Emerging Market Countries as Locations for Family Businesses – China Catches Up with Russia and Turkey

04.01.2018

China, with its more stable political and institutional framework than Turkey or Russia, is an attractive business location.

Of the most significant emerging economies, Turkey and Russia offer the most attractive conditions for family-run businesses. Given recent political developments in these two countries, however, China has managed to catch up, closely followed by Mexico, India and Brazil. A stable political climate and a secure institutional framework have thus proved to be decisive factors for multinational family businesses when choosing a new location. These are the principal findings of a recent study conducted by the Centre for European Economic Research (ZEW), Mannheim, on behalf of The Foundation for Family Businesses in Germany and Europe. The study is the first to develop a country index for family businesses based on an analysis of various location factors in emerging markets.

For the purposes of the study, a number of criteria including taxation, employment, regulation, financing, infrastructure and institutions were analysed. Accordingly, Turkey and Russia provided a highly attractive tax framework for family businesses compared to the other countries observed. In both countries, there is little regulatory pressure on businesses, the infrastructure is well developed and workers are relatively well educated compared to other emerging economies. Nevertheless, both countries have certain drawbacks in terms of the protection of property rights as well as the independence and efficiency of their respective legal systems.

With respect to the protection of property rights, Russia comes in last, after Turkey, out of all the emerging economies observed in the study. Another considerable downside for businesses are the costs associated with crime and terrorism, with both Russia and Turkey scoring relatively poorly (coming in fifth and sixth position respectively) in the subcategory “Crime and Political Stability”.

Asian countries on the rise

China, meanwhile, with its more stable political and institutional framework is also a highly attractive location for investors. For one, contracts can be enforced relatively quickly and efficiently in Chinese courts. Most importantly, though, companies face relatively low costs associated with criminal activity or terrorism. However, China’s overall score is dragged down by its inadequate data networks and low levels of education among the workforce which makes expert personnel hard to find. China’s high levels of private debt are also cause for concern.

The authors of the study predict that Asian countries like China – and also India – could soon close the gap between them and the leaders of the pack like Turkey and Russia. “The Asian countries are exhibiting an upwards trend; they offer a stable political environment and are willing – and in the case of China in a strong position – to tackle their deficits in education and infrastructure through investment,” says Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” and leader of the project.