The Economist & Baker-McKenzie on China

The good folks @ Baker & McKenzie were kind enough to extend an invitation to an update on China: China Update Roadshow 2011-Structuring for Growth in a Changing China.  Mike Morkin, Managing Partner of BM’s Chicago office, Jia Zhao, the 1st Chinese woman to earn a western law degree & pass the bar, & Tom Doyle, Chair of the North America-China Initiative, provided opening remarks.  We then jumped into new legal developments:

• Bing Ho said 85% of BM clients are making money in China, & 20% said China is their most profitable market globally.  Foreign Direct Investment reached $90B in China during the financial crisis, & is now @ $105B.  The government continues to roll out the red carpet & is downsizing it’s approval domain by raising the level which it uses to approve investments from $30M to $300M.  Investing in China still requires skillful due diligence & lots of work post-acquisition.
• Michelle Gon spoke to compliance & corruption in admitting China is not yet “civilized.”  There is less bribery of public officials, & now no one is exempt from prosecution.  China does have an equivalent to America’s Foreign Corrupt Practices Act including it’s extraterritoriality, but state secret issues are still vaguely defined.
• Brandon Kelly expounded on taxes.  Shares transfers require a 10% withholding tax on capital gains, which were rarely paid before 2007.  Now transactions are more difficult with more reporting obligations because there are fewer shells in which companies can shelter income.  The withholding tax was reduced to 5% in Hong Kong & Shanghai, but you must have real substance to justify the lower rate, which changes how you structure deals.
• Joseph Deng talked to employment.  As Chinese demographics change, the is no more endless labor pool.  The dependency ratio is changing from 10:1 to 3:1.  Companies that came to China for labor savings are staying to serve local consumers.  Unions in China are passive & work with the government on development.  Regardless, unrest is now further, deeper, & more dangerous.  The government should not be paranoid about the Jasmine Revolution, but should be afraid of dissatisfaction.  Employee demands for individual rights have increased the last 3 years & we are starting to see some overtime actions.
• Clement Ngai informed us about intellectual  property (IP).  Because China sees it’s future in innovation, technology, R&D, invention, & patents, rather than as the world’s factory, filings are up the last 5-6 years.  HuaWei was sued by Cisco & they settled, & HuaWei now is a joint venture partner of 3Com.  There is new legislation on patent law:  inventors are required to file in China 1st with creations created in China.  Inventor compensation is now mandatory, but the issue is ownership.  The presumption is the creation belongs to the employee, who receives ongoing remuneration of 2-10%.
• Howard Wu espoused on  supply chains.  There is a shift from broad assembly for export to turnkey manufacturing for local consumer consumption to add more value & pay more taxes.

I attended the break-out sessions on investments/acquisitions & R&D/IP.   Mergers & acquisitions have increased from $41B in 2001 to $105B in 2011.  The number of projects has dropped from 45 at it’s peak to 28 now.  87% of respondents said their investments are profitable, & 68% are better than overall.  74% make China a top 5 priority & 66% are accelerating their commitment, while 61% are producing locally for the Chinese market.  31% say bureaucracy & 30% say finding capable management are the most pressing challenges.  The Chinese are tightening up on the approval process, having adopted a European model which requires lots of information.  The specifics of a new National Security review are unclear.  If for some reason your deal is rejected, it’s better to negotiate further rather than going to court to overturn a decision.  Pre-acquisition due diligence & post-acquisition integration are key.  The questions respectively are “What will you tolerate & not tolerate?” & given 3 typical sets of books, how do you set a price?  1 result is pushing Chinese multi-national companies out to better compete globally.

To R&D/IP, R&D has increased .45% to 2.2% of Chinese GDP.  High New Technology Enterprises (HNTE) & Technologically Advanced Service Enterprises (TASE)  seek to create National Indigenous Innovation Products (NIIP).  HNTE’s get 10% tax breaks from 25% to 15%.  TASE is created to confront India in services.  Chinese companies compensate inventors with either a 1-off payment when a patent is filed &/or 2-10% when a patent is granted 2-5 years later.  NIIP product certification is done @ the local level, but may transition to federal, & impacts upon government procurement opportunities.

Ran Xu of the Economist Intelligence Unit offered insights from their research.  Although American living standards are still higher than those of the Chinese, China wields more clout around the world today.  Chinese household income is $15K/year, & will equal that of the US in 2014.  The Chinese market is the #2 market in many global sectors after the US.  Chinese growth will fall from 7.5%/annum 2011-2020 to 5.5% 2021-2030.  Rebalancing investment, consumption, & exports is tricky.  The financial crisis exasperated imbalances.  China has 100K infrastructure projects where corruption & quality are problems.  What could go wrong in the next 5 years?

• a volatile stock market with lots of insider trading & the end of cheap Chinese labor could lead to inflation
• changing demographics lead to 1 worker feeding 4 mouths as the young decline & the aged rise
• the centers of wealth are changing 2009-2015 with new consumer markets:  Carrefour moves fast & makes decisions after opening a store whether to stay open or close in 1 year; Burberry is buying back it’s franchises.  Income disparity is leading to social stability issues as local governments are beholden to the rich, & there is lots of hidden wealth.  Shanghai residents have 1.3 computers while the national average is .6-.8
• In 2012, the majority of the Chinese population will live in urban areas, which is increasing property values, & potentially leading to another bubble.  The majority of the Chinese can’t afford to buy a home, (men have lost wives due to lack of a house) but there is little incentive to build low-cost housing.  Property value has been divorced from rent.  The population was angered when, during China’s most recent earthquake, the government buildings withstood the melee while schools did not.
• China is the world’s biggest consumer & emitter of CO2, so they are desperately seeking new energy sources, but China doesn’t develop it’s own technologies:  it imports or “shares” them.

Q&A

• Whether inflation will kick in depends on whether or not you include food & housing in the definition
• GDP/per capita will plateau in 2015 & then show 5% growth
• China will not crash in the next 1-2 years

invest in Bulgaria?

The International Trade Association of Greater Chicago invited us to learn about Bulgaria-your strategic gateway to southeastern Europe which featured speakers from Johnson Controls. Kraft, & McDonald’s.   Ambassador of the US to Bulgaria James Warlick kicked off the road-show’s 1st stop in the city with the most Bulgarians in the US to introduce Bulgaria to investors & exporters.  The US was the biggest investor in Bulgaria in 2010 & forecasts 3 1/2 % growth for 2011.  The remaining issues are the legal system & infrastructure.

Elena Poptodorova, Ambassador of Bulgaria to the US, let us know Bulgaria joined NATO in 2004, the EU in 2007, & contributed to defense cooperative agreements in 2006 in Afghanistan & Iraq, which creates bonds stronger than politics.  Big investors like McDonald’s & Starbucks are now part of daily life in Bulgaria, but SME’s are a focus, such as special programs for rural areas.

James Kramer, VP-Intl Franchising for McDonald’s, expounded on Mickey D’s experience in Bulgaria.  They entered the market in the mid-1990′s as owners & built 19 restaurants then transitioned to a franchise structure in 2006.  Since then, they’ve added 15 new stores, + 2 this June, & 8 McCafes to employ 1300 people.  On the Corporate Social Responsibility side, they’ve opened a Ronald McDonald House in 2002 & raised $300K & also sponsor McHappy Days.  McDonald’s has won a best employer award in Bulgaria & internal awards for the highest quality & employee experience in Europe.

According to Sherrie Esposito, Assoc. Dir. of Global Issues Management, Kraft entered Bulgaria in 1993 with the acquisition of a chocolate plant that employed 500 people.  In 2001 they expanded to Nova Brasilia with 100 employees & made a $30M expansion in 2009.  Kraft is #2 to Coke in recognized brands in Bulgaria.  The reasons Kraft went to Bulgaria are:

• member of EU, including Schengen agreement
• low costs & skilled workforce
• low taxes (10%)
• location

In the future, the Bulgarian government needs to:

• streamline government
• establish the rule of law
• build infrastructure

Johnson Controls Director of Sofia Development Center (SDC) Roman Vasilev told us about their batteries & power solutions for autos & building efficiency.  At their SDC they made a long term commitment to do R&D on hardware, software, & mechanical design for 5-10 years there.  They’ve actually invited R&D competition because that is better for everybody.

Q&A

• it takes a few months to incorporate in Bulgaria
• there are no restrictions on foreign ownership
• Johnson Controls bought an instrument company in 2001 with 50 engineers which has now grown to 500 engineers.  The cultural fit & mobility of Sofia’s engineers keeps Johnson Controls there.  McDonald’s expanded into a number of other similar countries @ the same time.  The size of each market determined if they entered as owners or franchisees.
• Bulgaria is ready for €RM2 & it’s banknotes are simply tied to the €.
• Because of it’s educational system, Bulgaria is a technology-driven economy.  There are no issues with intellectual property.  The # of FTE’s (full-time engineers) is comparable to Egypt, a much larger country.  Unlike other emerging technology centers, Bulgarians ask more questions up front so that there are fewer problems later on.  McDonald’s focuses it’s technology on consumers & reporting.  Internet penetration in Bulgaria is 48%-broadband penetration is higher than in Western Europe.
• McDonald’s uses a single franchise model in Bulgaria because it’s the best model for McDonald’s, which allows them to manage risk better by engaging local business people with high profiles & financial resources to build the business & brand.  They take no real estate interest to minimize their risk.
• McDonald’s employs only 1 American in all of Europe, which has 6K restaurants, because there are talented people everywhere “with ketchup in their blood.”  Johnson Controls was skeptical of Bulgaria before it hit bottom, but entered @ the right time as the people & government matured.
• Inflation is predictable @ 3-7%.

the growing middle classes in the B(R?)IC countries

The University of Chicago hosted a conference focused on the BRIC (Brazil, Russia, India, China) countries called BRIC in 2020 which I was only able to attend for the 1st day, which focused on the emerging middle classes in those countries.  You’ll find many of the presentations on the website.  Dipesh Chakrabarty of UC’s dept. of history opened with a quick summary of today’s global middle class, in families cut across borders.  As the older middle class rode a wave of prosperity, today’s growth brings environmental & inequality problems along with it.  As there is more economic growth & “globility”, there is also more conflict.

Marcelo Neri’s presentation on Brazil is here or here:  brazilsmiddleclass

Harley Balzer of the dept. of government @ Georgetown addressed the middle class in China & Russia by 1st acknowledging that Russia really doesn’t share the growth characteristics of the other BRIC countries.  It doesn’t have the historical links or geographical proximity that the others do.  It’s not a member of the WTO & hasn’t diversified it’s economy off of oil, plus Russia is losing it’s educational & science/technology role.  Russia’s middle class is richer, but a smaller % of the population, the same as in 1995.  There are mostly private, & very few public goods.  There are also big security & mobility issues there.

In both Russia & China, higher education enrollment is increasing, but neither is expanding faculty.  The political role of the middle class is ambiguous because a sizable middle class is necessary but not sufficient for democracy.  Typically the professionals provide leadership & lead revolutions & they’re just not doing that.  Their welfare states are under pressure & demographics & income disparities are becoming problems.  The middle class is vulnerable to housing bubbles & food & energy price shocks, while governments are cutting services & jobs.

The number & wealth of China’s middle class is growing, but more education is not leading to better prospects, so China might not be changing fast enough.  It’s growth curve is leveling off.  Western companies have experienced consumer market failures like Best Buy Home Depot because of intense price competition & the focus on consumption is pernicious.

Devesh Kapur of the Center for the Advanced Study of India @ Penn addressed 4 topics:

1. fractured coherence/cohesiveness-15-20% of the Indian population still lives on $2/day while the number of taxpayers has risen to 30M households, 1/6 of the population.  50M or 15% of the population, have college degrees but their incomes are still less than in the west.
2. characteristics-in the 1990′s, jobs were linked to state employment, which is now flat.  The middle class has grown from self-employment & entrepreneurship, although less Anglicized & moving from major metropolitan areas to smaller cities.
3. attitudes-Pew global surveys indicate India is an outlier in that middle class attitudes are similar to those of the poor with no gap, & rate their past lives low & are optimistic & not nostalgic.  That they’ve become consumerists is no surprise.  The professions won’t play the same role as in the past.  They can be crusaders against corruption, but many self-governing bodies are corrupt themselves.  The media is corrupt too, so they don’t report on corruption.  Ultimately there is no vanguard for change.
4. political roles-the middle class is the base of power but are disenfranchised & dislike the democratic process.  The Right to Information Act was a result of middle class activism.  Whereas the old left looked to the state, the new left is skeptical of everything, the state, markets, etc.  2M non-governmental organizations (ngo’s), of which many are great & many are crooks, have substituted for the state, which parallel the for-profit sector.

Panel Q&A highlights

Brazil’s universal health care & public services provide poor quality, but it’s population wants a big state role.  Brazil’s diverse but integrated culture helps so they can take a middle path.  It has a relatively closed economy, but that has internal advantages.  Brazil is targeting OECD levels of education by 2020, which is the #2 priority now, up from #7.  They are learning from the Chinese in “working the plan.”

Russia’s Putin closed their 1990′s trajectory & discredited democracy where corruption has blocked globalization, which will all take a generation to change.  As they view the outside world, they may demand changes.  A Russian bubble would be tied to oil, but a petro-carbon-based economy can’t last.  Their future now depends on the price of oil & their budgets are in trouble.

India’s middle class is exiting from the state’s education & health sectors because they paid taxes but got little in return, but there is rapid growth in taxpayers.  The fastest rising asset class is student loans, debt & mortgages are rising, leading to supply & demand imbalances.  The poor still favor democracy as a fundamental right, while it’s extremely heterogeneous population has both positives & negatives.  Despite many communists losing elections recently, there are still photos of Stalin in every office.

