The news that the Canadian government has signed a trade deal with South Korea is the latest in an effort by the government to diversify Canadian trade. The government's initiatives on this issue are laudable, more systemic and arguably more effective than previous federal efforts. But the goal of trade diversification is an old one. John Diefenbaker in the 1950s and 60s sought to re-direct trade to the former British Empire; Pierre Trudeau tried and failed to expand relations with the European Union; and Jean Chretien's innumerable "Team Canada" missions followed the same diversifying impulse.
While the policy impetus has not changed, the international context and the stakes for Canada are dramatically different. No single country or durable alliance of countries appears able to meet the challenges of global leadership (as evidenced by the Ukraine and Syrian crisis). Twenty years ago there was a dream of open borders, falling trade barriers and a single global market. This dream has evaporated.
Emerging markets will be driving global growth for the foreseeable future. Yet picking the right emerging market is immensely difficult, as such markets tend to surge then fade. Most face tremendous internal political challenges that threaten to derail growth. Global instability will be more common than not. These facts suggest that for Canada to succeed this century, we need to develop strategic flexibility or multiple meaningful global business and political relationships.
While the Canadian desire to diversify is an old one, equally enduring is the failure of Canadian capitalism to orient itself to markets outside of the English-speaking world. Regardless of the government's best intentions, it is Canadian businesses that need to find and seize opportunity in emerging markets and create the strategic flexibility Canada needs to continue to prosper.
To this end, both the Rotman School of Management and Rotman Commerce at the University of Toronto have attempted to expose students to emerging markets. In the Rotman Commerce program, groups of select undergraduate students have been traveling to Istanbul, Turkey, to meet with business, economic and political leaders.
Turkey exemplifies the business challenge of the age. It has experienced tremendous economic growth over the past decade, engaged in substantial economic reforms, and built powerful global businesses and brands (KOC holdings and Turkish Air). Istanbul is a burgeoning global city in a developing regional power straddling Europe and Asia and bordering the Middle East, Caucuses and Central Asia. But Turkey is also experiencing growing political instability. It is the kind of market that poses both significant risks but also significant and necessary benefits to Canadian firms. In demonstration of its recognition of this opportunity, the Government of Canada has prioritized the relationship with Turkey, conducting successful ministerial visits and expanding the consular presence to Istanbul.
Markets such as Turkey are more difficult and more volatile than our traditional markets by an order of magnitude. Accordingly, there are certain key considerations for engaging emerging markets, such as Turkey.
Politics matters as much as economic fundamentals in driving business outcomes
It is taken for granted in developed economies that for the most part, economics and business are separate from cultural and political issues. Often this is not the case in emerging markets. Turkey has invested heavily in reforming the legislative frameworks governing its economy (new capital markets, enterprise and mining laws are but a few examples) in its attempts to gain access to the EU. But a recent corruption scandal involving the Turkish Prime Minister, his family, and cabal of business supporters is undermining the previously tidy narrative of a country undertaking serious reform. The scandal involves billions in infrastructure and defence contracts as well as the control of entire sectors, particularly the media. Some suggest Prime Minister Recep Erdogan is become a mini-Putin on the Bosphorous. The secret taping of the Prime Minister and release of these recordings by security services betrays the deep fissures within Turkish political life. These fissures are now seeping into the economic realm.
Business acumen and knowledge are not enough in these markets; understanding how to negotiate a politicized regulatory and political environment is essential.
Like any buyer, emerging markets must want something you have
Turkey may be emerging, but it is not unsophisticated. It has a number of impressive conglomerates, advanced banking and consulting advisory services, a rapidly growing capital market in the Borsa Istanbul, and strong global networks. Like China, Turkey seeks the technology and know-how it doesn't have. Impressively, Turkey has opened dozens of new consulates in the last five years and globally staffed them with investment officials (Toronto was opened in 2010). These offices have done a good job of educating Canadians about what Turkey needs from our economy. One major interest is mining investment and technical capability (Turkey made its first appearance at the Prospectors and Developers Conference last year). Due to its location as a way-station for natural gas supplies travelling from the Caucuses and Central Asia to Europe, Turkey seeks pipeline and energy infrastructure competence.
Regardless of the industry, knowledge transfer will drive partnerships and the era of free lunches is long over. Canadian businesses must find real value to offer.
Local connections are an imperative
Turkey has made great strides in becoming more business friendly. A new commercial code has increased transparency, created protections for minority shareholder rights, and enshrined a requirement for independent audits. But laws are only as good as the legal apparatus that enforces them. Turkey's judiciary and legal system are nascent and gripped by political and factional fighting. Irony aside, it is apt to describe aspects of Turkish political and economic life as Byzantine. Thus, using local experts in joint ventures is as essential in Turkey as any emerging market.
The future prosperity of Canada will require a concerted effort to capture the fast-growing markets of emerging and frontier economies. The hard realities of commercial and global instability will make this even harder than in the past. Nations like Turkey exemplify this reality: dynamic, fast-growing, culturally impressive and sophisticated, but political unstable. Canadian businesses must develop strategies to enter and succeed in this new world of great opportunity and great risk.
J.C. Bourque is a business strategy consultant in Toronto.