% of executives identified external factors as the biggest challenge facing their businesses in MENA. This new regional reality has raised pertinent questions for businesses that are unsure how to engage new and transitional governments: How can companies mitigate risks through government relations? Should companies take a wait-and-see approach in the region or build government relations networks that will assist them through these transitional years?
Mitigating risk through government relations
Foreign MNCs have a variety of tools that they can utilize to mitigate risks associated with ongoing changes in governments. Judith Barnett, principal for the Middle East-focused consultancy The Barnett Group, sees several concrete steps that companies can take to reduce risk:
“There will be more changes, but the core of the governments will stay. Executives should visit these markets and establish close relationships with career people who handle product registration, bans, taxation, and tariffs. Being aligned with some of the local business organizations and federations is very important during this transition. MNCs also need to organize a strategy that allows them to invoke a range of relevant ministers who could play a substantial role in establishing new government processes by the time they leave office. Coordinating with a relevant embassy can be important because in most, but not all of these discussions with local government officials, the Ambassador and her staff can be very helpful in assisting companies to reach out to local governments and most importantly, to conduct follow through activities.”
While senior executives in Latin America are awash in funding and senior executives in Asia have high growth markets like China and India, EMEA executives must contend with an atmosphere in which they are expected to do more with fewer resources. This presents challenges for obtaining internal buy-in for a government relations unit in the region. However, failing to devote the appropriate resources to government relations in MENA can result in tens of millions of dollars in losses. “An internal government relations program is actually inexpensive to establish. With a set of priority issues (trade barriers your Company is confronting), a strategic plan, focused meetings with government officials, and intense follow-through, you can resolve expensive problems and make 2011 and 2012 market-building years. You need to build your brand’s name, but you also need to protect it. That is where government relations can be critical. All you need is one tariff increase, product ban, new tax, or problem with registration to throw off your entire year,” Ms. Barnett adds.
Wait-and-See approach is the wrong one
In markets plagued by political and economic turmoil, conventional wisdom for many Western firms is to take a wait-and-see strategy before unfreezing projects, increasing investment, or expanding operations. This type of risk-averse policy leaves an opening for Chinese, Gulf, Turkish, and other international companies to gain significant market share in a very short period of time. Judith Barnett comments that there are long-term ramifications for this approach:
“Wait-and-see is the wrong strategy. When I visited Egypt over the summer, companies were talking about US$150 million investments, US$1 billion investments. These are smart companies that are moving forward at this time of opportunity. The more you continue to support these countries, the more that people will remember it. There is a great deal of brand, and inter-personal loyalty in the region.”
There is no doubt that MENA markets will present challenges to businesses in the short to medium term. Democratic transitions are not usually a smooth process. For example, unemployment historically increases as the economy is transformed. This will exacerbate political stability. Still, the investment opportunity is undeniable in the region. Right now 200 million people in MENA are under 29 and that figure will rise significantly over the next 10-15 years when the population surpasses 500 million. Regional GDP will surpass US$3 trillion next year, which is 30% higher than the rapidly growing African continent is forecast to reach by 2020. The MENA figure is expected to more than triple to US$10 trillion by 2030. A robust government relations strategy is critical for capturing this growth opportunity.
“Candidly said,” states Ms. Barnett, “If you don’t take care of your customer, someone else will!”