China has reestablished the intrusion of the state into life.  Housing & food price bubbles could pop up because their economic history dictates that their current growth rates are not sustainable.  Their large & integrated domestic market leads them to be optimistic, similar to the US in the 19th century.  Chinese savings are a result of a lack of valid pension schemes, so the government is concerned about inflation.

how to enter India

The Chicagoland Chamber of Commerce Global Connections Council presented a much improved forum INDIAN BUSINESS FORUM: NEW BUSINESS OPPORTUNITIES IN INDIA which featured Eric Cohen of Power Plant Services & George Molokal of Alcor Fund & was hosted by Allen Ginsburg & Raj Shah of DLA Piper.  Those techy Indians opened with greetings from the Consul General in Chicago sent via video feed.  She informed us that her US region did $4-5B in trade in the Midwest, the most with Illinois & Michigan.  There are at least 13 Illinois companies working in India.  India’s GDP is growing @ 8.5%, & 2nd in the world in Foreign Direct Investment, while India has invested $5.5B in the US, which is more than the reverse.  If you’re interested in working in a country with a stable democracy, large & young population, (their growing middle class is now bigger than the population of the U.S.)  that is investing in infrastructure, India is your place.  But because India prohibits foreign law firms to practice there, foreign lawyers have to partner up with the locals.

George Molokal was kind enough to send over the very comprehensive presentations by him & Eric Cohen.  Here they are:  India Forum – Alcor Presentation

Q&A

• Corporate taxes are uniformly applied @ 35%.  Withholding taxes are 15% on dividends.  There have been no issues with repatriation of profits for the last 15 years.
• Doing 360 degree interviews with employees & customers of 8-10 potential partners as an extra layer of due diligence should enable you to find partners you can trust.
• The Indians are more process-driven & capitalistic than their neighbors to the east, so political connections are less important than they are in China.  However, certain industries, like infrastructure, have more political controls…
• It’s best to take services & construction companies to India via partners, which is easiest & cheapest.  To hire & build takes experience & a long time.
• Meeting partner expectations on both sides is a cultural risk.  Contracts very well may change in 6 months, so design that into your plans.
• Because of India’s focus on education, the caste system has diminished in the last 15-20 years.  Now capitalism & merit-based systems prevail.
• Geographically, there is more manufacturing in the west;  silicon valley is in the south; the auto industry is centered around Chennai; the northeast is the weakest.
• More Indian women are joining the workforce, but most still stay home.
• India’s Right to Information (RTI) act has opened up government bureaucracies so that they are now more transparent & move faster.  Thus, these bureaucracies have been losing power the last 5-7 years.
• India is culturally different in being more family-driven, showing respect to elders, & minimizing individualism.

europe @ different speeds

Much to my surprise, in the aftermath of the fall of Neil Hartigan’s World Trade Center Chicago/Illinois, the Chicagoland Chamber of Commerce has started an international group called Global Connections Council, which hosted this event EUROPE AT DIFFERENT SPEEDS: DOING BUSINESS IN THE EUROPEAN UNION .  I knew that Shufen Zhao, formerly of the WTCC/I, had moved over to the CCC & was organizing international events, but this group was news to me & others.  Pres. Dr. Lance Pressl announced that they had led a trade mission to Turkey a few weeks beforehand.

The event featured Antonio De Lecea, Minister of Economic @ Financial Affairs of the delegation of the European Union to the United States, W. David Braun, Partner @ Quarles & Brady, & David Pistrui, Managing Director of Acumen Dynamics, LLC.  De Lecea was the keynote speaker & addressed 3 issues:

1. why do business in Europe?-because it leads to profitability & job growth.  @ $210B earnings are 20X that of China & India combined $8.7B, & 40% more than Latin America & the Asia/Pacific combined.  This has created 13-15M onshored jobs, 7.8M of which are directly employed.  The EU is the biggest investor of Foreign Direct Investment (FDI) in Illinois, up 44% to $22B, which has led to 53K jobs, of which 25% are in manufacturing.  In 2009, the EU bought $9.5B worth of chemicals, computers, & machinery.
2. the financial crisis in Europe-which brought up 4 issues which were addressed head on:  A.  mispriced risk & credit with too little surveillance & cyclical tax bases was addressed by recapitalization & regulatory reform  B.  bloated public consumption & social security net which led to fiscal problems was addressed by consolidation for long term stability  C.  market distortions & lack of access to finance which led to lack of critical mass & competitiveness is being addressed by deep broad structural reforms  D.  lack of policy government coordination led to segmented markets with no sovereign credit mechanisms is addressed by creating a €-area sovereign crisis mechanism, financial supervision & coordination, & enforced surveillance.
3. European stability & growth with budget austerity-fiscal conservatism is growth friendly as they cut non-productive expenditures & change tax codes & their enforcement.  Portugal has eliminated the mortgage interest tax deduction.  The Europeans are putting an emphasis on innovation, (which mirrors Obama’s State of the Union speech), by encouraging cross-border venture capital, creating a single EU patent, increasing the effectiveness of R&D aid rules, recruiting non-nationals in research, providing open access to published research publications, & national funding of R&D.  They are also pooling EU resources by coordinating R&D, prioritizing infrastructure, opening research to US organizations, creating markets through coordinated public procurement, & creating innovative financial models.  Finally, they are trying to strengthen trans-Atlantic partnerships with the Trans-Atlantic Economic Council.  The collaboration between the FDA & European Medical Agency is 1 example.  In sum, the crisis was an opportunity to change @ the national & EU levels.  The EU has made more structural reforms in 1 year than the prior 10.

A simplistic panel Q&A followed:

• Europe is complex, so do your research to learn about your potential clientele to get started
• Network, join chambers, go to trade shows in Europe to seek out like-minded people/partners, engage in daily life there to understand the culture
• You can structure operations essentially 3 ways:  A.  sales representation  B.  distribution  C.  foreign direct investment to build your own organization.  There are different costs & amounts of work for each.  There is no uniform system of law across countries, so local legal counsel is required everywhere you go.
• Europe is not repopulating, which is not sustainable & leading to a shortage of technology workers, but Europeans are xenophobic.  This labor shortage is combined with a pension problem.
• There is no United States of Europe.  You must still meet the particular needs of each market with particular products.
• We need to change the mindset to pursue foreign markets since, for example, even only 4% of French companies export.

This event proceeded @ different speeds.  The keynote on Europe was very detailed.  The panel discussion was overly simplistic.  Participate with your eyes wide open.

chinese consul general on china & US

Had breakfast with Yang Guoqiang, the Consul General of China in Chicago @ the Niagara Foundation where he talked about THE RELATIONS BETWEEN CHINA AND THE U.S.: STATUS, POTENTIAL AND PROSPECT.  He led off by noting that the bilateral relationship between the US & China is 1 of the most important in the world.  Hu Jintao’s visit yielded a historic bilateral agreement which spelled out a mutually respectful partnership which pursues common goals.  A fundamentally good relationship between these 2 countries is better for the whole world.  Never before have we worked so closely on so much.

China recently unveiled it’s 12th 5 year plan, which outlined projections for China’s economy, politics, society, & culture.  It sets 3 goals:

1. Continuously rising living standards-the focus is on bringing low-income earners to equality in China’s midwest & west.  There has already been big changes, reflected in increases in the price of food.  Whereas earlier, they would eat pork once/week, they are now consuming pork 2-3X/week.  The poor are rising as a result of the dynamics of supply & demand, which will affect domestic consumption.  For the 1st time in 20 years, they had a trade deficit.
2. Upgrade industries-to add quality & higher value as businesses & manufacturing shift.  Inflation will create wage increases.  The shift to higher value-added products will lead to a shift from east to west.
3. Environmentally friendly & sustainable economy-clean energy.  They recognize that massive development leads to less environmental control.  Their goal is to share lots of business opportunities.

China is a pro-free-trade country which contributed 20% to global growth.  Education will be a focus to reach 4% of GDP.  Many municipalities are already meeting this goal.  While China’s economic growth was 10.2% in 2010, that is being scaled down to 7.5% for the next 5 years, with more investment in infrastructure, agriculture, & transportation.  They target 3% of GDP going towards science & technology.

Q&A

• Economic development creates demand for oil throughout the world, especially among the BRIC countries.  The world must work together to solve this problem.  It’s not just the price of gas that’s the problem:  it leads to less systematic stability.  Better technologies which are clean & sustainable have not been developed yet.  The US Dept of Energy is working with China in monthly & weekly meetings.
• China has invested in pork production in the US & imports pork, meat, feed, corn, soy from the US.  Food processing has good potential in China, of which there are 500 enterprises in Chicago.  This report discusses Chinese investment in the US:  An American Open Door? | Asia Society
• Rich Daley has made 2 trips to China in the past 6 months to make Chicago the most China-friendly city in the US with a focus on education & creating business relationships.  Pat Quinn is going to China in the fall with a group of other governors.  China is determined to invest in manufacturing abroad so that they can learn better management skills.  They recognize that transportation, trucking, etc. are best in the midwest.
• High speed rail is 1 of 10 core innovation technologies China is developing, which is taking a global focus over the next 8-10 years.  Their technology is suitable to a flat environment & urbanization will happen along those lines.  It will never pay for itself, but the world needs it because air traffic pollutes the most on a per capita basis.  China has 5K miles in operation with Shanghai-Beijing coming online in June & more in the next 2-3 years.
• Yang is no expert in exchange rates, but China believes the rate must be decided by the market with governmental guidance, as all governments exert some control over exchange rates, right?  They watch & monitor other currencies & established an exchange rate swap market in Shanghai.  Given the experts say China’s currency should appreciate, the question becomes how to do it in a stable & sustainable manner.  The Chinese government has 2 concerns:  1.  hot money which creates opportunities for speculators, & 2.  the capability for industry to digest an appreciating currency, which are ultimately passed on to end-users/customers/consumers.  If prices increase too much too quickly, consumers won’t pay , & businesses won’t be able to adjust.  Exchange rates are reflected on retail racks in 6-12 months & have risen 4-5% in the past few years.

turkey & the middle east

The Niagara Foundation invited us to lunch to listen to Kerim Balci, Journalist & Chief Executive Editor of Turkish Review, talk about TURKEY AND THE RESTRUCTURING OF THE MIDDLE EASTERN REGIMES.  Turkey is changing.   9/11 marked the beginning of the 21st century with the death of liberal capitalism & a return of Islam to history.  World War I took hope from the Muslim world.  Change is now accelerating, as Tunisia’s leader left in 3 days, much to the surprise of protestors there.

In Turkey, the Justice & Development Party has more potential to contribute to change.  They’ve set new policy objectives, such as the “No problems with neighbors” policy, which the EU mandated as a condition to apply for membership.  Historically Turks were educated to believe that they were surrounded by enemies in Greece & Bulgaria, & other nearby countries differ in religions, Iraq’s Kurds & Iran’s Sunni’s vs. Turkey’s Shia.  Turks were led to believe that the world was against them & that they have no friends, so there was no cooperation with anyone.  It bred a fear of an us vs. them mentality.  His daughter is now Facebook-educated, so her generation knows that they have plenty of friends, on Facebook & elsewhere.

Social mobilization occurred horizontally & vertically in Turkey.  Rural populations moved to urban areas in the 1980′s & this changed their understanding of the world.  The periphery moved to the center as villagers moved to the cities, which changed the perception of what Turkey can do.  They entered productive dialogues with the Greeks.  In 1998 Turkey almost went to war with Syria, but is now in a common market with them that’s growing.  The EU was the best peace project in history.

Turkey has turned into a moderator & bridge-maker between east & west as there has been an axis shift from west to east.  They won’t leave the west because it’s attractive to the Muslim world.  Support for EU membership is higher in Kurdish Iraq than it is in Turkey.  EU allies are less willing to accept Turkey, but that”s OK because the EU is sick financially & socially.  Turkey will be the biggest economy in the EU if it enters the EU by 2050.  Turkey has good relations with the Middle East, India, & China, which gives it more bargaining power with the EU.

The current regime made 2 major mistakes lately:

1. it’s decision to abstain on the nuclear issues in Iran
2. Arab states need Turkey to talk with Israel.  They don’t trust Americans & Turkey can talk to both.  As moderator, Turkey needs to talk with all sides.

Q&A

• Turks don’t use the term Ottoman empire, which is simply an ethnic identification. It was more of a multinational alliance. Turkishness became a creation years later & they’ve lost the feeling of belonging for an identity.  Turks were not even in the majority of the Ottoman regime.
• Turkey’s decision to not allow the Americans to enter Iraq from the north reflected the national sentiment.  A closed vote was taken twice & rejected.  There were domestic incompatibility & capacity issues as they did good without knowing it after seeing the results.  In the Arab view, March 1 is the day American imperialism was resisted.  They are hopeful that the Arab Spring will flow into central Asia, but legitimacy is lost when western powers bomb opponents in those areas.
• Egypt is in an embryonic stage of democracy.  As bridge-maker between east & west, they were 1 step ahead of the Oslo negotiations between Israel & Syria.  Turkish multi-party democracy is a good example to follow while single party bureaucracies must change so that governments can govern.
• The Arab world can learn from Turkey’s mistakes.  There is no new world order; it’s a new human order.  Turkey has been active in Ireland moderation between the Catholics & Protestants.

lunching with the brazilian ambassador

Had lunch with Mauro Vieira, Ambassador of Brazil to the United States & other members of the Chicago Council on Global Affairs @ BRAZIL AND THE UNITED STATES: BILATERAL PARTNERSHIP AND GLOBAL PERSPECTIVES where he shed some light on Brazil’s perspective on inter-American relations.  Pres. Barack Obama stressed on his recent trip to Brazil, the country’s rise to 7th largest GDP ($2.1TR) in the world with 7.5% growth, & recognized that our partnership has become deep & intense.   The U.S. is Brazil’s #2 trading partner with $58B of $383B in international trade.  Brazil received $10B of it’s $48B in foreign direct investment (fdi) from the U.S., while Brazil has a total stock of $16B of fdi in the U.S., $3.9B of which came last year.  Exports to Brazil support 250K jobs in the U.S., while exports to the U.S. support 120K jobs in Brazil.  Brazil grew so much the last 15 years as a result of the imposition of social justice, which created 14B jobs & raised wages 42%.  24M were lifted out of poverty as 30M joined the middle class as GDP/per capita rose 80%.   The 2008 financial crisis was a turning point which caused the emergence of closer involvement of the emerging markets.  Obama supports an expansion of the UN  Security Council (I assume to include Brazil), & Brazil is now producing oil, of which Obama wants the U.S. to become 1 of Brazil’s best customers.  Brazil & the U.S. have come to many agreements on trade & economic cooperation, aviation-open skies, & cooperation on education & innovation.   They signed a peaceful use of outer space agreement which will allow the U.S. to launch space ships from northern Brazil.  Dilma Roussef wants more Brazilian students studying the hard sciences in the U.S. while Barack promised to increase the number of Latin American students to 100K in the U.S.  Earlier that day a US-Midwest Brazil Business group was launched.

