The Asia-Pacific region has the potential to help increase the fortunes of foreign companies due to high economic growth rates of over 6% in most of the region’s markets. As a result, there’s been an influx of activity by foreign companies, coupled with trade and investment liberalization. Before foreign companies decide to enter the market, however, it’s important to identify why local Asia-Pacific economies matter to your business via market research and to determine how much investment in time and resources you’ll need to establish a presence. Identifying hurdles that exist in each market is also vital before entry. Here’s an overview of the six challenges foreign companies face in Asia and what your company should do about them.
Light Financial Regulation and Enforcement
Asia-Pacific region economies in some cases have less financial regulation than economies in the West, and therefore present business practice uncertainty and legal compliance risks for foreign companies – particularly for American companies that must comply with the Foreign Corrupt Practices Act (FCPA).
Moreover, Asia’s wealth is highly concentrated which fosters a more friendly climate for domestic businesses, resulting in corruption and opaque decision-making systems in some cases. Foreign companies, therefore, are rendered less competitive in this climate due to lack of insider status.
What to do about it
Foreign companies should secure localized legal counsel for each Asia-Pacific region economy where they plan to operate. American companies, in particular, should ensure they are fully compliant with FCPA as under the table transactions are more common than not in certain countries in the region. Some of these things involve “gifts” which is traditional in Asia but can be construed as a bribe instead. Clear guidelines and training are important (e.g. maximum gift value is US$25).
Currency Rate Fluctuation
There is no single regulator of Asia-Pacific region currency trading. Hence, Asian nations can maintain low rates of exchange in order to promote exports (which often is a complaint by Western economies). Foreign companies must work within local currencies and complex regulatory environments, creating further challenges to growth and profitability.
What to do about it
Western companies should secure local tax, management consulting, and governmental relations counsel capable of advising on how best to navigate local currency and regulatory environments. A lot of the currencies are capital controlled or restricted (e.g. Malaysia, China, Taiwan), so it’s important to not apply a Western approach to currency in certain countries in Asia. Some countries transact in US$ more often than not.
Varying Legal Systems
Despite recent liberalization of several Asia-Pacific region economies, many still place significant restrictions on the operations of foreign companies. Among the challenges include compromises of intellectual property and proprietary technology rights of foreign companies. Local shareholding requirements are common. This environment can create instability for foreign companies who can face thriving counterfeit markets in local Asian economies. Some questions also remain in some jurisdictions about the impartiality of local judiciaries to set and maintain legal precedent, which protects intellectual property and proprietary technology.
What to do about it
Western companies should secure localized legal counsel in the region attuned to all legal issues and opportunities, which they may face in each jurisdiction where they plan to operate. It cannot be underemphasized that no two jurisdictions in Asia are alike. What may be the legal landscape in China, for example, will not be reflective of those in the ASEAN region, Japan, South Korea, or elsewhere. A bit of professional skepticism is helpful.
Unique Business Culture
The Asia-Pacific region possesses unique business cultures distinct from that in the West. Asian business cultures, to varying degrees, focus on hierarchical structures and group dynamics over individual autonomy. Gender applies as well in certain places. Asian companies benefit from a preference for local talent and protectionism of local industries and business practices. Governments in Asia underpin these practices with policies favorable to local culture and business, which is often detrimental to Western companies.
What to do about it
Foreign companies must adopt many local practices in order to survive and thrive in Asia. This usually requires localizing human resources practices as well as corporate strategy that can anticipate and ameliorate the impact of local regulatory environments favorable to incumbent businesses. Find a few foreigners from your country that lives in the country you’re interested in and ask the real situation from their experiences rather than what is told to you.
Increased Local Competition
Amid the dramatic growth in most of the Asia-Pacific region’s economies and a growing middle class in China and southeast Asia, local businesses now have more capital and more access to sophisticated advisory services to help them compete against well-healed Western businesses. Contrary to what many in the West might presume, much innovation is occurring in Asia.
What to do about it
Western businesses, therefore, should anticipate more sophisticated competition and carefully analyze local competitive environments before entering the market. Some foreign companies may also be disadvantaged by long-term planning cycles, as local Asian competitors often take less time to bring products to market. Finding advisors that are supporting local industry in your space will give you insights on how to hone your strategy to compete.
Local Political Tensions
Relationships between neighboring Asian countries can negatively impact foreign companies doing business in the region. For example, smaller regional economies with a favorable trade and investment relationship with China must balance this with a desire for closer ties with Western countries.
Amid Western competition with China and the ascension of ASEAN-region economies in southeast Asia, Western companies must navigate this environment with careful planning and a strategic approach to risk and management.
What to do about it
Foreign companies should secure governmental relations and public affairs counsel in order to consistently monitor not only local political, economic and social developments, but also their own national governments approach to each country in the Asia-Pacific region to help guide their decision-making. Start by visiting governmental offices for foreign investment and ask for support. Their KPIs are to increase FDI so they should be supportive in connecting you to some of the right (but often times useless) people in the government. Being able to say you’re working with the government goes a long way in Asia; where the lines between business and government are often blurred.
Looking Forward
The Asia-Pacific region has become the economic growth engine for the world, presenting much opportunity for foreign businesses. However, any foreign business interested in tapping into this growth must be aware of the often-complex environments they will encounter in each Asia-Pacific region economy and plan accordingly.