The True Cost of Going Global

A new tool, called the “Opacity Index,” helps to make known that which is hard to know: the true cost of doing business abroad. What does it really cost to tap China’s massive market? Is that a better value than setting up shop in India or Brazil? Why is Finland considered such a safe place to do business? These questions are the basis of the book, Global Edge: Using the Opacity Index to Manage the Risks of Cross-Border Business.

Co-author Joel Kurtzman, a senior fellow at the Milken Institute, former editor of the Harvard Business Review, and columnist and editor for The New York Times, says that to gain a true risk-perspective on a country, the last place anyone should look is in the news media.

“In the United States in particular,” he writes, “international news reports are often better at misinforming than they are at educating business leaders.” (He says, as a former journalist, it pains him to admit it.) “The news media is fascinated by highimpact, low-frequency risk and rarely covers low-impact, high-frequency events.” It is the latter that drives up the risks and costs of doing business, Kurtzman contends.

"We realized that a lot of information about countries or companies is lost or intentionally hidden. If you can't get good information, risks can be overvalued or undervalued." -- Joel Kurtzman 

Along with co-author Glenn Yago, director of capital studies at the Milken Institute, Kurtzman developed the opacity index to assign real costs to challenges, such as high levels of corruption and lax controls, specific to individual countries. The index relies on a framework dubbed “CLEAR” which represents the five dimensions—corruption, legal systems, enforcement, transparency of accounting, and regulatory factors—that are the basis for the evaluation of 48 countries. The scores can be used to inform decisions about plant or office locations, M&A strategy, or legal-arrangement structures.

Indonesia, Lebanon, and Nigeria are at the bottom of the scorecard, while the United Kingdom, Finland, and Hong Kong (so different from China, the authors define it as a country within a country) are at the top.

“What can’t be meaured can’t be managed,” a truism attributed to management guru Peter Drucker, moved PricewaterhouseCoopers 10 years ago to underwrite the initial research that led to the creation of the index. At that time, Kurtzman was senior partner and Yago an outside consultant to PwC. “What we were interested in were the capital markets and how they reacted to information,” Kurtzman recalls. “We realized that a lot of information about countries or companies is lost or intentionally hidden. If you can’t get good information, risks can be overvalued or undervalued. Our yardstick was how the capital markets looked at companies and whole countries and how that related to currencies…Then we looked at governance nationally and at a corporate level and were able to determine that there’s a lot more globalization of processes than information. We know how to manufacture around the world, but executives in Germany don’t necessarily know how business is conducted in France. The index provides a snapshot.”

Boards can use the index to assess a company’s geographic risk profile on a global basis or to forecast problems that may increase the cost of risks. “If you’re a technology company,” Kurtzman says, “you probably don’t want to be in France, because our index shows that if you’re in a fast-changing industry like technology, regulation is too slow there.”

The index is scheduled to be updated in late April. Some of the significant changes? Finland is the most transparent country. It will be number one on the index, and the United Kingdom, which had been number one, moves down a couple of spots.