Q&A

• The middle class has grown to become 53% of Brazil’s population.
• Lula & Turkey built confidence with those who weren’t talking to Iran.  Dilma stands ready to contribute in the future.
• Brazil has lots of legislation, programs, & multilateral fora to fight violence, police excess, & human rights violations.  They favor general overview actions rather than specifics in fighting these problems.
• Trade is important (exports=25% of GDP) to Brazil.  China is their #1 trading partner.  Bureaucracy & corruption are not impediments to foreign trade, as there is no pattern to discern in either.  They want better regulations & legislative control.
• Hillary Clinton was interested in the bilateral agreement against racism 3-4 years ago, which it is assumed will be discussed @ an upcoming meeting in Minas Gerais in June.
• Brazil thrived during the financial crisis because the government took quick action on stimulative VAT consumption taxes, which were reduced to 0 for popular cars & home appliances.  The President went on T.V. & said “Continue to work & spend.”  The government also built houses.

US trade rep says “attend Asia Pacific Economic Cooperation conference”

The Chicago Council on Global Affairs welcomed US Trade Representative Ron Kirk to talk about THE ASIAN MARKETPLACE: DRIVING AMERICA’S ECONOMIC GROWTH, which was essentially a promotion for the upcoming Asia Pacific Economic Cooperation Conference (APEC) later this year.   This conference will gather leaders of 21 of the largest economies of the world which account for 40% of the world’s GDP & 1/2 of the world’s population.  The US is the host of a yearlong series of meetings on transpacific partnership in San Francisco & Montana.  Private industry will participate too, contributing to public/private partnerships.  Pres. Obama will take part in Hawaii in Nov.

Kirk kicked off saying 70% of Americans think trade is not good for America, that we’ve traded electronics & t-shirts for jobs, & that America is helping emerging economies, while the opposite is also happening.  Illinois exported $50B in goods & services, which results in employing 348K people.  If was sell more to the world, that’s good for us, so we’re lowering their barriers to sell them more.  APEC countries are responsible for 1/2 of the growth in the world, so they are prime target markets.  Kirk’s office is trying to make it cheaper, easier, & faster to sell abroad.  His focus is on strengthening integration with supply chain connectivity so that we can plan & expedite our value.  He’s trying to eliminate tariffs on green technologies with regulatory cooperation.  SME representatives are invited to APEC to meet with trade ministers in Montana.

Q&A

• Visa issues are a challenge.  We’re open to retaining the best & brightest talent, but congress is zealous in protecting our borders.  We need to relax/expand our visa programs again.  More tourism leads to more trade.
• The Trans Pacific Partnership started 1 year ago to build the next generation trade model & has had 7 rounds of negotiations with 8 countries.  They’ve agreed to put everything on the table & be as aspirational as possible.  They are now getting to the hard part, crystallizing differences & making the tough decisions.  It’s progress has been put off because of natural disasters in the region (earthquakes in Japan & New Zealand & floods in Australia) & elections in 5 countries.  Kirk is working together with congress to protect intellectual property for pharma, etc.
• Congress is bitterly divided on the 3 Free Trade Agreements the Obama administration inherited.  The administration vows to do it better & not fall to false choices to rectify the imbalances of access to foreign markets.  Ford & the UAW have embraced the worker protection & human rights efforts.  $38B could be won in exports to Korea & 80% of that would be manufacturing.  Also no industry is more dependent on exports than agriculture.  Services would be opened up too.
• Trade is 13% of GDP, although some people are frustrated with & even hate trade.  The administration is trying to create wise policy that supports job growth.  Other countries are taking advantage of us, so trade rules need to be enforced.  For example, China shouldn’t be able to dump products below cost in the US.  Made in America is still the best brand in the world.

Kirk spoke with the press after the event & here’s what the Chicago Tribune reported:  U.S. puts condition on talks with EU to resolve airplane subsidy dispute

do your R&D in Austria

ABA-Invest in Austria, the Office of Science & Technology (OST) at the Austrian Embassy, & Austrian consulate in Chicago hosted this event Start Your R&D Business in Austria featuring Markus Costabiei of tech 2 B incubator, Michael Moll of Entrance Entrepreneurship & Finance , and Alexander Krajete of Green Energy Think Tank. Here is the presentation AustrianR&D they made.  I’ll summarize what they said that’s not included in the presentation.

Hans Nagel of ABA opened by pointing out that German is the largest homogeneous language spoken in Europe by 100M people, of which Austria is included, while Vienna is so diverse that 25% of it’s population doesn’t speak German as their mother tongue.  Philipp Marxgut of OST indicated that Austria intends to increase it’s investment in R&D to 3.25% of GDP to become an innovation leader.

Michael Moll provided the details of funding sources in Austria, the government for grants & soft loans, & the Austrian Promotion Bank & Research Promotion Agency which offer grants & soft loans of up to €100K without any liabilities.

Alex Krajete was able to raise €400K to convert CO2 into natural gas.  He got the idea from Chemical Engineering News in 2007.  His concept mirrors the origins of life, starting with microbes, & organisms, etc.   He wrote a 10 page business plan which got him €100K in June, 2009.

Markus Costabiei discussed Austrian incubators & his in particular.  His program started in 2001 to support start-ups using a balanced scorecard model.  They’ve done 1000 projects which has resulted in 400 companies starting-up which have won 200 prizes.  Markus noted that while A.Krajete knew his technology well, he was lacking business knowledge, so they worked together to build this human capital to seek financial capital.  They now meet every 4 months to update & review the technology & business.

A couple of attendees were from Baxter Labs, which is big in Vienna.  Baxter acquired Immuno 15 years ago in Austria & it shifted the direction of the company.  They now have more than doubled the number of researchers from 500 to 1200 in Austria so that 80% of their R&D people are there.  Austria’s asset is it’s people & their talent, which leads to an excellent R&D environment.  The country offers premier living conditions which makes it easy to attract talent.  They also mentioned that any innovation involves risk, & that most scientists are lousy business people.

Q&A

• The tech 2 B program gets 40 applications/year & ~9 are accepted, depending on budget availability.
• Legal issues all come down to intellectual property, (IP), which is different from other kinds of law because entrepreneurship requires IP that is new.  You have to get the right patent, but finding capable lawyers can be difficult.  It took some time to find someone qualified in München.
• Krajete originally thought his customers would be the power companies, but they were too focused on using their existing resources, so actual communities seem to be his clientele.  A major issue is enabling the long-term storage of energy.
• A qualified project must do R&D in Austria.  Selection criteria should be discussed on a project-by-project basis.
• Krajete’s business model depends on taxation & the pricing of energy per kilowatt hour.
• The # of angel investors with € & experience is growing.

europe’s freedom of services directive

The John Marshall Law School hosted another lunch & learn entitled CHANGES IN EU BUSINESS REGULATIONS: WHAT U.S. LAWYERS NEED TO KNOW which featured Fulbright Scholar Prof. Giovanni Coinu, Faculty of Law @ University of Cagliari in Italy.  The deeper topic was actually the EU’s “Freedom of Services” directive & it’s enforcement in Italy.

Article 26.2 of the Treaty of the EU (TEU) guarantees freedom of movement of services & article 61 ensures there is no discrimination based on nationality or residence, but the European Court of Justice’s (ECJ) jurisprudence on services has been inconsistent.  As the EU is becoming more market-oriented, the ECJ & EU laws now tend to put economic freedoms above social rights.  In 2008, the ECJ examined Poles who were working in Germany & earning less than 1/2 of what Germans earned there.   Rüffert v. Lower Saxony cited a local law which provided for public works to pay employees at least the minimum wage where the services are performed, but the ECJ ruled it was a violation of article 56 of the TEU.  Since services account for 2/3 of the EU’s GDP & employment, the pro’s of this are:

• extends EU fundamental freedoms
• benefits SME’s
• better functioning services markets should enhance EU economic competitiveness

The cons are:

• threat to worker’s rights & fair working conditions
• unfair competition from countries with lower labor costs
• no protection for local employers & workers

With enlargement of the EU, it’s population increased 27%, but GDP by only 4%, so the equilibrium changed & the wealthy became worried.  The “Polish Plumber” became a dangerous man to the west, as it was a sign the “Anglo-Saxon” economics were running rampant over the EU & competition between workers in different countries was resulting in a downward spiral in income levels & the west being overrun by immigrants from the east.  This contributed to the European constitution being voted down in 2005, so the EU adopted directives instead to bring national laws into line with each other, especially those pertaining to the single market.  The Services Directive defined a service & service provider:

Service:

self-employed activity

• self-employed activity
• of an economic nature
• included regulated professions
• with explicit exclusions

Service Provider:

• individual who a a national of a member state (MS)
• legal person established in a MS

A MS can grant authorization for freedom of establishment only if it’s non-discriminatory, justified by reason relating to the public interest, does not go beyond what’s necessary, unambiguous, objective, transparent, accessible, & made public in advance. Prohibitions from freedom of establishment include:

• discrimination based on nationality
• limiting establishment of SP to 1 MS
• limiting the choice of SP between principal & 2nd-ary establishment
• condition or reciprocity
• economic tests
• competing operators involvement in decisions of authorities
• guarantees legal form for operators established in the same MS
• registered or exercised activity for a period in the same MS

Regarding the freedom of movement of services, the ECJ concluded in 2003 (Schnitzer) that even temporary activities carried out over several years in another MS can be considered to be service provision.  Firms have the freedom to provide cross-border service without unjustified restrictions.  The SP will know that they will not be subject to the legislation of the receiving MS & may continue to use home-state law.

The EU has embarked upon a simplification program (similar to the US’ Paperwork Reduction Act) to reduce administrative costs & burdens on companies from existing regulations by 25% by 2012 which would increase the EU’s GDP by 1.4%/€150B.  This creates Points of Single Contact (PSC) as information points as a 1-stop shop for business that have been established in each MS across the EU that allow SP’s to complete their administrative formalities electronically or in-person.

Enforcement of the service directive is the most interesting part.  In Italy, enforcement of the PSC, which work in the back-office,  will be available April, 2011.  1 office will coordinate & subsistute all competent authorities for each procedure.  SP’s can immediately start their business & self-certify.  Within 30 days, the PSC will check all paperwork, ask for more info, ban the continuation of activity only if necessary.  PSC’s have been available in Sardinia since 2008 where they are more powerful than in the rest of Italy.  No permits are needed.  SP can apply online through certified e-mail.

The directive cannot find direct application for American citizens or 3rd country citizens, but could be a gateway to the EU internal services market.  It applies to enterprises legally established/registered in the EU irrespective of whether or not the owners are EU nationals or not.

tax’ role in global decisions

The Illinois MS Tax Program & the Niagara Foundation hosted this luncheon event International Competition through the Tax Code – How a Company’s Worldwide Investment Decisions are Influenced by National Tax Systems featuring Harry L. “Hank” Gutman of KPMG, Larry R. Langdon of law firm Mayor Brown (formerly of HP), & W. Kurt Meier of the IRS.   I thought about asking for their presentation to post it here, but whenever there are lawyers involved, I shy away from it.   Here’s a summary:

CONSIDERATIONS

Tax is not the 1st (should be #4-#6)

• rule of law
• ownership (& Board of Director) requirements (40% in Nigeria & Malaysia)
• intellectual property rights
• political stability (expropriation) & relationship integrity (HP refused to work in the Phillippines until Marcos left)

Human resources

• labor rates & productivity levels
• educational levels (HP hired foreign nationals in the US to return them home)
• union vs. non-union
• language barriers

General Economy/operating conditions assessment (once there, it’s difficult to change, so centralize in a few locations)

• site selection (requires infrastructure-access local markets too)
• local investment incentives (state vs. state competition can tip the balance)
• access to raw materials & supplies
• in/out-bound shipping & tariff costs (HP chartered planes to assure supply)

Tax (think through end-to-end & remain flexible to change)

• income (differentials are ~5-10%)
• VAT:  value-added (HP paid more VAT than income taxes)
• other-”creditable?”
• possibilities (SME’s have little experience & few of the appropriate contacts with current service providers)

NATIONAL TAXES-(corporate taxes in the US are 35%, the highest in the world, but the real effective rate is 24%, the OECD average.  Strictly domestic companies must pay 35%, while international companies can lower their tax rates.  We need to lower our tax rates to attract inbound FDI-Foreign Direct Investment, but this is not being discussed.)

• stability of tax regime-(legislative) process & proposals (so that you can accurately predict outcomes, parliamentary is different from congressional, & there are different rates of change, i.e. conservatives in the UK are making big changes fast)
• administration-reporting & examination/enforcement

TAX PLANNING

• local law & rates
• cost sharing of intangible development (patents, know-how, etc.)
• licensing of intangibles through 3rd (or 4th) low tax jurisdictions

INTERNATIONAL TAX ADMINISTRATION (the world follows the US)

1. “arm’s length method” transfer pricing principle (white papers were written on this 25 years ago, but the US is now less enamored because it helps transfer business offshore.  We did convince the rest of the world though.  We need uniform rules on how to tax ex-US income, how to define compensation, & whether or not to equalize to 3rd countries.  We need to create a tax system where there is no tax advantage to go abroad, or so that taxes are not a decision-making factor.  A challenge is that China has 1M auditors for VAT, but they don’t keep good business records.  The rest of the world is moving away from world-wide systems to more territorial ones.)
2. enforcement

• audits increasing worldwide
• risk of double taxation
• international information sharing-oecd, jitsic-joint international tax sharing of information, & sharing of tax information & joint audits

ADVANCED PRICING AGREEMENTS tax planning-agree on transfer pricing with local taxing jurisdiction uni- & multilaterally (reduces uncertainty)

COMPETENT AUTHORITY post audit review of transfer pricing adjustment (treaty driven)

• attempt to avoid double taxation
• between national tax jurisdictions
• taxpayer provides information but not involved in meetings
• no guarantee of success
• time consuming

“Some countries have competitive advantages so great, they create a hostile tax environment anyway.”

Q & A

The social safety net changes the cultural perception of taxes in Europe, although health care costs 2X as much in the US.

