>> MIM Speaks
DOING BUSINESS IN A FOREIGN LAND
OCT 12, 1997 -
THE STAR
By Chow Chee Yan
HOW do you become a millionaire in Vietnam?
"Start out as a billionaire," bemoans a French businessman in
Vietnam on the difficulties foreign investors faced in the
bureaucracy-ridden country.
"If you behave like a hammer as a foreign investor in China,
the nail will probably go into your own coffin," complains a
businessman on the need for foreign investors to understand
and address the business cultures of the country.
"I have been to several big banks and all they say is NO. But
if the project is in Kuala Lumpur, then no problem," laments a
Malaysian businessman on the difficulties in seeking external
financing for a property project in Yangon.
What do these businessmen have in common? That doing business
in emerging markets of lesser developed (LDC) and developing
countries (DC) can be fraught with complexity, pitfalls and
uncertainty.
With Malaysian businessmen heeding our Prime Minister's call
to venture abroad, many Malaysian companies have invested or
looking to invest in emerging economies. But investments in
LDC and DC countries are not without its perils. In fact, the
pitfalls and risks are many.
In many instances they are so unique and different from home
and from one country to another that it often leaves even the
experienced businessman bewildered. True, there are some
publicised successes Asia-Pacific Breweries in Vietnam,
Coca-Cola in China for example. But the field is literedwith
casualties, many of which are hushed up and unreported.
Yet for those companies that can meet the challenge and find
ways around the barriers before their competitors, it can be
an extremely rewarding venture.
The next time you plan to invest or already have invested in
LDC and DC countries, whether it be in Vietnam, China, Oman,
India, Zimbabwe, Uganda or Albania, give careful consideration
to the following factors. It may save you millions!
* Political risks
Three Malaysian projects were reported (The Star, Aug 7) to
have incurred losses of RM80mil following the recent political
turmoil in Cambodia. In Albania, Malaysian investments
amounted to RM10mil.
The Investment Guarantee Agreement signed between countries
provides some guarantees but will most likely take years to
recover As Datuk Gishammudin Hussein, International trade and
Industry parliamantary secretary, said: "It is the
responsibility of the investors to bear any risks involved in
thier operations abroad when political or economical
instability occurred."
In countries where political or economic instability is high,
investors should obtain, if possible, the most comprehensive
"business interruptions" insurance and with reputable and
responsible under-writers.
* Culture
The need for foreign managers to understand to local culture
cannot be stressed strongly enough. This will allow managers
to reach correct conclusions and decisions about business with
the locals.
The story is told of an American negotiator found running
naked in the lobby of a Beijing hotel. Weeks earlier, he wired
his HQ that he had managed to secure the desired contract with
the Chinese party, only to discover later that it.was not the
case. This unfortunate event was repeated many times and each
time he wired his HQ.
Saying "no" directly causes loss of face, whereas for the
Chinese saying "no" to the American is usually quite
appropriate. The waiting game proved too much for the American
manager, hence the scene at the lobby.
Learning about the local culture and demonstrating that you
know a little of of the local customs, including the language,
will go a long way for the development of long-term
relationships. Even simple things like bringing a gift along
when you visit government officials can give a significant
first impression in China or Myanmar, for example.
It is important for the foreign managers to appreciate the
importance of culture in their business dealings. Therefore,
select your managers carefully. Look at their personality and
attitude. Of course, a manager who has lived and worked in
these countries is often an advantage.
Another factor is corruption. It is a fact of life and usually
affects many levels of government bodies. Learn in advance how
to deal with it and how to avoid getting caught.
In your negotiation, don't be surprised that the local
counterparts do not have a lawyer. If they have, don't assume
the local lawyers are familiar with your ways of doing
business. One golden rule is not to be intimidated by their
unhappiness that you are using a lawyer.
If you use use English to communication it is best not to
assume that the locals understand you although they appear to
speak or understand English. This applies vice-versa and also
to translators.
* Legal system
The legal systems in most LDC and DC countries are in their
infancy stage. There may well be no commercial code, no body
of law or judicial precedents that are familiar to the more
developed countries. Be prepared for laws and regulations that
are subject to different interpretations by different
government bodies.
In Myanmar or Vietnam, for example, the few people assigned to
implement the legal system may not be trained to decide on
commercial disputes. Arbitration, therefore, should be
provided in all agreements. Procedures to resolve disputes
must be clearly spelt out, including the selection of
arbitrators.
