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Risks Associated with Conducting Business in a Foreign Market

By Edited Nov 13, 2013 1 0

 

Over the past thirty years globalization has been the main force guiding and changing political economies of nation states; particularly, developing nations whom are often under or shifting from totalitarian rule and live under collectivist ideologies.  As more and more of these countries see financial incentive to switch to market based economies and adopt more democratic practices, there are still major challenges that firms face to protect their assets and maintain ethical business practices abroad. Thus, the attractiveness of a nation to invest or do business with is dependent upon  the political economy of that particular nation and to what extent, if any, bribery, piracy and product safety and liability laws are enacted and enforced.

The political economy is the idea that political, economic and legal systems of a nation are interrelated and interdependent, therefore the economic well- being of a nation hinges upon these systems. While the concepts are nothing new, and have been in place for thousands of years, hitting peak and low points in history, it is imperative to understand them as they affect every aspect of international business  and today’s global market place.

Collectivism and totalitarianism are partners in crime, meaning that when a society believes in the notion that society’s well-being is more important than an individual’s personal needs the society is often complimented with a totalitarian form of government, which exercises that the government should have complete and total control over all spheres of human life. In addition to this, many of these types of societies do business through a command economy in which the government determines what products and services are produced, how much and at what price. Furthermore, the legal systems of these countries are often codependent on the political system in place as well, where civil and or theocratic laws are practiced. Under civil law judges have uniform codes which they apply during cases that come before courts, thus they apply the law rather than interpret it.

In contrast, political economies that emphasize the concepts of individualism and democracy promote self-expression and individual freedoms as well as allow individuals and businesses to pursue their own economic self-interests. The economy of these nations is often based on a market economy, or the fact that all businesses are privately owned as opposed to state ownership of business. This type of economy is based on a price system which supply and demand dictates. If supply is low and demand is high then the price for a good or service will increase; and when supply is high and demand is low the price for a good or service will decrease. This is more attractive to businesses because entrepreneurs have a right to the profits generated from their efforts and supply and demand, rather than the government dictates financial prosperity. Thus, privatization of businesses and supply and demand is the guiding force of market economies. The legal systems of these countries generally practice under common law which is based on tradition, precedent and custom. Judges are allowed to interpret cases rather than just apply them. All of these aspects make it easier to do business and often deter corruption.

Another aspect that is important to understand, is that while, on paper these systems are clearly opposites, in practice, there is a spectrum, and that  countries can have a mix of free market economies while still denying basic human rights. China, for example, is thought of as a communist state, however globalization and economic incentive have given the Chinese government reason to loosen their economic policies. Today they are the leader in the developing world of exports and their output level has risen from an incalculable number in 1963 to 8.2% in 2009. China also offers new opportunities for firms, and being that their population is vastly larger than any other nation, the market share a company receives increases gravely once they enter the Chinese market.   On the other hand, China also experiences high levels of corruption and denies its citizens basic human rights, such as the right to freedom of speech. China is also known to be a main harbor of piracy and bribery. Often times workers are exploited. The country also has been known to have extremely lax product safety and product liability laws, which can affect the quality and safety of a product produced in China. Two questions arise from this, first, what can firms do to protect themselves from bribery and piracy of their good and services and, to what extent do they have a moral obligation to adhere to their home countries laws regarding bribery, piracy and product safety and product liability laws?

Firms can do a number of things to protect their businesses from potential risks of a foreign market. Any market a firm enters that has a different political economy than their own is going to pose risks because the laws of the land and business practices are different. The challenge is to understand the differences, respect the differences and build relationships so the differences don’t impede on the real task at hand. We will use China as an example, because the country poses great opportunity in outsourcing and foreign direct investment, however with that opportunity comes a whole set of challenges; politically and legally. Since China entered the World Trade Organization in 2001, it has quickly ascended as one of the world’s top manufacturing hubs, it has an immense population offering firms a vast potential market ; thus making it a prime destination for not only outsourcing and investment but for generating more business transactions as well.