Getting to a level playing field is difficult to evaluate on a number of different dimensions, i.e. foreign vs. domestic, state vs. local, etc.  In Michigan, the economic costs of their incentives for the film industry outweigh the benefits.  The EU pressured Holland & Ireland for giving away too many tax incentives.  The US is schizophrenic about FDI, which is viewed as a necessary evil.  We don’t want anything owned by non-Americans.

The new worldwide accounting system IFRS International Financial Reporting Standards shouldn’t affect tax liabilities, (although LIFO-Last in 1st out, will be abolished) but we shouldn’t abdicate FASB-the Financial Accounting Standards Board.

Changes need to be made for tax regimes to keep up with technology.  Reporting for overseas accounts should be increased, which requires legislative action.  Little uniformity between federal & state jurisdictions threatens the states.

doing business in india

Walter Vieira was back in town as a guest of the British American Business Council & Organization of Women in International Trade @ this event AN INFORMAL DISCUSSION ON CHALLENGES AND OPPORTUNITIES IN INDIA  I wrote about Walter’s last visit to Chicago Indian consultant’s take on India & he certainly does know marketing in India.  Here’s the presentation he gave Doing-business-in-India which can also be found here.  Here’s what Walter had to say in addition to what’s contained in the presentation:

India is a land full of contradictions: growing companies are energized, while lazy city workers leave the streets dirty.  Power plants are highly efficient, while Indians are inefficient in cleaning the toilets.  Multinational companies need to be in China &/or India as the 2 of them combined comprise 2/6 of the world’s population.  When entering India, there are 3 issues to consider

1. is there a need, but no market?
2. is there a market, but no customers (because of corruption) ?
3. are there customers, but you’re not able to reach them with the right salespersons, distribution, etc.?

India has many different varieties of vegetarians, & the lowest prices @ McDonald’s restaurants in the world.  Dominoes Pizza changed their delivery deadline to simply anytime before the next meal.  Interestingly Indians keep their water glasses on their left so that they can eat food with their right hands.

8 Indian companies are listed on NASDAQ & the UN says India will become the world’s 3rd largest economy in the next 5 years. Inflation in India is really ~20%. Mobile communications is changing the face of India as 3.1M Indians start new mobile phone subscriptions every month.  Walmart is keen on India as LG & Samsung from Korea have done well there.

Recently the size of India’s middle class exceeded that of the poor, either of which is larger than the population of the US.  Literacy in India is defined as being able to sign your name, so literacy statistics are overstated, according to Western definitions.  There are 1400 major infrastructure projects going on right now in India.

Q&A

• corporate social responsibility is becoming the flavor of the day in India, as it’s become a part of annual reports.  The government encourages firm to donate 2% of their profits, but legislation won’t help.  Tata donates 95% of its profits to charities.  2nd level institutions start schools/colleges, give away smaller %’s, & label everything for the branding.
• There is a plan & eminent domain will prevail in building highways & infrastructure like the highway from Delhi to Mumbai, even though democracy & religious sensibilities (must build around temples, mosques, etc.) get in the way.  Dwight Eisenhower got the idea for national highways from Hitler’s Germany, & Ike met lots of resistance to supporting them.  But India has no Ike-their president is simply an honest man presiding over a bunch of crooks.
• India’s relationship with China is complicated.  The Chinese have the advantage of being in a dictatorship that provides strong leadership, which always rules, regardless of the system.  India’s democracy requires education & literacy, but this makes for slow decision-making.   India is leasing a region in it’s northeast to China for 20 years for them to clean it up & then return it.
• LG & Samsung have been successful in India because of , unlike Americans, their lack of arrogance.  They probed for the needs of the Indians & then reoriented their products to meet those needs.  To contrast, an American Kellogg’s executive questioned whether there was a “market for cereal in India.”  They thought “We taught the Japanese in 4 years, so it will take 7 in India.”  That CMO was recalled in 3 years, & the successor had success promoting cereal as a healthy mid-morning snack with vitamins.

global higher education in the midwest

President Emeritus of the University of Michigan James Duderstadt has written a Heartland Paper entitled A Master Plan for Higher Education in the Midwest for the Chicago Council on Global Affairs, which hosted an event Reforming Higher Education to Compete in the Global Economy to introduce it, which featured a panel discussion with Michael Hogan, Pres. of the University of Illinois, & Jerry Sue Thornton, Pres. of Cuyahoga Community College.  The discussion was moderated by Donald Stewart, former Pres./CEO of the Chicago Community Trust.  Marshall Bouton opened by noting that education is the single biggest variable in how economies compete, & that despite American spending 2X as much per student as other countries, achievement gaps persist.  McKinsey ranked the US educational system 18th out of 24 countries.

Duderstadt put forth 4 new conditions in higher education

1. new knowledge, innovation, & transformation are required
2. these imperatives will only intensify
3. our diverse population requires public & private investment in infrastructure & new public policies
4. urbanization & the breakdown of geographical boundaries no longer serves manufacturing-we need brains now, so our most valuable assets are our schools, but higher education can’t be decoupled from primary education

From these, he draws 3 conclusions

1. geographic boundaries are irrelevant
2. we must shift from a competitive mindset to collaborative relationships
3. we need a systematic & strategic approach to create a new knowledge ecology

K-12 recommendations:  We need to require all high school students earn diplomas, but we’ll need to restructure this level of education & provide the resources to do this well.  Universities need to get more engaged in K-12 education.

Higher education recommendations:  we need to;

• change policies to increase participation & funding
• make others aware of the importance of higher education
• challenge ourselves to demand 0 defects results in schools
• gather best practices from around the country & world
• make learning a lifelong activity
• renegotiate social contracts
• find alternative funding options, i.e. graduation taxes, Kalamazoo promise, etc.
• encourage diverse missions, i.e. research to drive innovation, for-profit schools for adults, etc.
• make success in college lead to success in life
• look at new institutions like German gymnasiums, EU Polytechnics, & British Open Universities
• simplify intellectual property policies to encourage faculty to spin off new technologies, perhaps by getting them to invest their own assets
• create a highly skilled workforce with a firm public purpose, not short-term fixes

panel Q&A

• Community colleges are local entities-85% of graduates stay locally, but we need to change the culture of communication & rather than waiting for manufacturing to return, become a part of the innovation supply chain to export more
• The University of Illinois is a national/international institution which has 7.2% foreign students & the curriculum has been globalized.  Our challenge is to convince citizens that our economy can’t do well unless we fund education.  Research universities have been the hubs of rebirth in Pittsburgh & Cleveland.
• The Bologna Process in Europe has involved Ministers of Education, faculty & others which has resulted in a transformation which serves as an example of how to achieve change-the opportunity costs are great.
• Community colleges must create better transitions to other schools & careers.
• California’s Plan created a highly differentiated educational system-now we need to re-differentiate.  We need to put institutions together:  UI is fragmented on 3 campuses, so we need to integrate & consolidate
• Societal leadership is required at all levels to bring about change.  We need to bring $ back to states in new social contracts.  Schools should have fewer regulations & greater control of their own revenues.
• State funding has dropped from 70% to 4% for UM, so it’s now only a state located school.  We must build a culture of public engagement & collaboration like the Committee on Institutional Cooperation, the longest standing organization of research universities.

Open Q&A

Since we don’t have extra $ lying around for education, we have to challenge our institutions to streamline & collaborate.  We have no national strategy for higher education.  We need to make a cultural change to increase its importance.  On 1 hand, UI’s purchasing power is the same as it was in 1970 & it’s now serving 75K students, so they’re highly productive.  On the other hand, we can all still do a better job, for example, UI has the lowest non-resident student population of 21%.  The Big 10 average is 33%, so UI suffers from a lost revenue deficit.  Different student populations create better learning environments.

Education itself doesn’t create jobs: innovation & entrepreneurship do.  But a college education is now required to reach the middle class, & the % of the population earning bachelors degrees is falling.  We need to train more educated people for global positions, not fewer.  It’s not always appropriate to make a direct link from higher education to job skills.  College teaches you how to think & solve problems, so it’s a preparation for your last job, not your 1st.

Unions of university workers impact upon the flexibility of work rules, but are usually not a detriment & are not for faculty.

To better engage K-12 schools, we should

• place college faculty in high schools to create better awareness, visibility, & collegiality
• extend the school year to year-round
• help students see the possibilities
• make teaching a higher status occupation like it is in Europe-it’s part of our culture that our teachers earn the lowest SAT scores in the world

my $.02-1 thing they missed:  To compete in the global economy, you have to engage in it.  We enculture our students to be insular & parochial when we require them to learn state rather than world history & discourage the learning of other languages.  We need to create curricula which educate students about the rest of the world as much or more than we trumpet how great America is.  We need to learn more about the Chinese, Indians, Europeans, Latins, & Africans if we’re going to compete with them.

PBS video on the fall of the wall

The Chicago Council on Global Affairs hosted a screening of the video After the Wall: A World United & hosted a panel discussion immediately afterwards Germany United: The Story of a European Powerhouse featuring the director/producer/writer Eric Stange, Christian Friedrich Ostermann, director of the Woodrow Wilson Center’s European Studies Program, & J.D. Bindenagel , who was U.S. deputy chief of mission at the U.S. Embassy in Berlin, East Germany, at the time of the fall of the Berlin Wall in 1989. You can watch the preceding video The Wall:  a world divided @ the bottom of the above-mentioned webpage.  You can rent the video we saw on Netflix & see it aired on Chicago’s WTTW on 8 May.   Here’s a summary of the panel discussion.

All of this was predicated on Gorbachev’s commitment to non-violence & non-intervention.  It was not just the East Germans who opened their borders, it was the Poles & Hungarians as well.  The reform of travel rules was an accident, & the result was the breaking down of the wall when an East German official mistakenly gave the OK to the mass media to report that the wall was open before it really was.  Prior to the fall of the wall, the Americans were pretty much MIA in recognizing the imminent changes.  Bindenagel was struck by the pace of what happened, as if it were a video on fast forward.  Conventional wisdom held that the USSR would defend the DDR, but the 1st meeting between Bush & Gorbachev didn’t happen until 3 December, 1989 when the DDR was on the verge of civil war while 400K Soviet troops stood by.  Demonstrations in Dresden & Leipzig set the popular mood, so it wasn’t just East Berliners who made the 1st moves.

This documentary was created because George HW Bush didn’t think Americans knew enough about the significance of these events & wanted to give Gorbachev credit for what happened.  Researchers found leaders of resistance who risked everything before the wall fell.  Ironically, organized religion was the chink in the Soviet armor because it became a sanctuary for activists.

Q&A

• The economic impact @ 1st was drastically negative on the united Germany, when they created a monetary union & converted East German debt into West German debt-it killed them.  They’ve paid $100B for each of the last 20 years, which has been equated to 4 Marshall Plans.  The longer term effects are still being determined.
• There was some resentment on both sides after reunification, but it had to be done.  The US encouraged $8.5B in investment in the 5 new federal states by Dow Chemical, Guardian Glass, etc., which created great relationships for US businesses through these investments.  There was an exodus of skilled labor from east to west, which created labor shortages, which were also fueled by low birth rates, & globalization.  Germans questioned immigration policies & multiculturalism in asking how open they were to foreign workers.
• The main difference between the fall of the wall & the recent “Middle East Spring” is the level of violence, which changes everything.  In East Germany, the Stasi headquarters was attacked, but there was no violence.  The West German constitution had article 23, which allowed older parts of Germany to rejoin, so there was already regulatory governance structure to allow it to happen.  Germany had Helmut Kohl leading the charge, although he originally couldn’t conceive of reunification, he proposed confederation.  Reunification was proposed by a Russian to him.   So Germany is very different because it had prefabricated solutions in NATO, the EU, etc.  Also, those who made the revolution did not end up running things.  The situations are a little bit similar in that the East Germans’ future looked bleak, & they felt they had little to lose by change, which is a similar mentality to that they had in Egypt.

environmental rights comparison between Europe & India

John Marshall Law School’s Center for International Law hosted this lunch & learn program ENVIRONMENTAL RIGHTS – AN INTERNATIONAL AND COMPARATIVE PERSPECTIVE featuring Prof. Mark Poustie, Head of the law school @ University of Strathclyde in Glasgow, Scotland.  He 1st likened environmental rights to human rights, & compared them to civil & political rights ( for ex. rights to self-determination).  Are they like the right to life?  Are they substantial, procedural, or both?  A comparison between Europe & India ensues.

The Stockholm Declaration in 1972 stated “Man has the fundamental right to …an environment of a quality that permits a life of dignity & well-being.”  By 1992, the Rio Declaration declared, “Human beings are at the centre of concerns for sustainable development.  They are entitled to a healthy & productive life in harmony with nature.”  The African Charter treaty of 1981 articulated, “All peoples shall have the right to a general satisfactory environment favourable to their development.”  The San Salvador Protocol in 1988 says, “Everyone shall have the right to live in a healthy environment…the State’s Parties shall promote the protection, preservation, & improvement of the environment.”   Finally, the Aarhus Convention in 1998 ambles on, “Recognizing that adequate protection of the environment is essential to human well-being & the enjoyment of human rights,…Recognizing that every person has the right to live in an environment adequate to his or her health & well being…”

There are a number of explicit environmental rights which have been adopted.  A number of existing civil & political rights have been re-interpreted to have an environmental dimension, although more at a regional than global level.  It’s unlikely that there will be customary international universal right to a clean environment.

Europe greatly depends on permits issued by integrated national or regional agencies for pollution prevention & control.  Inspection powers & enforcement mechanisms with reasonable degrees of enforcement activity underpin criminal law in the UK & civil penalty system in Germany.  There are extensive rights to access to information.  These are supplemented by emissions trading, environmental taxes, etc. There are limited restrictions on taking actions against state bodies.  The European Convention on Human Rights provides the right to life.

By comparison, India’s permit systems are operated by fragmented State Pollution Control Boards.  They provide inspection powers & rely on criminal law for enforcement, but there are serious problems of under-enforcement, & few alternative mechanisms.  There was very limited access to information until 2005′s Right to Information Act.  The public sector is largely immune from tort action.  India’s constitution provides the right to life.