If arbitration is provided for outside the country, make sure
it is enforceable in the country. In many countries, for
example Indonesia and Myanmar, agreements are in the local
language. Make provisions in all cases for the English version
to prevail over the local one if a dispute arises.
* Joint ventures
This is probably the most difficult area of the investment to
co-ordinate successfully. There are more cases of failures
than successes.
Prof Wilfried Vanhonacker's article Entering China: An
Unconventional Approach (Harvard Business Review, March/April
1997), deserves a second reading. He argues that the better
way to enter China is through a wholly-owned foreign-owned
enterprise and not as an equity joint venture as conventional
wisdom suggests.
This equally applies not only to China but also to other LDC
and DC countries. Many investors simply rushed into joint
ventures with local partners with dire consequences. Cultural
differences, miscommunication and mutual suspicion are reasons
for strained relationship as well as a perceived or real
"superior" attitude amongst expatriate staff.
Do not be too quick to sign a joint-venture agreement. Read it
carefully. Consult an experienced lawyer. Otherwise, you may
end up with unfavourable terms.
Realise that in some countries, for example Myanmar and
Vietnam, the local partner contributes very little. He
probably has no expertise, no business knowledge and no money.
His contribution is Usually only a plot of land, and at
inflated value.
When China first opened its doors, many foreign investors
rushed in thinking that the guangxi or connections will help.
Many were disappointed more of a hindrance than help.
Most local partners from excommunist or socialist countries
are ignorant of the ways of the free market. They behave more
like bureaucrats than businessmen.
Before you enter into a joint venture, ask yourself whether
you really need one. If you do, choose your partner carefully.
Make sure the partner is responsible ethically and
financially. In most Middle Eastern countries, local sponsors
are required and most are usually happy with a small
percentage of revenue or a fixed amount as their fee, without
getting involved in the operations. They work very much along
the lines of the "Ali Baba" concept in Malaysia, Indonesia and
Brunei.
* Beware of foreign exchange losses
Even big and established companies can have their profits
severely dented because of foreign exchange losses in foreign
investments. Some wisely hedge against foreign exchange risks.
But currencies of LDC and DC countries cannot be easily
hedged. If it can be done, the cost of hedging is usually
prohibitively high. Emerging economies are often fragile,
interest rates high (over 20%), and the threat of a
depreciating currency is real.
The usual advice is: match your local currency income with
local currency expenditures. Borrow locally, if you can, for
your investments but you will have to contend with high
interest costs. Your accountants and bankers should be able to
advise you on the various types of instruments to help
minimise foreign exchange risks.
A golden rule is not to send in one ringgit more than is
needed to avoid currency risks.
* Dual exchange rates and foreign exchange restrictions
Black market and official currency exchange rates operate side
by side in many of these economies. This can create havoc to
your business if you do not know how to handle them.
In Myanmar, the official exchange rate is 6 kyats to US$1.
The black market rate can be as high as 300 kyats to US$1-
some 50 times more. It may be "illegal" to convert your US
dollars at the black market rate, yet no businessman is stupid
enough to go to the local bank to buy kyats.
To get around this problem many countries officially issue
"Foreign Exchange Certificate" (FEC), where you are issued one
FEC for every US$1.
Book-keeping under a dual exchange rate environment can be an
accountant's nightmare. What exchange rates do you use for
your local books? Be careful too of the tax implications.
To illustrate, suppose you import item X costing US$100 and
sell it for 45,000 kyats in Yangon (equivalent to US$150 at an
exchange rate of 300 kyats), making a 50% margin of US$50. In
the local books you can only recognise the official exchange
rate of 6 kyats. What you have is a sale of 45,000 kyats and
cost of 600 kyats. You make a margin of 44,400 kyats.
You pay 13,320 kyats in tax which is 30% on 44,400 kyats.
After-tax profit is 31,080 kyats. This works out to be
US$103.60 at exchange rate 300 kyats. Thus you only actually
make US$3.60 or 3% because of the tax you have to pay. Of
course, there are creative ways around this and you must plan
them in advance.
Many countries do not allow free countries of income. Take
the above example. You will not be able to easily remit the
US$103.60 out of the country. You may have to buy some local
exportable items (beans, seafood) and sell them
internationally to recover your money.
The above illustrations are but simple examples. In real life,
the issues are more complex. But there are ways around them.
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