 Entering the Chinese market, however, is a difficult task to a westerner. Our cultures are different in almost every aspect from the way we live to the way we conduct business. Politically, westerners face the challenge of red tape, The collection or sequence of forms and procedures required to gain bureaucratic approval for something, especially when oppressively complex and time-consuming. To overcome this challenge westerners must understand a term the Chinese use in their business practice called, “guanxiwang.” Guanxiwang is a term that stresses business relationships should be focused on long term mutual benefit, rather than short term individual gain. While American culture promotes transparency and contractual obligations, social status and relationships are more important to the Chinese people.

 Perhaps the biggest challenge a firm faces in the Chinese market is the different legal system. While property rights and intellectual property are protected in most western nations through patents, trademarks and copyrights and strict enforcement of laws when these protections are violated, Chinese law is quite the opposite. No doubt, this is most likely the biggest threat to businesses entering the Chinese market. Even though the government has been attempting certain reforms and denouncing piracy, businesses are still at risk for having their property stolen by counterfeiters. In China, everything from pharmaceuticals drugs to software is stolen and illegally sold in the Chinese market and abroad. This is not only a financial burden, but could potentially be catastrophic to the consumer it reaches.  Another risk is that, Chinese law is ambiguous, leaving room for Chinese lawyers to manipulate their laws and take advantage of western businesspersons.  To overcome this challenge, it is important to have a Chinese mediator. The Chinese do not trust “outsiders,” and can be to some degree, racist; however by having Chinese natives on a firm’s team can help deter being taken advantage of by lawyers and counterfeiters. Referring back to guanxiwang, it stresses the importance of how building strong relationships with the Chinese people can either destroy or build a business. Often times a firm will hire a manager who is Chinese, show them business strategies that they would like to implement and have the Chinese person train Chinese workers. In addition to protecting business by holding a reputable social status and hiring Chinese natives, a firm can reduce its risk by auditing every aspect of the business both internally and externally, and by registering intellectual property with Chinese officials before entering the Chinese market. Being aware of these threats and by taking preemptive action can greatly reduce the potential risk of being shut down by the Chinese government and discourage counterfeiting.  

While a firm must protect itself from being taken advantage of by the Chinese, in contrast a firm can also take advantage of the lax laws of product safety and exploit cheap labor. To what extent does a firm have a moral obligation to ensure the safety of their products being produced in a foreign market and to what extent should they be protecting the workers manufacturing these products? This has often been debated, and there is no clear solution. However, there is good reason to follow the rules of one’s home country. While cutting corners may benefit and increase a firm’s revenue in the short term, in the long term quality is compromised. When quality is compromised it opens a Pandora’s Box of consumer complaints and potentially costly lawsuits. Certainly, Chinese law allows for firms to cut corners, but it isn’t always in the best interest of the company.

Another loop hole that Western companies can take advantage of is the exploitation of Chinese workers. The most recent report has come from Samsung, where gruesome working conditions, verbal and physical abuse of workers and even child labor is prevalent in their factories. Wal-Mart, an American brand, made headlines in 2006 when it was revealed that women were denied maternity leave, workers were overworked at about fourteen hours a day and severely underpaid, by underpaid we are talking 22% less than the 41 cent per hour minimum wage rate, earning a mere 23 cents per hour. While Wal-Mart was ridiculed by the press to audit their business practices, the implications for the violation were not nearly as severe as the implications the violation had on the individual worker. When a consumer reviews this information, they are often disgusted and a company’s reputation comes into question. I am sure I am not the only one who does not shop at Wal-Mart for this reason. While, no legal implications may arise, I do wonder how Sam Walden sleeps at night in his cozy mansion knowingly exploiting his workers abroad. His brand may offer the cheapest prices, but these prices come with a very high humane cost.

We can conclude that globalization has offered extreme opportunity coupled with extreme risks. These risks need to be assessed before entering a particular market. When these risks are assessed and responded to properly and business relationships are formed with the natives of a particular country, the it is more likely to thrive and ultimately succeed as an international or multinational business. When the risks are overlooked, it can and will be catastrophic to the company, its workers and consumers. Thus, conducting business in a foreign country calls for an open mind, an appreciation and understanding of another culture and ultimately mutual respect, so that our similarities and goals outweigh our differences. 

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