Europe & India are similar, in that both involve re-interpretation of existing rights.  Most focus on failure by state authorities to regulate or enforce adequately, but there is a reluctance to challenge major governmental projects.  India differs from Europe, in that:

• it takes a less gradual approach to the development of rights & remedies available
• access to justice is broader
• resorting to litigation is much swifter
• European Convention on Human Rights qualifications are less apparent
• there is a less structured approach to decision-making
• it’s a national system as opposed to a regional international system.

The value of environmental rights is in being able to address failures to regulate or enforce by state authorities, which helps ensure fulfillment.   Environmental rights are limited by:

• issues not directly impacting human rights
• definition issues-what’s a clean/healthy environment?
• constitutional problems-are judges best placed to adjudicate complex multi-faceted claims involving resource allocation?
• rules that impact on effectiveness
• conflicts between human rights & environmental protection
• weakening systems of environmental administration
• culture change in public administration

re: environmental rights & climate change:

• climate change will have an impact on human rights
• climate change focuses on aggregate human welfare & recognizes different levels of development
• environmental rights may help further progress with development of a post-Kyoto regime
• environmental rights may shift focus from aggregate human welfare to the need to assist individuals with adaptation & mitigation
• will a lack of universal environmental rights limit the usefulness of rights-based approaches to climate change?

Q&A-The court of international justice has indirectly recognized environmental rights & confirmed sustainable development as a principle of law.

the future of cities

I caught this Young Professionals event put on by the Chicago Council on Global Affairs The Future of Cities: How We’ll Live Next & boy, it showed.  Greg Lindsay was pumping up his book “Aerotropolis:  The way we’ll live next” while Jeanne Gang kept right up with him, pushing her’s, “Reveal.”

GLOBAL CITIES-As of 2006, the world officially became urban when it’s population crossed the 50% threshold, which will total 3B in 30 years.  Gang’s architecture firm is working in Hyderabad, Mumbai, Taiwan, & Shanghai.  Different climates dictate different architecture, as does culture, i.e. India’s concept of feng shui leads them to want to interact, so they design in more common areas.

SUSTAINABILITY-China is building infrastructure before it’s actually needed, in anticipation of what they’ll need.  Now we need to build cities that are more dense to concentrate knowledge.  Another advantage to density is greenhouse gases per person are lower in cities.  Water quality is another issue:  it’s a problem when city’s sewage overflows with 1/8″ of rain.  There is a zoning problem re: trains;  there is a limit of 5 story buildings above train stations, so we need to rezone density.  Low rise buildings are not a solution to preserving the social fabric because people will just move farther out.  China has buildings that look like Chicago’s high rise Cabrini Green projects, but the Chinese buildings are active & vibrant.

INSTANT CITIES-A developer in China was asked to build a city the size of Boston to house ex-patriots, so the developer incorporated the best from many different cities, but character still counts to bridge the generic with the novel;  we’ll see in 150 years if these have it.  The key is to create that social fabric while each city responds to it’s own different climate.  Governments & corporations are building cities in the United Arab Emirates.  China is moving into the interior of the country, of which Chicago is already a good example.

Q&A

• Youngstown, Ohio is an example of a shrinking city where the goal is no longer growth, rather to simply be sustainable by creating more green space in the city, etc. which can be cheaper.  There are now shrinking cities conferences.
• There is no optimal size or upper limit for a city.  Cities violate all laws of biology, i.e. they double in size & get an additional 15% increase in productivity.  Cities are changing into communities of villages today.  They are hyper-connected with no boundaries.  Online connections are reducing the need for cars & when you do need to go someplace, people are finding it’s better to talk on your iPhone on the train rather than veg out in your car.
• Chicago was actually an Instant City when it was rebuilt after the Chicago fire.  That same process will happen elsewhere, as there is an urgent need due to migration to cities.  Singapore understands it’s limits in resources & they were the 1st to recycle gray (disposed) water, institute congestion pricing on cars in the city, & is now getting into the consulting-to-cities business.
• Urban agriculture is bringing food infrastructure into cities with hothouses, vertical farms, etc.  The bottom million of the world population simply wants access to these mature markets.  The biggest obstacle is the size of the area required to raise farm animals.

I realize the content here is all over the place, but that’s how the conversation went.  It’s not me.

Austria & eastern european entrepreneurship

The Austrian consulate general & American Southeast Europe Chamber of Commerce hosted ENTREPRENEURSHIP IN SOUTHEAST EUROPE: A VIEW FROM VIENNA featuring Thomas Schnoell, Consul General of Austria in Chicago, & Dr. David Pistrui, Managing Director of Acumen Dynamics, LLC.

Schnoell worked in the western Balkans for 10 years, so he knows the area, which because of its geographic proximity, is a foreign policy priority.  90K Bosnians came to Austria & have been successfully integrated.  He feels the EU has fallen off the radar, & this is a positive development.  War there is now inconceivable-political stability reigns.  Economically, this area should achieve 3.6% growth & banking is more stable.  Visa liberalization (except for Kosovo) has isolated movement restrictions.  However, the rule of law & an independent judiciary need to be improved while corruption & organized crime must be fought.  Austria supports a European-wide perspective, but the closer they get to full membership, the more their support falls.  Now there is no alternative.  That’s in everyone’s best interest.  When the EU last enlarged from 15 to 27 countries, trade tripled from 150B to 450B Euros.  Politically, Vienna doesn’t see Bosnia Herzegovina as a viable state because it can’t speak with 1 voice.  The EU sought constitutional reform, but the country is still governed by an international authority.  Vienna also supports a separate Kosovo, as long as Serbian rights are protected.  Austria was the 1st advocate of Serbia, but the EU is still split as 5 countries still don’t recognize Kosovo.  Southeastern Europe & the western Balkans offer huge potential.  The ascension of Kroatia will come to an end soon.  Their bilateral issues with Greece will be resolved, integrating 2 former enemies into close friends.

Pistrui started working in Romania in the 1990′s & noted Vienna is the anchor for south-eastern Europe.  He actively promotes the entrepreneurship program @ the Austrian School of Economics, & notes you can’t separate economics, politics, & culture.  All this has deep roots in Austrian thinking, as family-owned businesses, 30% of which are 2nd generation, drive growth.  There is a difference between entrepreneurship & small business in that the growth mindset differs, & self employment is not promoted.  Starting a business gets more challenging as you move farther east, although you can open a business in a day in Macedonia.  In the EU, 99% of SME’s created 65M jobs.  In Austria, 99% of businesses created 1.4M jobs.  In south-eastern Europe, this is the 1st generation of accumulating wealth.  Opportunities bubble up & change every month, but they’re volatile & relationship driven.  Governance is an issue & there is a lack of transparency.  They need better education to build the talent pool & to provide a better structural framework for business, i.e. get the government out of the way with less bureaucracy on the way to entrepreneurship.  Entrepreneurship is the best path to civil society & drives market economies.  The perception of failure needs to change:  in the U.S. it’s a badge of honor;  in Germany, you can then no longer be the president or ceo of a company.

Q&A

Challenges to entrepreneurship in south-eastern Europe are:

• access to capital-no angel investors or venture capitalists to be found
• bureaucratic regulations are daunting
• finding qualified people with a mindset other than following protocol is difficult
• corruption
• fluctuating real estate prices
• political uncertainty
• the perception that entrepreneurship is a “dirty” profession

There is a generational crisis in Romania in that kids are now feeling entitled

Health care in Romania can be improved by:

• paying doctors better
• encouraging private medical practices
• partnerships
• reducing cigarette smoking

I requested Pistrui’s presentation, but he hasn’t sent it to me yet.

McKinsey & Boeing on India’s momentum & infrastructure

The Chicago Council on Global Affairs hosted this event India’s Economic Momentum and the Infrastructure Challenge featuring Jaidit Singh Brar of McKinsey-India,  Varun Bajpai of SBI Macquarie Infrastructure Management, & Rik Geiersbach, VP-Corporate Strategy @ Boeing.

Jaidit opened by noting that India’s infrastructure is behind on all parameters & needs massive investment of $1.5-2TR to catch up with their quality of life.  Because a water shortfall of 50% is expected, river basins are centers of economic activity.  The rural population is moving to the cities which will result in urbanization of 50-60% by 2030.  Unfortunately India has a poor track record of building infrastructure, which could derail growth, but that’s unlikely.  Consumer markets are attractive because they are relatively unregulated.  All infrastructure opportunities are open to the private sector & foreign investment, although few participated until 2005.  During Y2K-2010, infrastructure firms provided 4 out of the 5 best returns.  Power projects provide 30% returns annually.  Capital & skills availability make it 30-40% cheaper to build infrastructure in India.

80% of the capital raised for Varun’s State Bank of India-backed firm came from mature markets.  By 2025, 70% of India’s population will be of working age.  India’s economy is very inward-looking, but domestic consumption is high.  The conservative banking system has been relatively untouched by the financial crisis & Indians have the highest savings rates in the world.  Rising GDP leads to increased consumption, which leads to the need for infrastructure.  India is already @ the bursting point.  12 megawatt power plants are being built.  Regulations were a problem 10 years ago, but are no longer a barrier to entry.  For example, the telecom industry used to be convoluted:  now they have the cheapest phone calls in the world.  Although India’s infrastructure deficit consists of made-up numbers, their spend must simply be faster & deeper.  India’s is a slow moving democracy, but it always moves forward.  Large pension funds are investing in large projects like privatising airports.  Corruption is a problem, but the investment climate is sophisticated.  They could do more MNC investment, but they’re doing it already via partners.  All large private equity funds have offices in Mumbai or Delhi, but their local exposures are small.

Geiersbach observed that Boeing can’t ignore India’s opportunity set, which will be  the largest aviation market in the world.  That market’s growth is 18% from 140M passengers/year to 420M, while cargo traffic grew 80% in 2010.  There are 5 major airports in India & air traffic management is another growth area.  Security & environment are issues there.  India falls between China & the Middle East in terms of regulations & liability.

panel Q&A

• Political connections, presence, & good partners all lead to creating a successful business in India, along with a fully differentiated offering.
• There are still regulatory challenges in defense industries, but they are hungry to refresh old Soviet equipment.
• While it’s simple to have standard cooperative agreements, equity partners are another story.

open Q&A

• Corruption is a huge systemic problem, but the economy still does well.  Flagbearers are needed on some issues.
• India is a complex country in which states compete for investment.  Working there requires a local presence because something is always simmering below the surface.  1 state has cleaned up its act & maintains its own standards.
• India has the inspiring goal of putting a man on the moon by 2020.  108 of 126 defense planes will be produced in India by Boeing.  Although there is some debate on how much technology should be shared with Indian counterparts, Boeing is not holding back.

McKinsey left this document with the attendees India’s urban awakening which seems to contain a trove of information on India’s infrastructure.

award winning commercials from Paris

The Alliance France hosted La Nuit de la Pub: Award-Winning Commercials featuring an evening of videos hosted by Anne Saint Dreux,  Director-Founder of  Maison de la Pub .  The House of Advertising or La Maison de la Pub is a global, international archive of advertising media. With a collection of 400,000 advertising films, (now 500K commercials, I believe) from the first commercial by the Lumière brothers (1897) to current advertising campaigns, it offers incomparable research material on French and international advertising. Its multimedia archives are designed for professionals, students and the public at large and provide materials for television programs, festivals and large exhibitions in France and abroad (from the website).

Our Master of Ceremonies from DraftFCB placed Chicago in the history of advertising right up there with New York & San Francisco as the founding home of J.Walter Thompson in 1864, Foote, Cone, & Belding in 1873, & Leo Burnett in 1935.

The original purpose of advertising was to simply inform the public, but it has now become much much more.  There is an inherent contradiction:  is the purpose of marketing strategy now just to manipulate minds?  Lever Brothers created the 1st commercial as we know it when they combined a ticket to the movies with Lumaire soap.  Over time, advertisers diversified their offers.  In the 1950′s & 1960′s, the golden age of advertising in France, comedy spiced it up as the thought transitioned from “reason to sympathy.”  The 1st oil crisis in 1974 encouraged consumers to conserve.  The 1980′s were the decade of “careless sympathy.”  In featuring cars, (the blind) Ray Charles was shown driving a Citroen in the desert of Utah.  In the 1990′s, as we were greeted with live images of war for the 1st time, advertising became soft, surreal, & discreet, & focused on inner values while at the same time appealing to the pleasure principle & showing off the libido.  Women then rebelled, as advertising has now become more friendly & perhaps a social mirror.  Advertising has become a weapon of mass creation.

Q&A

• Advertising has become more democratic.  Now there is much more 2-way communications which engages consumers.
• Advertising follows major trends world-wide, but France is different from the US in the nuances.  Now you can’t limit the conversation:  consumers can now provide feedback.
• While consumers are now creating their own ads, advertising agencies aren’t abdicating their duties as professionals.  For every trend, there is a counter-trend.
• The La Maison de la Pub has some radio advertising from the 1930′s-1950′s, but otherwise has mostly TV, video ads, but does focus on life beyond TV commercials.
• The television series “Mad Men” has been a great success in it’s 1st year in France.
• France is not necessarily more creative than anywhere else because advertising is subjective & the French do some lousy advertising too.  US advertising is typically more locally-oriented.  Because women & humor differ, the conversation might or might not be different from place-to-place.
• Now conversations are in 2 ways between consumers & brand builders on the internet.  Commercials still must be observed in context to determine their relevance.

invest in slovakia

Baker McKenzie invited us all over to consider investing in Slovakia.  Peter Burian, Ambassador of the Slovak Republik to the U.S. provided the welcoming greetings.  Martin Chren, Deputy Minister of Economy, offered more specific business background on the Slovak Republik.  The Slovak Republik lies in the heart of Europe, & is no longer the little brother of the Czech Republik.  The country implemented strong reforms in 2002 & has benefited from them since.  The transition from communism is over.  The Slovak Republik is a full member of NATO & the EU & the only country in the region which qualified to implement the Euro.  There are no limits on repatriation of profits from the Slovak Republik.  They seek to become the Singapore of Central/Eastern Europe.  The government is centrally focused, & perhaps leans a bit to the right.  It’s easy to hire & fire there.  All public contracts are published on the public internet, which deters corruption.

Ken Ryan of KPMG offered these tidbits:   The Slovak Republik is the #3 per capita producer of cars in the world.  The country has 4% GDP growth, (vs. 2% for Western Europe),  provides a bridge to the rest of the European Union, & has received $800B of foreign direct investment in the last 20 years, from 140 companies in the US, as well as elsewhere.  Labor costs are 1/3 of what they are in Western Europe, but will rise to 50% by 2020.  The Slovak Republik offers a secure & stable economic environment with attractive fiscal & tax incentives.

