Red Tape – Bureaucracy and its Influence on International Business

Matthew MacLachlan

8 Apr 2013

Bureaucracy and excessive regulation, commonly known as red tape, has a strong influence in any country’s economy. Red tape includes all sorts of rules, paperwork, permits, taxes, procedures or requirements which can be crucial when setting up a company or doing business ina new market. Even though there may be great business opportunities, many organisations shy away from the so called ‘business-unfriendly’ countries.

According to an article published on the Grant Thornton International and Emerging Markets blog, the global impact of red tape on business expansion is now about 30%. The top 10 countries being strangled by red tape are shown in the article and curiously enough, except for Greece, which ranks first in the list with a 57% of bureaucracy pressure on business, the majority of countries that appear on the list are considered to be emerging economies.

Russia, India and Brazil, three of the four BRIC countries, are among the world’s top ten economies and will continue growing quickly. Such economies are considered attractive opportunities for investment, but they can also present high levels of risk to anyone doing business in there.

If we analyse the case of Brazil, for instance, we can see that bureaucracy can indeed be a challenge for anyone doing business there. Brazil ranks second in the list, with a score of 50% in terms of bureaucracy pressure on business. It was ranked 126th out of 183 countries on the last World Bank’s Ease of Doing Business report.

Reports suggest that about 17% of Brazilian GDP is lost in bureaucracy, and it takes from 13 to 17 procedures and 169 days on average to start a company in the country, but there are many cases of companies that after two years were not still able to legally operate. In fact, approximately 40% of Brazilian start-up businesses do not survive more than two years according to data published last year by the Brazil’s Government Research Institute and many foreign companies have failed after having invested huge amounts of money in Brazil.

A society’s need to create rules and processes, which can often result in heavy bureaucracy, is culturally driven. When people in a culture find risk or uncertainty uncomfortable, they usually define rules or policies to ensure that there is no ambiguity. Interculturalist Geert Hofstede analysed this component of culture and called it Uncertainty Avoidance. Cultures who feel a need to control things to avoid any risk or vagueness are often classified as having a low tolerance to uncertainty avoidance.

Countries who tend to be on this end of the scale, and who therefore are often perceived to have a lot of red tape, include Russia, Argentina Brazil, Poland and Greece. People in these countries do not like to be rushed into making decisions and think that detailed and rigid processes makes the world a better and more secure place. Bureaucracy may impede companies to take appropriate actions to achieve organisational goals or adapt on the changing market, but it is deeply rooted in some cultures as a mesure to guarantee equality. How things are run in other countries may cause frustration and failure, promote stereotypes and will undoubtedly make building trust and enhancing interpersonal relationships more difficult.

While it is easy to perceive red tape as a negative, it’s important to understand that it is a culturally driven behaviour resulting from a value of needing security and low risk. If interpreted differently and harnessed effectively, this could in turn bring your organisation more benefits than you realise in the long run. Doing business in one of these countries might be challenging at first, but it can also be a great opportunity once you know how culture affects every procedure, activity or objective.

Although things may take longer and may be more complicated, the end result of successfully dealing with the red tape you encounter could give you an edge on all of those companies who avoided these challenges.

 



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