You can access the full article here.

Newsweek has a new piece exploring how the new requirements might impact technology companies like Apple and HP whose parts suppliers rely on source material from conflict-prone countries in emerging and frontier markets such as the Democratic Republic of Congo (DRC).  Foglamp continues to hear plenty of buzz around investment opportunities in the mining sector in DRC, and it will be interesting to see whether the new U.S. regulations will have any material impact on investors’ view of that market.

Gregg Wolper, a senior fund analyst at Chicago-based Morningstar Inc. said “investors in frontier markets know that the regulations will be less stringent in some of them…That doesn’t mean companies can’t be successful in frontiers, and the stock markets in general could rise if conditions are favorable, but there are risks in frontier markets and corruption levels are one of them.”

Wolper said a way to “spread your risk pool around” is to invest in funds, rather than individual companies, in frontier markets, but he cautioned that because these markets are so small, one corruption scandal can still have a large impact.

“If there was a major corruption scandal in one company in a smaller market it could create a lack of confidence in that market for a while,” he said.

You can access the full article here.

In a paper published by the World Bank, Daniel Kaufmann and Shang-Jin Wei subjected the “efficient grease” hypothesis to careful scrutiny. They found that companies that pay bribes actually end up spending more time negotiating with bureaucrats. The prospect of a pay-off gives officials an incentive to haggle over regulations. The paper also found that borrowing is more expensive for corrupt companies, probably because of the regulatory flux.

We couldn’t have said it better ourselves.

You can find the Economist article here and Kaufman and Wei’s original analysis here.

This year’s assessments have been receiving significant media coverage, including from the Wall Street Journal and The Hill. Among the report’s key findings:

Despite a change of administration in the United States in 2009, significant progress has not been achieved in curbing corruption at the national-level in the U.S.

China is dropped from Global Integrity’s Grand Corruption Watch List.

Vietnam has made virtually no progress in implementing effective anti-corruption reforms since Global Integrity last assessed the country in 2006.

Uganda and Bosnia and Herzegovina have the dubious distinction of boasting the biggest “implementation gaps” of all countries covered in this year’s Report – that is, the gap between their anti-corruption laws “on the books” and the actual enforcement of those same laws.

Although the February 2010 presidential run-off election in the Ukraine demonstrated that the country is able to hold relatively free and fair elections, it has suffered significant setbacks in the implementation of other key transparency and accountability safeguards since Global Integrity’s last assessment in 2007.

Access the full report as well as data and specific country assessments at http://report.globalintegrity.org.

As Dow Jones writes:

51% of respondents delayed business plans & 14% abandoned them completely because of legal questions arising from unclear anti-corruption regulations

59% of respondents delayed and 11% abandoned key initiatives because they could not get the information they needed to adequately assess the corruption risk

Fearing noncompliance, 40% of companies avoid emerging markets

One-third of companies have lost business to unethical competitors

Also intriguing to us is this tidbit that Dow Jones highlights in its findings:

Fear of breaking anti-corruption regulations plays a key role in company executives’ decision to enter or expand in emerging markets – or not. Forty percent of respondents interested in entering emerging markets cite fear of running afoul of anti-corruption regulations as a significant influencer in their decision not to enter an emerging market while 32% said it had played a minor role. Of those companies looking to expand their existing presence in emerging markets, 35% cite fear of breaking anti-corruption regulations as a significant factor in their decision not to expand and 37% said it had a minor role in their decision.

These data validate much of what Foglamp has seen over the years: despite the high upside, a fear of entering the more exotic emerging and frontier markets because of corruption and transparency challenges.

Kudos to Dow Jones for the survey.

Our friends at the Legatum Institute have put together an impressive survey of more than 2,500 entrepreneurs in India, asking them about their motivation, aspirations, and the challenges they face in launching new ventures.

To quote from the Institute’s key findings:

40 percent of respondents have been pressured to pay a bribe.

93 percent say corruption is a problem.

49 percent of respondents say that “jugaad” is “very important” to succeeding in India.

Those same entrepreneurs’ experience with government regulators is no more encouraging:

Government bureaucracy is cited as one of the 3 main reasons businesses fail in India.

The majority have favourable views of how well their state and national governments are promoting business. However, government regulations are one of the biggest barriers to starting and running a business in India and one of the most-cited reasons businesses fail in India.

You can grab the full report and findings on the Institute’s website.

Among the key findings:

(1) Half of the total risks in emerging and frontier markets may be linked to fraud, corruption, and discretion in the regulatory system.

(2) Corruption is not monolithic; it is highly country-, industry-, company-, and deal-specific.

(3) In many emerging and frontier markets, corruption is believed to have a tax effect upwards of 20%, reducing firm productivity by nearly 70% and stifling earnings.

(4) Data used by most investors are simple aggregates of imprecise country- and region-specific studies and are flawed for three reasons:

They are unreliable for making comparisons between countries because the studies used as data inputs vary by country, despite being portrayed as comparable;

They are unreliable for tracking change over time because the actual inputs change each year despite the aggregate data being portrayed as comparable;

It is impossible to tell what these data are actually measuring, as each study and each survey defines “corruption” differently.

(5) A new wave of corruption metrics and assessments are being developed utilizing local country experts to better identify specific, actionable corruption risks and undervalued opportunities.

Download the full whitepaper
Foglamp Whitepaper-Corruption in EM