Robert Simoncic of Slovak Investment & Trade Development Agency made the following presentation which provided more detail on investing in the Slovak Republik: Sario- US Road show presentation .  You can reach markets of 600M people from the Slovak Republik.  The country’s credit ratings are positive.  A World Bank study ranked the Slovak Republik #1 in terms of ease of doing business in Central/Eastern Europe.  Low labor costs combined with high productivity leads to high profitability.  A 19% flat corporate income tax helps too.  The country is home to 33 ICT centers which employ 20k-this industry provided the greatest contribution to the state treasury.

George Babcoke took US Steel to the east of the country in Kosice 10 years ago.  They started with joint venture in 1998, which they bought out later.

Mike Wysong opened a sales office for  Johnson Controls in 1993 which ended up serving VW there in 1998.  They opened a Business Center there in 2007 with 800 employees, which will be rising to 1100 soon.

Jake Slegers, Executive Director of the AmCham in Bratislava, gave this presentation  AmCham presentation for Invest in Slovakia seminar .

The other presentations are available here:  http://www.tradeinvest.sk/ppt108/

Q&A

• Slovakia is off the intellectual property watchlist & now protects IP well
• Slovak Republik has a small stock exchange, but not the size of those in Vienna or Prag
• Business plan competitions is 1 example of entrepreneurship programs developing there

Chicago celebrates international women’s day

The Chicago Chapter of the Organization for Women in Trade invited me to  celebrate International Women’s Day, which was sponsored by the International Trade Club of Chicago, WorldChicago, & the Union League Club of Chicago.  The event opened with an expo/fair which included the following international organizations:

• International Women Associates
• Women of the World
• Center for Cultural Interchange
• The Friendship Force of Chicago

Following lunch, we heard from these speakers, our 2 foreign guests being hosted by World Chicago:

Nataliia Bondarieva, a Methodologist @ the Kyiv  Regional Center of Educational Quality Assessment in Ukraine.  She manages the External Independent Testing on Foreign Languages.  Nataliia positioned this day as a national holiday in her country which honors women between Valentines Day & Mothers Day.

Luise Amtsberg is a member of the German Parliament as a representative of the Alliance 90/The Greens Party.  Luise noted that despite this year being  the 100 year anniversary of International Women’s Day, women are still not treated equally with men, although the Greens bring them closer to equality in Germany.  There they have enacted controversial  quotas for women, but women are still underrepresented as members of boards of directors.  Since 51% of college graduates in Germany are women, they deserve 1/2 of the power & responsibility.  Luise continues to fight against discrimination not only against women, but also against homosexuals, & others.

As the keynote speaker, Deborah DeHaas, Vice Chairman & Midwest Regional Managing Partner for Deloitte LLP made the business case for equality & diversity.  Deb 1st acknowledged March is Women’s History Month, & that Women’s Day is a national holiday in 15 countries.  Aging of the world’s population will create a 6M person gap in replacing retirees.  58% of bachelors’ degrees & 60% of master’s degrees go to women.  In Europe, despite being 1/2 the workforce, women comprise only 11% of corporate executives.  Women start 41% of all businesses grow @ 2X the rate of all businesses.  Women control $20TR globally & influence 80% of all decisions.  Companies with women on their boards outperform competitors by 53% & earn an extra 10% Return on Equity.  While @ Arthur Andersen (RIP) in 1993, the firm only had 1 woman partner.  Deloitte has taken the lead with their Women’s Initiative.  1 important remaining issue is whether or not there is a pipeline of qualified potential women employees.

Q&A

• women need access to mentors & sponsors to get recognition
• education is still the highest priority
• Ms. DeHaas role model was her own mom, who, while taking accounting courses @ Pitt many years ago, was handed a drop card (suggesting she drop the class) every class.

Chicago TV News personality Diann Burns acted as Master of Ceremonies.  To learn more about International Women’s Day around the world, check out this article in Today’s Chicago Woman magazine.

central & eastern Europe business conference

The College of Business & Management @ Northeastern Illinois University sponsored the EAST-CENTRAL EUROPE INTERNATIONAL BUSINESS CONFERENCE , which featured speakers over from Poland & representatives from all over central & eastern Europe.  Here’s a quick summary of 2 days of presentations.

Professor Felicjan Bilok of the Czestochowa University of Technology took a look @ trade unions demise in Poland, whose membership dropped from 38% in 1999 to 16% in 2008, while other countries only dropped 1-8%.  Union strongholds still exist in state-owned-enterprises, (35%), & for mid-level staff & technicians (37%).  Employees @ privately owned companies are only 1% unionized.

Dr. Leszek Cichoblazinski, also of the Czestochowa University of Technology, followed up on the labor relations theme by discussing his experience in mediating labor disputes, which is obligatory in Poland before strikes.  He used the example of spilled hot coffee resulting in a global installation of machines (instead of kettles) which the local workers rejected because it offered less choice in types of coffee & tea.

Dr. Hamid Adbari of NEIU offered a review of the book The Next 100 Years & how it applies to countries throughout the world, which hinges on access to water.  The US, Poland, Turkey, & Mexico are up, while China (isolated, inaccessible, unstable coasts with no naval power), Japan (dependent, looking for labor), & Germany will fall down.

I had to head out for a flight out of town, so the rest is contributed by Dean S. Santopoalo, Development Coach with Focused In Leadership in Chicago.

Prof. Pawel Pietrasienski of the Warsaw School of Economics spoke of using ethnic chambers of commerce to establish trade relations and look to “train the trainer” and other programs to help companies learn how to work with international cultures and build relationships.

Atakan Arica of Arica International Corporation & Vice President of the Turkish American Chamber of Commerce asked “Why do we go overseas?”  To mitigate risks by approaching growth markets when others are down & gaining access to resources via joint ventures. But we should not expect people to do business the way we do.  Different levels of professionalism are evident in each region. Everyone has a different understanding of a business agreement and if you don’t have it on paper, it does not exist.

Michael L. Hetzel, President of Northern Galaxy Corporation noted that  America has lost some 2 million jobs to China, but what the news reporters have not mentioned is that China has lost 15 million jobs to other “lower cost” nations.  In 2010, there were 90,000 strikes in China, although they never received any news coverage.  Supply chain risks in overseas companies have to build inventory to compensate for the distance between manufacturing companies and their end markets, which says goodbye to J.I.T. The  industrialization challenge that China faces is a lack of infrastructure and that foreign markets need a local supply chain, which facilitates quicker production and time to market.

Martin J. Claessens of the U.S. Department of Commerce & Mary Roberts of the Illinois Department of Commerce and Economic Opportunity gave their pitches to use the government’s help in approaching foreign markets, so I won’t repeat those here.

Mona Pearl, Founder & COO of Beyond A Strategy encouraged people to understand the unpredictability of different cultures, and that many cultures have developed around limited resources and knowledge, specifically the eastern nations that were governed under communism.  If a centralized style of governance is all someone ever knew from generation to generation, that thinking will take generations to change.

Milomir Ognjanovic, Economic Advisor to Consulate General of Republic of Serbia stated that the war of the 1990’s made the Serbs very tough, and less tolerant for undisciplined and privileged cultures.  This inclusive and independent demeanor resulted in Serbia acquiring a high amount of natural resources and incurring no real debt.  Serbia has petitioned for acceptance into the EU in 2011, but by joining the EU, they’ll have to open their borders to others that they might not want to work with. This is not because they do not like others within the EU, but because of their independent, inclusive nature and violent recent history.

Dr . Robert Donnorummo of the University of Pittsburgh intimated that countries in southeast Europe have not been doing as well as central Europeans because Southeast Europeans are farther from their main consumer goods market, Germany.   Privatization is necessary for capitalism within the region but that it may not be enough.  There must be an infrastructure based on laws, knowledge of contract negotiations, terms and conditions, for relations to exist.   Russia produces 1/3 of all natural gas and oil in that region, and no matter how independent one may be from the other, there will always be a common thread between Eastern Europe and Russia.  Europe needs Russia’s oil and gas. Russia needs Europe’s money. As long as those needs exist, so will the concept of trade.

Thanks Dean!

financial markets in Japan

It’s not without huge irony that’s not lost on me that it’s today that I post this on the day of 1 of Japan’s worst natural disasters.  I submit this today simply to inform people about a country which I think gets far too little press as 1 of the largest economies in the world.  Anyway, here’s my report on an event I attended a couple of weeks ago WHERE TO INVEST IN JAPAN IN 2011 which was sponsored by the Japan America Society featuring Dave Baeckelandt of  Segall Bryant & Hamil, Drew Edwards of Advisory Research Inc., & Nick Ronalds of FIA Asia. Here’s what they presented:  Where_to_Invest_in_Japan_2011 & Dave Baeckelandt expanded upon his presentation a bit here Baeckelandt_Invest Japan Talk 2011 Feb 24 . Ken G Kabira moderated the panel, which reconvened most of the principals I wrote about a couple of years ago here .

You can check out the presentations for most of what was said.  I’ll focus on Q&A here that’s not included in the presentations.

• what are value stocks that become growth stocks changes quarterly
• if you believe in leveraging emerging market’s growth, Japan gains access to them at better valuations, i.e. Japan is the largest trading partner with China, Malaysia, Indonesia, etc.  Japan’s margins are only 2.9% on domestic businesses, but 5.6% in Asia vs. 4.8% in the US.  Japan also leads the US, Germany, & the world in investment in R&D/GDP with a positive patent income balance since 2003.  It’s not losing it’s competitive advantage vs. these competitors because only 28% compete directly against products from these countries.
• if the number of pages of information is any indication, there is more disclosure in Japan than in the US.  Starbucks IPO generated 50 pages of legalese in the US & 80 pages of a more detailed prospectus in Japan, including the names & addresses of shareholders.  This was helpful in evaluating a gambling machine opportunity which didn’t look as good after perusing some shady investors involved.  Comparing risk factors is still difficult despite tons of information available from industry associations.
• private equity has been organized in Japan since the 1700′s when family organizations lent to help cash flow.  Collective investors serve as investor groups that invest in everything.  Conglomerates provide seed capital for some companies.  Keep an eye on Nomura & Carl Kay for more info.
• Shinsei Bank provided the biggest private equity story of a distressed company that was acquired by foreign investors which created a backlash when it was flipped for a profit.  The next 10 years will be different from the last 10, exampled by Nippon Steel’s merger with Sumitomo, which will squeeze redundancies in a Japanese way.  Now that we’re in the 3rd generation of succession after World War II, we could see a wave of mergers.
• Toyota is in it’s own interplanetary galaxy & has a corporate culture different from that of Honda.  Accidents happen even @ Toyota & they did get some bad PR advice, but their ability to learn is a positive.  Sony had a similar problem in growing so big so quickly, but was different when they failed to combine their content with technology when combating Apple & Samsung, which now outsells all Japanese electronics companies combined.
• Acquiring innovation (& R&D) is important in M&A, but you have to question it’s ROI.
• The CFO from Molex chimed in that while Japan’s value is now in hard assets & not as much in it’s brands, the market values on Chinese companies are based more than anything on their future prospects.
• It’s possible to bump up valuations by listing on other exchanges, but governments are taking a look @ this.

FT: Invest in Canada

The Financial Times hosted this event FT Global Investment Series:  Focus on Canada which shed a different light on America’s still largest trading partner.  After Bernard Simon’s (Canada correspondent for FT) opening remarks, Louis Lévesque introduced Canada’s unique opportunity:

• stable banking system
• economic growth
• lowest cost of doing business
• R&D
• top export destination for 34 US states
• bought 4X as much from the US as China
• IL does $35B in trade with Canada
• emerging markets are riskier than doing business in Canada
• Research in Motion, the Blackberry company, is based in Waterloo, ON Canada.

Dennis Gartman, Editor and Publisher of  The Gartman Letter & former Chicago Board of Trade trader, extolled the virtues of investing in Canada, where his fund has its biggest holdings.  His general thrust was, Canada offers a lot of stuff, (such as lots of mineral resources & is the #1 supplier of crude oil to the US) but Canadians need to do a better job of selling them.  Canada has a highly educated productive workforce which consists of graduates of 13 quality universities.  Ports on the Atlantic & in Vancouver support exports.  Canada’s banks are more conservative, didn’t get caught up in real estate investments, & don’t have any “liars loans”, so their banking system is in better shape & are the best capitalized in the G8.  Canada’s political pendulum is swinging right as the comically leftward-leaning mayor of Toronto is out & the separatist movement in Quebec is non-existent.  As America “protected” its ports from foreign acquisition by companies from Dubai, the government in Saskatchewan protected their mines from foreign acquirers, perhaps stifling some investment as well.  Gartman then offered some suggestions to Canadians to help them market themselves better by playing to their strengths:

• leverage the Canadian passport that is never disdained as the world’s friend
• focus on mining
• produce better quality food from agriculture
• highlight technologies like RIM’s Blackberry
• spotlight Canada’s educational/university system

Q&A

• Premier Harper made a bad decision to tax income trusts
• the volatility of the silver market is scary
• the Canada-Europe Free Trade Agreement should be done soon
• until unemployment reaches 8-8 1/2% in Canada, there is no reason to change interest rates-the Bank of Canada does not have the same mandate of other similar central banks which are tightening monetary policy, (except for China, India, & Indonesia)
• Gartman does not recommend investing in China because he doesn’t trust their accounting

Panel discussion with Jason Gray(JG) of SunEdison Canada, Kevin Lynch (KL) of BMO Financial Group, Mark Mullins (MM) of Veras, Inc.

