As national companies face steep competition in their home countries in recent years, the need to go abroad to build a competitive edge is now on the rise. Some government entities in such countries welcome such decisions of foreign business and often times encourage business to choose their countries by relaxing their tax systems and other attractive measures to lure foreign companies to establish locations in their countries. Many a times, some companies relocate or open branches in emerging markets through means like Turnkey projects, Strategic Alliance, and Joint venture. All these mode of entry simple help business enter a market for the first time to build relationships. However, these methods sometimes provide companies some sort of protection and minimize the potential risk associated with doing business abroad. Over the past two decades, the most thought about of such risk is the “Expropriation Risk”- which simply means the likely hood of a foreign government seizing the assets and resources of a foreign company. With international trade laws and regulations, such risk is not as prominent as it was. Instead it has been replaced by “Policy Risk”- The risk that a government will discriminatory change the laws, regulations, or contracts governing an investment—or will fail to enforce them—in a way that reduces an investor’s financial returns is what we call “policy risk.
According to the Harvard Business Review, although the data on policy risk are less clear-cut than the hard numbers on direct seizures, press mentions of policy risk indicate that it has risen dramatically as seizure risk has fallen. Even though there are business laws and contractual agreements surrounding every business activity, any business that befalls such maneuvers by foreign governments turn to have limited options since the traditional contract laws and mechanisms that applied in their home countries often times does not apply in foreign countries because of the political situations and the less than perfect democratic systems. Therefore, business looking to do business abroad must adopt a strategic risk management capabilities and political-management strategies that limits foreign government entities’ incentive to divert investors’ returns. As your business deliberates on going into emerging markets, you should remember that managing uncertainty will help avoid loses but having a strategic long-term risk mitigating plan would be a source of competitive advantage in addition to a means of avoiding losses.