Risk management is a critical aspect of international business activities, as different countries present varying degrees of political, economic and social risks. Political risks revolve around security and government stability, while economic risks include inflation and the competitiveness profile of foreign governments. Health and educational standards and cultural diversity present social risks. You can mitigate these risks by entering joint venture agreements in international markets.
The Joint Venture Structure
Joint ventures, or JVs, are strategic business-to-business or business-to-government partnership agreements that allow two or more independent parties to collaborate in the pursuit of common interests. JV agreements essentially provide platforms for sharing the benefits and challenges of pursuing risky, capital intensive or rare business opportunities. The strategy is widely used when expanding into new markets, introducing new products and pursuing joint initiatives such as research and development.
Mitigating Political Risks
Tariff barriers, unstable tax regimes, license denials and unfavorable government policies remain some of the major political threats to international business. Some governments pursue policies that require foreign companies to cede significant shareholding stakes to state agencies and local populations. For example, some African countries, such as Zimbabwe, are taking over foreign-owned investments through state-driven indigenization programs. Investors are deregistered and lose operating licenses when they fail to comply with the indigenization requirements. JVs enable you to strike deals with local businesses in your host countries to avoid such state-sponsored shareholding and licensing restrictions.
Managing Economic Risks
JVs can cushion your business from fluctuating rates of economic growth in host countries that otherwise might destabilize your sales volumes. Factors such as rising interest rates and inflation -- that is, rising prices of products -- increase the cost of raw materials and reduce profits. Moreover, capital-intensive industries are characterized by significant barriers to entry, especially when they're launching operations in international markets. For example, setting up a water bottling business in a foreign country would require heavy investments in expensive machinery, equipment, operational technology and personnel. Worse still, you may incur these expenses amid the risk of dismal sales performance and losses once your operations get running. It would be wiser to enter a JV with a company that already has production infrastructure in place to maximize efficiency and minimize risks.
Overcoming Social Risks
Culture shock among employees is one of the risks businesses experience when they establish new operations in foreign markets. Although you can train your employees to adjust to a new cultural environment, it would be more convenient to enter a JV with another company in your chosen foreign destination. The partner company has a work force that understands the cultural dynamics on the ground. Differences of religion, national languages, health-care systems and education standards are the other challenges that you can minimize through JV agreements.
Paul Cole-Ingait is a professional accountant and financial advisor. He has been working as a senior accountant for leading multinational firms in Europe and Asia since 2007. Cole-Ingait holds a Bachelor of Science Degree in accounting and finance and Master of Business Administration degree from the University of Birmingham.