• MM-with a balanced budget, no inflation, & low taxes, Canada is set to bloom
• KL-Canada’s nice reputation is insufficient-it’s diversified well-managed financial system is a better brand as Canada now rates ahead of the US on many economic variables
• JG-is pleased with their growth in Canada as Ontario is doing it
• KL-Canada’s oil sands contribute to 5% of greenhouse gases, 1/60 of coal & is the most secure energy source
• JG-Ontario has bold pockets of innovation in green energy while the US hasn’t grabbed hold

open Q&A

• KL-generalizations about short-selling, pump & dump schemes, & Sarbox alternatives are dangerous.  Canada’s securities industry is viable & good.  MM-it’s well-regulated with a better division of power more closely aligned with the British system
• KL-Canada is just as concerned about security in immigration as the US & there has been no change in policy.  Like the US, future population growth will come from immigration.  MM-Is Australia’s point system model better?  Canada seeks foreign students to become “ambassadors” for Canada.
• MM-Although Canada’s manufacturing world share is declining, they’re not feeling that pain.  The relative strength of the loonie (C$) is sustainable as its relationship with relevant currencies like the OZ$ & Kiwi$ (Australian & New Zealand) currencies stays the same. KL-As long as demand in China & India for commodities remains strong, the loonie will remain strong, but Canada still needs to focus on innovation.  JG-the strong loonie does make it a struggle to export from Canada.  Northern Canadian tigers are taking advantage of the strong loonie in deals around the world.
• JG-Ontario is investing in green energy, with the goal of getting off coal by 2014.  MM-Green energy is still relatively small, so there’s room for growth.  He wants less subsidies because you can’t base business models on subsidies.
• KL-the US is Canada’s largest foreign direct investor while Canada is America’s #3 FDI contributor.  MM-the most Americans outside of America are in Calgary, Alberta, who have stayed, invested, & created a dynamic business culture.  JG-Canadian’s risk appetite differs.

Prof. of finance Raghuram Rajam, Univ. of Chicago Booth Business School didn’t talk about Canada much, other than to suggest Canadians focus on their strengths, openness & low taxes.   Just read his book Fault Lines:How Hidden Fractures Still Threaten the World Economy to get his take on the rest of the world today.

NU Kellogg prof on country-market selection

Northwestern University Kellogg business school adjunct professor of marketing Phil Corse conducted this seminar Where in the World is Your Next Customer? Foreign Market Selection and Entry  hosted by the Industrial Council of NearWest Chicago.  I heard Phil speak before & wrote about it here10 Questions You Should Ask About Doing Business in China (pardon the quality of this post, but it was from when I 1st started blogging).  Phil was good enough to forward his presentation so here it is:  IL Feb 16 Pres

Here’s his running commentary:

Like many, while his failures have been many & successes rare, he continues to serve FMCG (fast moving consumer goods) & B2B clients seeking to go global.  In assessing whether or not your company is global-ready, rate your firm from 1-5 on these questions:

1. What’s your global budget?
2. Do you have a global strategy/plan?
3. Are you wired for e-commerce, (which makes you global automatically)?
4. How is your firm’s international management expertise?
5. How are your global contacts?
6. How many global customers do you already have?
7. Is moderate risk acceptable to you? In assessing risk, Corse poses the questions, “Are you willing to quote prices in their currency?” & “Does it make sense to abdicate your markets to local representatives?”
8. Are you comfortable getting out of your comfort zone?
9. Are you willing to invest in global expansion?
10. Will you accept foreign currencies?
11. Are you culturally sensitive?
12. How well-traveled are you?

His CAGE acronym stands for Culture, Administration, Government, & Economy.  Only big companies can handle expanding into 3-5 countries @ a time.  Examples of winners of global markets in his 3 spheres are Wrigley’s gum in distribution, Coke in branding, & the iPhone in innovative products.  Phil adds Indonesia & VietNam & drops Russia from the BRIC acronym to create BVIIC & differentiates China from India by noting that the former has better hard infrastructure & the latter has better soft infrastructure.

Q&A

• PC recommends in-country localization/translation through a local agency.
• Since it’s no longer a big deal to have offices in many locations, the trend is toward more regional headquarters organizations.
• The A in his CAGE acronym refers to the forms you’re required to do business in any country.  The G refers to 1 of Porter’s 5 forces.
• While in the past SME’s might have serendipitously stumbled into global business in the past, it’s tough for SME’s to pursue it now because of their scarcity of different resources.  Serving foreigners here is 1 way to dip your toes into these waters.
• Transparency can work for & against you when pursuing world-wide markets.
• Corse has never done a letter of credit in his entire international career.

To add some real world application, Phil tasked the group with an exercise:  identify & rate the top 3 selection criteria & markets for Dell’s new Android tablet computer.  I wasn’t able to stick around to get the results, but this always enables the newbies to confront, at least @ a superficial level, all of the complexities that go into these kinds of decisions.

A fellow Chicago Triathlon Club member attended as the local representative of this program Trade Adjustment Assistance.  Check it out to see if it can be of help competing against foreign imports.

is it now a 0 sum world?

The chief foreign affairs commentator for the Financial Times, Gideon Rachman, finished a book entitled Zero-Sum Future:  American Power in the Age of Anxiety & was in town to talk about it @ Zero-Sum World sponsored by the Chicago Council on Global Affairs.  The basic premise of the book is that the world has transitioned from from a perceived win-win mentality to 0-sum game.  When Hu Jintao was in the US recently, he made a point of saying the world economy is not a 0-sum game, as have had all US presidents since Bush the 1st.  This issue is not only economic, but political as well.

Rachman divides the last 30 years into 2 eras:

1. 1978-1991:  Capitalism wins.  China opened up.  The USSR failed.  Europe came together.  India averted bankruptcy & opened up.
2. 1991-2008:  Native optimism, indicated by Krauthamer’s American unipolar moment defining globalism, the technology boom, Europe expanded & debuted the Euro, Latin America democratized, & Brazil emerged.

The economic crisis changed things.  It accelerated the shift of the economic axes from West to East & North to South.  China & India decoupled from the world economy by growing despite the crisis.  It’s come into question whether or not the EU is sustainable.  These shifts in power have created tension.  The Germans are resentful of bailing out the Greeks, while the Greeks & Irish are resentful of the impositions being placed on them.  Global problems like the environment & nuclear proliferation can’t be solved by 1 country alone.  The G7 realized it couldn’t work without others, so it expanded to the G20, but currency issues are still unresolved, Kopnhagen was a debacle, reflecting that national interests are more starkly opposed.

The US-China rivalry is at the core of this debate.  The economies are firmly interlocked, but does a richer China, (which is actually both richer-in the cities & poorer-in the countryside), mean a poorer US?  Today not only labor is endorsing protectionism.  China is a growing military threat in the Pacific & becoming more territorial with India & Taiwan.  They simply expect the US to pull back.  The Chinese don’t want confrontation;  they simply expect power to fall back to them.  America can’t afford to defend the rest of the world.  While allying with the US & trading with China, other Asian countries are simply acknowledging the creation of a new Sinosphere.  The Chinese have a much longer time horizon:  the question is “Will China still be a good neighbor to the US in 1000 years?”

On other topics, Rachman said integration into the global economy is the solution in places like Egypt & the Middle East.  Although democracy has won, we have a bumpy road ahead.  We must regain faith in economic solutions in the US & Europe.  Obama’s Spudnick moment seems appropriate.

Q&A

• World War III is too dangerous & not required for an economic recovery-mutually assured destruction as a deterrent is old cold war thinking
• Whether or not a US economic & military pullback is positive depends on your point of view.  Is leaving a single power more stabilizing in the Pacific?  We’ve always assumed there were enough resources for the world, but commodity prices are rising.
• Human rights in China are an up/down issue.  Hillary Clinton has downplayed it & Obama has been interpreted as backsliding on the issue, while the US endorsed the Nobel Peace Prize being awarded to an imprisoned Chinese dissident.
• The west has been ambivalent while China has courted influence in Africa to secure resources.   Kofi Annan was surprised to find Chinese television stations in Sierra Leone.
• The enlargement of the EU created a backlash & it’s doubtful they will expand much more.  1M Poles relocated to the UK rather than the expected 13K, which resulted in lower prices for services there.
• The Chinese currency is essentially pegged to the US$ against which the Euro has been appreciating, so Europe won’t necessarily lose as China cozies up with the US.
• Turkey’s relationship with the US has changed from being a staunch ally to voting against the US & European positions on Iran & Israel.  Despite being a Muslim democracy, the AKP party makes the US uncomfortable.
• Although center-leaning economists are opposed, isolationism & protectionism are increasing.  No 1 wins in trade wars.  Business lobbies for access to China’s vast market, but the Chinese are now demanding technology transfers.
• Europeans don’t want a Brussels solution.  They’ve rejected a EU constitution, but a voluntary agreement might work.  Stronger integration would require an even bigger crisis-it’s now like herding cats.
• Increasing Muslim populations in Europe is a problem for which there is no solution.  You can’t impose values, which is resulting in a massive security effort.
• Russia’s future hinges on the price of oil.  Putin wanted to embrace the west, but is still a nationalist & pushed back against democratization.  He’s trying again to create another sphere of influence.
• The 2008 loss of confidence in free market models has brought back the debate as to whether or not authoritarianism works.   The debate will be won by those who best unleash creativity in changing technologies, etc.
• The internet hasn’t created freedom the way Bill Clinton predicted it would.
• Completing the Doha round of WTO talks has become a cliche.
• The EU still thinks of China as an emerging market.

whither the european union?

Ralph Folsom was back for his 10th annual lecture on international business & trade law @ the John Marshall Law School Center for International Law in a talk entitled “Whither the European Union?“  He opened by quoting Yogi Berra, a favored quipster, “If you don’t know where you’re going, how will you know when you get there?”  Folsom essentially took us through a legal history of Europe decade-by-decade since 1949, weaving in some themes that spanned over time, such as human rights.  These were spawned by the European Convention on Human Rights by the Council of Europe in 1950, & culminated in the Treaty of Nice EU Charter of Fundamental Rights “declared” in 2003 & became binding law in 2009 (UK & Poland opted out).  Interesting things to note:

• the extent to which France led the initial integration, (although perhaps it shouldn’t be, as it was in response to “the German problem”)
• the slowness of the Brits to integrate, 1st because of their own hesitancy to give up the notion of their empire, & then blocked by deGaulle for 10 years
• Greenland “withdrew” from the EEC in 1983 to escape the highly regulated fishery industry in the EEC
• Although not members of the European Union, Norway & Switzerland have aligned themselves tightly with the EU by mirroring much of the legislation the EU has passed.

So “Whither the European Union?”  Iceland wants in, so they can be ripe to be bailed out.  The Balkans show growth for the future, but what does that mean for Turkey?  How will the economies of Portugal & Spain hold up after the financial breakdowns in Greece & Ireland?  The people of Europe have spoken a number of times when European constitutions have been voted down in France &  Holland.  As the largest economy in Europe with the most financial might, biggest contributor to & benefactor from a unified Europe, Germany is a key decision-maker in the future of Europe.  The general questions posed to them are how committed are they to the EU as is stands now?, & how much are they willing to pay to keep it that way? They’ve already put 100M Euros in to bring in the IMF as sheriff in Greece & Ireland & created a 1TR Euro safety net to protect against future crises.   German elections are coming in the spring, so we will find out soon what the German electorate thinks.

Folsom doesn’t see a break-up or breakdown of the EU.  Although the legislators might have been ahead of the people in proposing a European constitution & there is still concern that they may be creating a federal monster in Europe, French & German leadership is strong.  Chancellor of Germany Angela Merkel suggested a potential free-trade agreement (FTA) for Europe with the US as a result of the failure of the Doha Round of WTO negotiations.  Canada is negotiating right now with Europe on an FTA, which could be a model for the US.  A key sticking point is agriculture.   They know where they’re going, as the EU structure has endured.

Q&A

• China has bought goodwill in Europe by buying Greek & Irish bonds.  The Chinese trade surplus is not nearly as great with Europe as it is with the US.
• There is no formula to resolve the issue of managing a currency, the Euro, with central monetary control of the money supply by the European Central Bank (ECB), but without any fiscal control of many very diverse federal country budgets over what they spend.  It’s been suggested for the ECB to enforce sanctions, but a unanimous vote of financial ministers is required & that won’t happen.  They can’t even agree on a definition of insolvency.  The Germans simply want to make sure that federal government deficits don’t exceed 3% of each country’s GDP.
• An alliance between the EU & NAFTA makes sense, but again, the hang-up is on trade in agriculture & Europe’s Common Agricultural Policy (CAP).
• There are rumblings of undercurrents of opposition to increased federalism in Europe.  There is a reason the German government hasn’t asked its people to vote on it.  The ringer is that the German constitutional court hasn’t bought into the sovereignty of the European Court of Justice.  Merkel doesn’t want to surrender German sovereignty to Europe.
• The UK actually joined the EU with a trick that did not require the OK of its parliament.  The Brits are team players with the EU, playing by the rules & implementing lots of legislation, but they do lose a lot of debates there.

swiss financial history lesson in america

Albert Gallatin was America’s longest serving U.S. Secretary of the Treasurer. He was born (2011 marks his 250th birthday) in Geneva, Switzerland & became the most prominent Swiss-American in U.S. history.  THE NEW NORMAL – GALLATIN’S LESSON commemorated his birthday & provided some lessons which might be helpful today.  The event was hosted by The Swiss American Business Council, Consulate General of Switzerland, Economic Development Council, International Trade Association of Greater Chicago, & the Chicago Association for Business Economics.

Minister Martin von Walterskirchen, Regional Director-Americas of Switzerland Trade & Investment Promotion opened by remarking that @ that time the wealthy kept government kept government frugal, while today Swiss companies employ 500K in the US & 600 US companies work in Switzerland.  The panel consisted of Jean-Daniel Gerber, Swiss State Secretary for Economic Affairs, Randall Eberts, President-Upjohn Institute, Terry Savage-nationally syndicated financial columnist, (& University of Michigan alumna), & was moderated by (world age-group champion triathlete) Elizabeth Brackett-correspondent, WTTW tv.

Gerber started the discussion by noting that the U.S. does more trade with Switzerland than with Russia or Scandinavia.  Back to history, Gallatin cut America’s national debt by 50% in his 1st year as Treasury Secretary, which is comparable to the changes Paul Volker enacted in 1978 as head of the Fed.  We are still not out of the financial crisis yet because the debt issue still prevails.  Greece has never had a surplus since 1946 despite GDP growth, & when GDP has fallen they’ve had to take drastic measures.  There are 2 theories about how to get out of this mess:

1. spend our way out ala Keynes & Krugman
2. tighten our belts & reduce debt as Gallatin did, which builds confidence, reduces instability & risks, but is unpopular (Rogoff).

