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Management in Practice

How Do You Know if a Country Is Ready for Business?

Some of the fastest-growing economies are also ones in which financial institutions are young and commerce is hampered by corruption. How do multinationals decide where to allocate resources across diverse environments? Honeywell CEO David Cote explains how he approaches the challenge.

When a global company decides whether, and when, to enter a country, it must consider a series of questions about the government and its role in the market. Is the government stable? Are financial and legal institutions strong? How pervasive is corruption?

The World Bank releases an annual report, called Doing Business, that looks at how government regulations impact businesses. The 2016 report finds that countries that have good business regulations benefit broadly: “[T]here is a strong association between performance in the ease of doing business ranking and performance on measures of competitiveness and of quality of government and governance.” On the other end of the spectrum, countries with high levels of corruption suffer economically. The World Economic Forum labels corruption a “tax on growth and investment,” pointing particularly to the profound indirect costs including over-investment in rent seeking, underinvestment in productive activities, and the perpetuation of inefficient policies. The OECD pegged the monetary cost of corruption at 5% of global GDP.

In an interview with Yale Insights, David Cote, chairman and CEO of Honeywell, said “I spend a lot of time thinking about governments and how committed they are to supporting and recognizing the significance of business in their economy,” He looks for steady progress toward an open economy and good governance.

Since taking over Honeywell’s leadership in 2002, Cote has expanded the $40 billion technology and manufacturing conglomerate’s global reach, moving away from dependence on U.S. defense spending. The firm now has 131,000 employees spread across 1,250 sites and 70 countries, generating 53% of sales internationally.

Cote expects the bulk of Honeywell’s future growth to come from emerging markets, which are making up more and more of global GDP. “There’s no reason to believe it’s not going to continue for another 20 years,” Cote said. “That’s a trend that I think any big U.S. company cannot afford to miss.”

But many of the fastest-growing economies are still struggling with issues of governance and corruption. For example, the five countries of the BRICS association, Brazil, Russia, India, China, and South Africa, rank at 116, 51, 130, 84, and 73, respectively, in the Ease of Doing Business Ranking, and at 76, 119, 76, 83, and 61 on Transparency International’s Corruption Index.

Cote divides potential markets into three categories. He isn’t willing to put resources into the markets where the predictable outcome is a request for a bribe, he said. Then there is a set of countries in which current circumstances are promising even if the government’s commitment to a sustainable business environment is unclear. “Who knows how long it’s going to last, but they do have a good market, right now,” Cote said. Honeywell, he said, should have a presence and be ready to take advantage as the environment improves. “You want to make sure that you have salespeople in there and maybe you want distribution. You want to at least be talking in the market.”

But it’s the last category that gets the bulk of his attention. “The third group, for me, are the ones where I look at it and say okay, this government is committed. No matter what happens politically, they will stay committed to business and whatever contracts or commitments they’ve made,” Cote said. “That’s where I will look at actually doing acquisitions, putting money into building plants, and making a longer-term commitment.”

Overall, he sees countries moving in the right direction. “I think there’s a recognition that an economy doesn’t grow if you can’t eliminate corruption from society,” Cote noted. “Capital is a coward. It doesn’t go in places where there’s a chance it’s going to get lost.”