Overseas Risk Management | The Role of Governments

Overseas Risk Management: Read The Map … and Heed It
Marketing abroad can be a very risky pursuit as the legal landscape in some countries is extremely fluid. Laws are sometimes un-codified and even when they are, interpretation can be arbitrary. Governments certainly have the right, and in many cases the duty, to intervene in businesses or trade being conducted by foreign nationals. However, there are some other governmental activities that go beyond the law (or at least blur it) for which the international marketeer must be prepared.

Domestication
Entering a new market with a new product can often perplex local authorities who, not seeing the potential, may initially grant a marketeer carte blanche to operate. Success does attract attention, so it’s not unusual, especially in the emerging markets, for successful foreign companies to suddenly discover that they have a new partner. The partner may know absolutely nothing about your business and may bring nothing in the way of investment. Regardless, the government may insist that as much as 51 percent of the company be put under the control of the new associate or that the associate at least be given veto power over company decisions.

It can be the result of government greed, pressure by competitors who feel you were given a “sweetheart” deal, or sudden xenophobia with accompanying fears of exploitation. Multimillion dollar projects can be forced into renegotiation well after a project has been active, as happened to the Enron hydroelectric project in India; antiforeigner sentiments forced the American company to shut down construction while the deal was restructured to favor local partners. Local governments usually wait until a company is too committed to walk away before using the domestication ploy.

Taxation
Governments of all sizes and economic standings view business as a source of tax revenue. Unlike the tactic of domestication, taxation allows the government to receive a portion of a foreign company’s operation directly, without the sham of a proxy. Some authorities lure foreign businesses with initially low tax rates or “grace periods,” with the full intention that once the company has been committed and is operating successfully, tax rates will soar almost to the point of being confiscatory.

Expropriation
During periods of extreme political stress or due to inordinate levels of greed, governments will take over a foreign company outright. The former motivation still occurs quite regularly in war-torn countries (such as those in eastern Europe or central Africa). The potential is always there for any company operating in foreign territory, war-torn or not, when internal or international political tempers rise. The latter cause for expropriation has rarely been seen since the early 1980s and has been usurped by the somewhat more subtle domestication.

Sponsored Competition
Like domestication, sponsored competition puts a favored local company or person under a government aegis. These “competitors” are given substantial financial and distribution aid in the hope that they’ll unseat the foreign firm that first brought the product to market. Often, these sponsorships are further aided by technology transfers that were mandated by the government as part of allowing the foreign company to operate within its borders. Transfers are handed over directly to local companies that will exploit them without paying fees or royalties.

In a variation on this tactic, local partners have also been known to siphon off funds and materials from a joint venture with a foreign firm, in order to set up a competing company. Local government officials then turn a deaf ear to the complaints or lawsuits brought by the foreigners.

Bribery
Government officials seeking bribes from foreign firms is a worldwide problem. It can take the form of a storefront shakedown by the local police, special “processing fees” by customs officials, or “requests” for campaign donations for incumbent politicians. Bribery in some economies becomes the grease that makes the wheels of commerce turn more easily. Anyone engaged in international marketing must be prepared to deal with both the seemly and unseemly versions of such requests.

Risk Management
In all of the cases stated above, marketeers have to learn how to manage risk. The first step is recognizing potential risk through proper pre-entry research (Chapter 8). Once the level of risk has been determined in a particular market (it exists to some degree in all markets), the best possible preventative is engendering and maintaining good “relations” with the pertinent government officials. Marketeers should realize that realpolitik can become machtpolitik very quickly if a foreign company falls into disfavor with a host government. Risk management is an ongoing process and requires eternal vigilance.

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