The sequences of earlier crises were the same:  debt leads to insolvencies, all of which need time (10 years) to work themselves out, depending on the relationship between federal banks & fiscal policies.  Switzerland had dismal growth in the 1990′s, but had the fastest growth 2003-2010.  Although their social security & health care are problems, they recognized they couldn’t spend like before & changed their debt rates.  People demand transparency in how to get out of the crisis to endear trust.

Eberts pointed out 5 lessons from Gallatin:  we need to;

1. reduce our debt by balancing our budget
2. make good government investments, as Gallatin did with the Louisiana Purchase
3. recognize the importance of a strong central bank
4. demand transparency & accountability
5. recognize bipartisanship, as Gallatin recognized his rival Alexander Hamilton, but still embraced some of his policies.

Terry Savage majored in American Civilization @ Michigan, but requested we bring more Swiss bankers here.  In the stimulus vs. austerity debate, our political system is tilted so that too many vested interests receive government spending monies so that there is no will to stop them.  Austerity means increasing taxes, but not government spending, which doesn’t necessarily lead to a balanced budget.  The US$ is trending downward, while gold trends upward.  America’s Social Security system is the world’s biggest ponzi scheme.  Check out this website to see the official & unofficial US National Debt Clock .

panel Q&A

• re: increasing the debt ceiling; Gerber maintained that despite health expenditures taking an increasing part of budgets & doesn’t “last long,” some other expenditures are productive investments with an ROI.  Europe is decreasing its expenditures on the military while they’re increasing in the US.  We need to deal with the problem step-by-step rather than in a revolution.  Savage noted that Japan has been in financial crisis for 20 years.
• re: 1st steps; Savage proclaimed we need a dictator in Congress who will stop spending & publish on the internet every $.01 the government spends.  By 2030 we will collect 23% of our GDP in taxes & all of that will go to social security, medicaid & -care, interest on our debt-there will be none left for armies.  We need to cut spending.  Eberts chimed in that Gallatin made others pay for debt by levying an import tariff.  David Riccardo dictated that transparency is important.  Since we don’t export much, we sell internally, & thus need to double job creation.
• re: inflation; Gerber observed that it’s not a problem yet, but if it becomes 1, the Fed will have to withdraw $ from the economy & raise interest rates, which will lead to inflation & debt.  Europe fears a drop in the $, so inflation policies need to be implemented worldwide.
• re: trade policy;  Terry put forth, China holds $1TR of our debt, & we’re trying to tell them to float their currency?  The Chinese have bought lots of Euro-debt too.  REberts stressed we need to increase exports as the Asians pull away from exports to insulate themselves from risk.  Gerber summarized that China does not trade fairly with its undervalued currency, but a protectionist path against it is just as wrong.  Gallatin laughed last:  as a long-standing treasury secretary, he was able to see his policies implemented.  We need long-term bipartisan policies to do this.

open Q&A

• Although China has effectively free-trade agreements with most everyone, more FTA’s worldwide would help, thus rekindling the Doha round of trade talks could be helpful.
• Innovation in a knowledge economy should theoretically lead to successful trade, but if those new innovations are Facebook & Google, where is the payoff?  Regardless, it does make $.  Since 1980 technology doldrums, we had a 20 year technology boom.  Lower taxes help (IL is going in the wrong direction):  JFK was 1 of the biggest tax cutters by lowering rates to raise tax revenues.  We need to encourage free trade & sound currencies.

This book details his life:  Gallatin:  America’s Swiss Founding Father

China’s President Hu Jintao’s visit to Chicago

I, along with 1200 of my best friends, attended the U.S.-CHINA TRADE AND ECONOMIC COOPERATION FORUM in Chicago, which was organized by the Chicago Council on Global Affairs & China Chamber of Commerce for Import & Export of Machinery & Electronic Products (CCCME), sponsored by Caterpillar, ITW, Underwriters Laboratories, supported by Grainger, & Harley-Davidson, & co-organized by the Chicagoland Chamber of Commerce, State of Illinois Department of Commerce & Economic Opportunity, World Business Chicago, Chicago Sister Cities International China Committee, Chicago-China Economic Development Center, Midwest US-China Association.  Is everyone jumping on the China bandwagon?-it looks like it.  I wonder how much each paid for their promotion?  I was told the Chinese brought a delegation of 400, but I was misinformed:  they only brought 393;  see here. They sure do throw lots of people @ everything they do.

Rather than try to summarize all that was presented this day, I’ll simply make a comment about each speaker’s presentation where appropriate, & include links to their organizations, which should make a much better use of space here.

Opening remarks

• David Speer, CEO ITW, welcome
• Wang Chao, Vice Minister of Commerce, People’s Republic of China (PRC), more @ lunch
• IL governor Pat Quinn, “hi”
• Gary Locke, US Secretary of Commerce, China has invested $12B in the U.S., which has created 10K jobs:  China is America’s #3 export market, which were up 34% in 2010 over 2009 & support 245K jobs,  after Canada & Mexico.
• Leocadia Zak, US Trade & Development Agency supported $3B in IL as a driver of export-led growth
• Chen Deming, Minister of Commerce (PRC) signed contracts worth $25B, excluding Boeing plane orders & invested $3.2B in the US.  China is #3 in trade with $380B which will increase to $500B by 2015.  $100B of exports from the US to China will increase to $200B by then.  China’s trade balance with the US is $181B, but $183B with the rest of the world, so that needs to be rebalanced.
• US-China contracts signing ceremony

Panel discussions

Panel 1-next 10 years of China-US business relationship

• Tang Dengjie, Shanghai Vice-Mayor has population of 20M with GDP/ per capita of $13K & 500 MNC headquarters, 1/3 of which are from the US.  Services are a focal point with a goal of $100B in 2010.
• Robert Holden, Chair-Midwest US-China Association: “howdy”
• Michael Moskow, Senior Fellow, Chicago Council on Global Affairs China needs to develop a consumer credit culture that lends to more than just state-owned enterprises

panel 2-bilateral investment & economic development

• Cheng Lixin, VP, ZTE is a partner of 59 of the top 100 telecom carriers, has been invested $300M in the US in 12 years with 8 offices, 5 R&D centers, 400 employees, 82% of which are American, & 5M subscribers, & signed commitments worth $10M
• Richard Lavin, Group President-Caterpillar has 11 plants & R&D centers in China
• William Spence, Chicago Sister Cities China Committee Chair “Hey…”

panel 3-clean energy & green economy

• Liu Xiaoming, Deputy Chief Economist, China National Offshore Oil Corp.was the 1st in China with liquefied natural gas
• Frederick Palmer, Senior VP-Government Relations, Peabody Energy signed an agreement for carbon capture plants with “green coal” near Tianjen
• Chris Gangemi, Senior VP, General Counsel & Corporate Secretary-Underwriters Laboratories

panel 4-SME cooperation

• Yu Ping, VP China Council for the promotion of International Trade (CCPIT) processes 140K inquiries & signed an Memorandum of Understanding with the US Foreign Commercial Service to help Chinese companies invest in the US
• Suresh Kumar, Assistant Secretary for Trade Promotion & Director General of US & Foreign Commercial Service (FCS) -US Dept of Commerce-International Trade Administration.  The FCS has 100 employees in China working on 5 missions to 14 cities.  They’ve helped 5600 companies, 85% of which have been SME’s.  He is also on the global councils of the  Thunderbird School of Global Management. In 2004 Mr. Kumar was named Distinguished Executive-in-Residence by Thunderbird School of Global Management for his contributions to global trade.
• Jerry Roper, President-Chicagoland Chamber of Commerce

Luncheon speakers

• Yao Wenping, VP CCCME, “say what?…”
• Wang Chao, Vice Minister of Commerce PRC-China & the US are 2nd largest trading partners with each other.  China has moved up from the #9 importer to #3 importer in the last 6 years.  The US has invested $65B in China while the Chinese have invested $4.7B in the US.

Materials distributed @ the event

• Promote your service in Chinese to companies in China
• International Business Partnership Program
• Joint Statement – China-US Healthcare Cooperation &  United States and China Launch Public Private Partnership on Healthcare
• ChinaWatch

owit & jetro on business in Japan

The Chicago chapter of the Organization of Women in Trade (OWIT) organized this event @ JETRO’s offices DOING BUSINESS IN JAPAN.  The Chief Executive Director of JETRO in Chicago, Tatsuhiro Shindo, who relocated from New York, welcomed us.

Next Kevin Kalb of the local JETRO office gave a tutorial on doing business in Japan:  jetro presentation – owit 1-19-11 kk Japan is about the size of California, but with little arable land.  Its population is declining so much that by 2030, 1/3 of the population will be 65 or older, which will put a burden on the health care system & workforce.  There is little immigration into Japan, but it is surmised that will have to change.  1/4 of all Japanese joint ventures & foreign direct investment in the US is in the midwest.  The Japanese are fascinated with robots & are even developing them to perform services these days.  However their services sectors are less developed, as is technology transfer, than in the U.S.  Japan is another land of engineers & their customer focus is very strong.  Japan was hit hard by the financial crisis, upping unemployment to 5% from it’s normal 3%.  Again re: the workforce, men boast an 80% employment rate, but women only a 60% employment rate because 2/3 of women leave the workforce after having their 1st child, which is double the rate in the US (1/3).    It’s important to establish trust & loyalty in long-term business relationships, which can take 7-8 years to get going.  It took 1 company 20 years to open a Japanese office.

Mark Mohr, EVP of DMG/Mori Sieki USA, the American subsidiary of a German/Japanese machine tool manufacturer, discussed cultural aspects of doing business in Japan.  Here’s his presentation:  Mohr – Culture of Doing Bus w Japan Mori Seiki came to the US in the 1980′s because at the time, US suppliers couldn’t deliver-some customers were expected to wait a year for delivery & customers didn’t accept that.  Now those US icons are gone.  Some Japanese companies have brought daily morning exercise to their subsidiaries in the US.  An advantage of the Japanese way of doing things is that people take responsibility for their actions & all workers are respcted. The Japanese “Never say die” attitude helps them “walk through walls.”  Don’t worry if you hear a lot of pregnant pauses when speaking with the Japanese-they’re just considering their response.

Tiffany Jespers, General Counsel of DMG/Mori Sieki USA, compared legal aspects of exporting from the U.S. & Japan.  Here’s her presentation:  Jaspers – Export Comparisons Additionally, METI has representatives in JETRO offices.  Internal controls are simply operating procedures, such as financial requirements, screening customers, acquiring customer information, & installing GPS to track locations of installed units as specified by METI for general licenses to export.  Sometimes rather then give a rejection, METI will just let an export license application hang in limbo & never be approved.

Q&A

differences between the Japanese & the Germans:

• in a meeting, the Japanese will listen, then meet & decide later while the Germans will expect a decision
• both are perfectionists, but achieve perfectionism differently:  the Germans will tell you what’s perfect, while the Japanese will ask
• the Germans are aggressive & expect their way to happen;  the Japanese will listen how to get to the same end & get buy-in.
• Both always see what can be improved, but differ in format.  The Japanese require an approval process for all $100+ purchases from the company president.

world bank pres. on global financial crisis

James Wolfensohn, former president of the World Bank spoke about THE GLOBAL ECONOMY IN THE WAKE OF FINANCIAL CRISIS at the invitation of the Chicago Council on Global Affairs.  Growth has changed now, compared to 1960-2000.  Then the 5B in the developing world had 20 % of the world’s wealth.  Jacque Chirac invited representatives from less-developed countries to the G7 meetings for the 1st time in 1997 & they each had 12 minutes to make a presentation.  The G7 is no longer relevant & has become the G20-the next summit will be held in Brazil.  The world GDP has grown @ 4%/year, but the mature economies have grown 2% while the emerging economies grew 8%.  By 2050, the original G7′s 80% of world GDP will have shrunk to 25%.  At that time, 65% of world GDP will come from Asia, 50% from China & India, which is a historic change.  The specific accuracy of those projections is unimportant-there will be a tectonic shift regardless.  Much of the west refuses to look at the extent of this change.  350K Indians & Chinese are studying abroad to earn their PhD’s.  We are not responding adequately:  we only send 13K to China & 1300 to India.  Education is the 3rd largest industry in Australia, many teaching Indian & Chinese students.

Financially, coffers in emerging economies hold most of the world’s reserves.  Our orientation must change towards Asia in manufacturing & technology.  The US$ is still favored, but we have $1 1/2 TR out there & there are limits to debt levels.  This problem cannot go on, especially when health care & retirement benefits rise to become 30% of GDP.  Growth is required, but the American educational system is appalling & fallen to #18 in the world.  You can’t solve these problems in 2 year election cycles or this year’s budget.  We must think long-term & strategically with a 10 year view, but we haven’t shown the maturity to deal with it.  Neither side shows that thinking is necessary.  Our most serious challenges are not immediately visible & we’re not prepared for them.

Africa’s GDP will grow from $1200 to $4000 per person by 2050 when the same will grow to $30-40K in India & China & $80K in the US & Europe.  Cellphones have made Africa aware of the rest of the world.  Transportation & nasty people are a potent mix.  There is no social justice there now, but we need to create opportunities for peace.

Q&A

• interest rates are currently not a problem, but they inevitably will rise because they can’t go any lower
• start by communicating with your governmental representatives
• the World Bank’s role/challenge has changed.  It’s biggest clients used to be India & China, but is now focused on Africa.  They all still require technical assistance.
• Latin America & Brazil are generally in good shape, but haven’t benefited as much as other regions.  Brazil is growing @ 1/2-2/3 the rate of China & India.  Hydrocarbons in Brazil are an opportunity, but they’re 6X as deep & will take 10 years to develop for export.  Mexico has had a tough time because it’s so closely allied with the US & the US hasn’t done well.
• Today totalitarian regimes, such as China, are well-managed countries which have the short-term under control & develop leadership in advance of change.  There has even been some progress in corrupt Africa, but they must come up with African solutions, not those imposed by others.
• European leadership says they must keep the Euro together, but can they afford it & how can they pay for it?  It’s a currency union, but there is no mechanism to coordinate economic development, so there could be a crack in the Euro.
• Although India was poorly managed, it’s now well-managed, so expect India to overtake China by 205o because of China’s 1 child policy demographics.
• As economies change, the issue of who is the world’s policeman will have to be addressed.  China is building a huge navy…