Assessing the Risks Associated with International Expansion
Foreign markets are attractive to many businesses as they represent untapped potential. Many emerging regions offer an unreached customer base that is just now beginning to be able to afford commodities that developed markets have enjoyed for years. Additionally, the growth of global communication tools such as the Internet has made it easier than ever before for companies to reach people outside of their target market. This has become especially pronounced with major Internet players such as Google talking about using unmanned drones to beam wireless Internet into areas that otherwise wouldn’t have it.
That said, the allure of foreign markets often blinds executives, who look at entering new regions solely as a means to drive more sales. As CFO magazine recently noted, for every company that thrives abroad, there are four or five that are struggling to recoup their investments, decidedly not rolling in profits. In some cases, even if there is a clear opportunity in a region, it can often take so long to turn that opportunity into a reality that it becomes financially unviable to achieve. The news source pointed to Wal-Mart as an example of this, with the retail brand entering the Japanese market in the early 1990s but not converting these operations into a “win” until just recently.
As firms enter new markets, or at least consider doing so, it’s crucial they think of all the risks involved with such a transition. Here are three risk categories that companies face when contemplating a transatlantic move:
1. Operational Inefficiency
If companies have been operating in one country, they are generally well aware of how to operate efficiently in that region. That won’t always be the case when it comes to opening a new firm abroad – differences in work culture, social acceptance, laws and compliance factors can make the transition much more difficult than anticipated. Obstacles may not even be huge – several small hindrances, however, can add up to create a testy work environment that doesn’t allow organizations to fully capitalize on opportunities. “There are lots of delays in approval of licenses and licensing agreements,” Andrew Karolyi, who runs the Emerging Markets Institute at Cornell’s Samuel Curtis Johnson School of Management, told CFO magazine. “All of it revolves around central agencies that govern how business is done.”
2. Political Risks
Many emerging markets come with substantial political risks attached to them. Although they may currently have an optimal audience and ideal business conditions for a corporation to pursue operations in these regions, unforeseen political shifts could have huge ramifications. For example, several auto manufactures began selling cars in Brazil because they were less expensive than domestic offerings. However, the Brazilian government decided to pass protectionist measures to promote the local manufacturing industry, which essentially halved the sales of many of the foreign auto brands. Kia’s head of Brazilian operations Jose Luiz Gandini even went as far as telling the Financial Times that everything the company had done in the country up until that point was “thrown in the trash” by those measures.
3. Legal Risks
In many emerging countries, the legal infrastructure isn’t as sound as in the markets firms are accustomed to. This can result in businesses taking unforeseen losses simply because they may not have the ability to protect their rights or assets as they would in their home region. If something goes awry, they may be limited in their ability to make things right again.