Expanding operations include several strategic decisions
When executives of multinational enterprise (MNE) decides to expand the operations of their firms into foreign countries in emerging markets, they are faced with several important strategic decisions, including, which operation form to establish adapt i.e. start the operations from scratch (build of facilities) or through acquisitions (buy equity share in an existing foreign entity). They are also faced with whether to do it alone (to establish a wholly owned subsidiary) or to involve a local partner (to establish a subsidiary with shared ownership), in addition to financial, HR, and operations considerations.
As such, supposedly negative discussions are paid rudimentary attention. How would Nordic executives reach if years after expansion and operation in a country, the host government decide to increase taxes on profit by 100%? How would you react if the local authorities in a destination country decide to put a cap on l repatriation of profits? Or raise local requirements?
Collectively, these are called political and regulatory risks. That is, the probability that a host government/authorities will discretionary change laws, regulations, or contracts terms governing an investment or refuse to enforce them in a way that reduces a foreign investor’s returns on that investments. To most executives, these will obviously go against their legitimate expectations.
Emerging markets are characterized by underdeveloped institutions and frequent environmental shifts (Khanna and Palepu, 2014). This brings uncertainties to investments that can have a huge consequence for Nordic companies expanding into these places. Ex-post modifications of the legal framework in force at the time when the investment was made or interference with the investment in response to external pressures such as public opinion leading to (in)direct expropriation of assert from investors.
Risks change over time
The nature of these risk is not static – they change over time. For instance, a recent study by the Wharton School found that although outright expropriation of foreign assets by host countries in emerging markets have largely disappeared (Henisz and Zelner, 2014). As investors interest in developing countries/emerging markets grow, some host governments have learned, that more value can be extracted from foreign enterprises through the subtler instrument of regulatory control rather than outright seizures.
This new risk is the main concern of today’s investors. In this article, I would like to introduce our cherished Nordic clients how are to prepare their investment and maneuver these risks when expanding their businesses overseas.
The good news is that political and regulatory risks can be managed. Almost all (Nordic) governments have been very active in helping investors from managing these risk in emerging markets by signing various International Investments Protection Agreements (IIAs) with most emerging markets governments.
Today, there are 3,000 IIAs in existence around the world. Among the Nordic countries, Finland has the most investment agreements, with 67 agreements in force¹, followed by Sweden with 66 investment agreements in force², see Figure 1.
Investors must be aware that National investment legislations are made voluntarily by national parliaments.
Succeeding in these markets is learning to manage risks
Gilbert Kofi Adarkwah
Henisz, W., & Zelner, B. (2014). The hidden risks in emerging markets. IEEE Engineering Management Review, 42(2), 27-34. http://dx.doi.org/10.1109/ emr.2014.6823807
Khanna, T. and Palepu, K. (2014). Winning in Emerging Markets. Boston: Harvard Business Review Press.
Regjeringen.no. (2018). Norway Common Model Agreement for future investments 2007. [online] Available at:
https://www. regjeringen.no/contentassets/e47326b61f424d4c9c3d470896492623/draftmodel-agreement-english. pdf [Accessed 1 Feb. 2018].
UNCTAD - Bilateral Investment Treaties. (2018). Investmentpolicyhub.unctad.org. Retrieved 25 January 2018, from Grabowski, Alex (2014) "The Definition of Investment under the ICSID Convention: A Defense of Salini," Chicago Journal of International Law: Vol. 15: No. 1, Article 13.
Available at: http://chicagounbound. uchicago.edu/cjil/vol15/ iss1/13