A new tool, called the “Opacity Index,”helps to make known that which is hard toknow: the true cost of doing businessabroad. What does it really cost to tapChina’s massive market? Is that a bettervalue than setting up shop in India orBrazil? Why is Finland considered such asafe place to do business? These questionsare the basis of the book, Global Edge:Using the Opacity Index to Manage theRisks of Cross-Border Business.
Co-author Joel Kurtzman, a senior fellowat the Milken Institute, former editorof the Harvard Business Review, andcolumnist and editor for The New YorkTimes, says that to gain a true risk-perspectiveon a country, the last place anyoneshould look is in the news media.
“In the United States in particular,” hewrites, “international news reports areoften better at misinforming than they areat educating business leaders.” (He says, asa former journalist, it pains him to admitit.) “The news media is fascinated by highimpact,low-frequency risk and rarely coverslow-impact, high-frequency events.” Itis the latter that drives up the risks and costsof 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 MilkenInstitute, Kurtzman developed the opacityindex to assign real costs to challenges,such as high levels of corruption and laxcontrols, specific to individual countries.The index relies on a framework dubbed“CLEAR” which represents the fivedimensions—corruption, legal systems,enforcement, transparency of accounting,and regulatory factors—that are the basisfor the evaluation of 48 countries. Thescores can be used to inform decisionsabout plant or office locations, M&A strategy,or legal-arrangement structures.
Indonesia, Lebanon, and Nigeria are atthe bottom of the scorecard, while the UnitedKingdom, Finland, and Hong Kong (sodifferent from China, the authors define it asa country within a country) are at the top.
“What can’t be meaured can’t be managed,”a truism attributed to managementguru Peter Drucker, moved PricewaterhouseCoopers10 years ago to underwritethe initial research that led to the creation ofthe index. At that time, Kurtzman was seniorpartner and Yago an outside consultantto PwC. “What we were interested in werethe capital markets and how they reacted toinformation,” Kurtzman recalls. “We realizedthat a lot of information about countriesor companies is lost or intentionallyhidden. If you can’t get good information,risks can be overvalued or undervalued.Our yardstick was how the capital marketslooked at companies and whole countriesand how that related to currencies…Thenwe looked at governance nationally and at acorporate level and were able to determinethat there’s a lot more globalization ofprocesses than information. We know howto manufacture around the world, but executivesin Germany don’t necessarily knowhow business is conducted in France. Theindex provides a snapshot.”
Boards can use the index to assess acompany’s geographic risk profile on aglobal basis or to forecast problems thatmay increase the cost of risks. “If you’re atechnology company,” Kurtzman says,“you probably don’t want to be in France,because our index shows that if you’re in afast-changing industry like technology,regulation is too slow there.”
The index is scheduled to be updatedin late April. Some of the significantchanges? Finland is the most transparentcountry. It will be number one on theindex, and the United Kingdom, whichhad been number one, moves down acouple of spots.