Despite the forecasts there are many impediments to the development of global businesses such as protectionism. Protectionism is the discouraging of imports by, for example, raising tariff barriers and imposing quotas in order to favour local producers. It is rife in agriculture. These are reviewed here. Pursuing a global strategy is a source of risk to a business, either because the forecast opportunity doesn’t come about or because host governments change their policies towards ‘foreign’ investment
and render it no-longer valuable.
Political risks in international business
The development of plans for international business will depend on the following factors:
1. The stability of the government. Rapid changes or political unrest make it difficult to estimate reactions to an importer or a foreign business.
2. International relations. The government’s attitude to the firm’s home government or country may affect trading relations.
3. The ideology of the government and its role in the economy will affect the way in which the company may be allowed to trade, and this might be embodied in legislation.
4. Informal relations between government officials and businesses are important in some countries. Cultivation of the right political contacts may be essential for decisions to be made in your favor.
Political risk is still relevant with regard to overseas investment, especially in large infrastructure projects overseas. History contains dismal tales of investment projects that went wrong, and were expropriated (nationalized) by the local government.
Suspicion of foreign ownership is still rife, especially when prices are raised.
Opposition politicians can appeal to nationalism by claiming the government sold out to foreigners.
Governments might want to re-negotiate a deal to get a better bargain, at a later date, thereby affecting return on investment.
In addition to expropriation, there are other dangers:
Restrictions on profit repatriation (for example, for currency reasons)
‘Cronyism’ and corruption leading to unfair favoring of some companies over others
Arbitrary changes in taxation
Pressure group activity
A Worked Case
In eight months (of 2006) Intel committed more money to building production capacity in Vietnam than it committed to China in whole previous 10 years. Flextronics, a manufacturer of computer printers for Hewlett-Packard already has vast facilities in China but it chose Malaysia for its latest investment. Yue Yuen, a Hong-Kong based shoemaker, has been ramping up output of trainers for Nike and Adidas and production is increasing at the firm’s factories in China and Vietnam, but output in Indonesia is growing the fastest.
These companies are not alone. In the calculus of costs, risks, customers and logistics that goes into building global operations, an increasing number of firms are coming to the conclusion that China is not necessarily the best place to make things.
Analysts give two big reasons for why China is not top of the list for new factories.
Rising costs: Most development has taken place on China’s Eastern costal strip and now costs of land, office space, utilities and labor are rising. Firms cannot find or retain managers versed in international production techniques and this causes rampant poaching and wage inflation.
Diversification: Many firms are reluctant to put more eggs in the same basket. Many firms are adopting a ‘China + 1 other country’ strategy. Risks include increasing civil disturbances in China as the have-nots get left behind by the haves; growing protectionist talk from the USA and EU which has already resulted in ‘anti-dumping duties’ being imposed by the EU in October 2006. Another risk is the lack of legal protection for intellectual property in China which has led to designs being churned out by local factories under different brand names. Capital intensive industries where cheap labor is not so valuable, such as chemicals, prefer Singapore. The rising currency (6.5% rise 2005-2006 and projected to rise 5% during 2007) is also another concern because it will make exports from China less competitive
