Expanding into new international markets? Here are the risks to be aware of.
When considering a new market or a reassessment of an existing one, it's essential to examine what risks may arise that threaten your expected investment return. These run the gamut and can include strategic risks (unwise market entry execution), political risks (discrimination, retaliation, asset expropriation), operational risks (regulatory or tax noncompliance), financial risks (currency devaluation and capital controls, contract repudiation, and collection risk), cultural risks (failing to respect norms of business and employment customs and negotiation styles), and reputational risks (running afoul of anti-corruption or other laws and the public disclosure of that fact).
For those who proactively identify, manage, and mitigate the various threats to generating profitable business and investments, there are significant market opportunities in challenging markets. What follows is a roadmap of risks to prepare for when considering expanding into a global market.
Many sanctioned countries offer attractive business opportunities, but the challenges to doing business in each of them are both many and different. Among the countries worth considering are Russia (agricultural products and equipment, pharmaceuticals, franchising), Iran (imports of foreign-made products, construction, medical equipment), Venezuela (agriculture, auto parts, and equipment) and Cuba (selected tourism, agricultural products and equipment).
All require a comprehensive and oft-updated sanctions compliance strategy advised by specialized sanctions counsel, as well as their own country-specific strategy, which should include careful market data collection and evaluation of the industry segment opportunities, finding the right local partners, and managing currency volatility. Refer to Export.gov for detailed country commercial guides.
In most markets in which the state is a significant player, expect some form of discrimination in favor of state-owned or controlled organizations.
International businesses in China have experienced a persistent creep in these regulations and business practices. Included are purchasing agreements that favor domestic over foreign suppliers and joint venture "IP for market access" requirements that have forced the transfer of technologies from business processes and trade secrets to software codes, patents, and copyrights.
An increasing percentage of international companies in China – nearly 60 percent in a recent survey – said they believed foreign companies were being singled out in government investigations, antimonopoly and anti-corruption campaigns.
In Venezuela, there is a clear political fact of life: Play ball with the government and all will be well; speak out and harassment may follow. AT&T's Direct TV was lucky enough to be partnered with a group on the right side of the game; another TV competitor – a pro-opposition station – lost its license and went off the air.
Despite the level playing field that the World Trade Organization and various multilateral and bilateral trade agreements are supposed to create, subsidies are another advantage countries give to their own. Gulf-region airlines benefit from alleged financial support from their local state carriers, giving them an unfair competitive advantage over European and U.S. carriers.
Similar complaints are made about Chinese airlines. Boeing has long complained that Airbus enjoys subsidies that allow below-cost pricing. Beyond airlines, in China, it's estimated that tens of billions of dollars have been provided to Chinese state-owned enterprises through concessional export credits and export credit guarantees.
China is famous for this and the automobile industry offers a number of examples of blatant copying. BMW, Rolls-Royce, GM, and Mini Cooper all have experienced launches of lower-priced copies of their better-selling models.
Often, SME and tech companies, influenced by seemingly trustworthy partners, let down their guard, only to find that their Chinese partner has appropriated their core technology.
In Russia, when a business is prosperous enough to be on the radar screen, it is vulnerable to being pressured by hostile competitors, sometimes in coordination with local authorities; the weak rule of law offers little recourse. Local and foreign players alike are at risk.
Ikea suffered a multiple-year delay in opening its mega mall in a regional city due to fire and building code violations, at least some of which were widely suspected to be fabricated to postpone the opening and which inured to the benefit of the region's governor, who was known to be the owner of the city's existing major shopping centers.
Despite these challenges, there is tremendous opportunity for growth within challenging global markets. Brands like Starbucks and Subway have all successfully navigated specific challenges to thrive overseas. Through strategic planning and forward thinking in regards to risk, brands can capitalize on untapped foreign markets and add considerable value to their bottom line.