Foreign Investment.

The following paragraph, taken from my international business law textbook, sums it up perfectly:

“No greater decision can face a firm engaged in international business than the decision to make foreign investments, particularly in the case of active commercial investment (establishment of operations), but equally so in passive portfolio investment (buying securities issued abroad). The firm must decide whether to commit itself to the foreign market in a manner that involves the highest degree of capital investment and the longest commitment to goal achievement, in a situation often difficult to unravel. This all takes place in an environment that may be susceptible to radical change, with the firm’s reduced capability of understanding and adapting to cultural differences. As a result, the commercial potential of such an opportunity should be clear on its face, or capable of explanation in sound and tight commercial terms. If the commercial realities of foreign investment are not well founded, the venture will, at all times, be at serious risk, and no amount of legal creativity will be able to change the situation.” (Willes, International Business Law, McGraw-Hill Irwin, 2005)

When choosing to enter a new market, especially one as complicated and culturally different from ours as China, it is important to do homework. There is no worse reason to go to a foreign country to trade, manufacture or sell than “the competition went in, we have to go in too.” How do we know the competition did their homework? By staying out could we gain advantage and market share as they struggle to keep their foreign business operational and profitable?

Entering a foreign market is about research and reporting. Data collection is key. Get as much information as possible and figure out what it says. Look at the history of growth and the various markets. Get all the numbers together and then perform a statistical analysis of that information to gain at least an educated guess of the chances of success or failure. What are the chances, how great is the swing? Standard deviations for ROI opportunities have to be taken into account.

What is the political environment like? Are you expanding domestically? If so, are you ready for different challenges in each new local government? What will the country look like in five years? Are the state-owned banks going to start lending to local entrepreneurs, and if so, what’s going to happen to your product when suddenly an influx of available cash for small businesses creates a market saturated with competition? If you’re entering China with a consumer good like fried chicken, what do the cultural differences suggest? People from Sichuan province are going to want spicy chicken, people from Beijing will not.

When entering a foreign market, no matter where it might be, all possible risks must be assessed and re-assessed. As the company goes in and starts work, at least once per quarter, and probably once per month, someone in upper management should re-review that report and take a hard look at where the business stands. What are we looking like in reality compared to what we saw on paper? If there are issues, how do we address them? Are we missing something from a cultural perspective that is dragging down morale and making our business less profitable? How do we stay on track? How do we keep the lines of communication open? How do we affect real dialogue with our Chinese counterparts and employees? How, in effect, do we succeed?

The answer to that last question is easy: Homework.

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