A Simple Equation You Need to Know When Doing Business in Some Developing Countries

What do you get when you combine hundreds of overlapping regulatory bodies and a constant flow of vague laws/decrees?  A business environment that leaves quite a bit of room for corruption and extortion.

Example 1:  No less than three police stations may be in charge of the zone where your business resides.  Each demands a “relationship” – maybe in the form of “You should buy 2 million dong ($100 USD) worth of charity tickets to our variety show (which won’t actually occur)!” When you don’t have a “relationship”, they start to enforce all sorts of real or imagined laws, like no motorcycle parking on your sidewalk. Never mind it is legally your property and all your neighbors selling Pho, likely without a business license or hygiene certificate, are able to block half the street with their cars and motorcycles.

Example 2:  You have signed a contract using an international law firm and have had it notarized with all applicable government offices.  A few years in, the landlord wants to triple the rent because “land prices have gone up since we signed the contract.”  When you appeal to follow the agreed-upon, notarized contract, the landlord starts threatening you and calling the police with false complaints.

Example 3:  You have filed for a license to start your business or NGO.  The process is taking months, despite other projects being approved in less than one or two weeks.  Every time you inquire, the official says “It is almost finished – come back next week.”  But each time you return, you learned you filled out one form wrong and have to completely resubmit your papers.  Or perhaps you haven’t gotten the right letter of introduction.

Example 4:  The government has just doubled the minimum wage.  No problem – you already pay far above the minimum.  However, because of the raise, you will pay higher salary/insurance taxes on employees’ new base salary.  Most of your competitors simply switch all employees (except key management) from contracts to part-time employment to avoid taxes (meaning you can fire them anytime you want and they receive no government services like unemployment, health insurance, sick leave, etc.).  Technically it is illegal since they will still work 48+ hours/week.  You want to do the right thing for your employees, but the 20-30% higher labor costs will substantially reduce your competitiveness.

There is a simple equation all sides know: Cost of doing things right > cost of corruption

You can fight the phony police fines, but the police will keep coming week after week to hassle your customers.

You can take the landlord to court, but the legal fees (and security guard costs to protect yourself) will outweigh the additional rent he/she is seeking.

You can continue to wait on your business or NGO license, but you are incurring real and opportunity costs by waiting around and doing nothing. 

You can continue to employ everyone on proper contracts with full benefits, but your competitors will likely find a way to edge you out of the market with your higher cost structure.

The system is built in this manner, giving the enforcers of regulations quite a bit of gray area to extract funds from unsuspecting new start-ups.  It is ever so tempting to avoid the time and stress involved with trying to go against the grain.  However, if the system is ever going to change, people need to start somewhere.  And, after all, it really isn’t too different than doing business in the West.  At its best, the corruption is just a bit more obvious; at its worst, the corruption is more confrontational and dangerous.

~ by responsiblenomad on October 22, 2011.

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