Brilliant post over at Paul Denlinger’s China Vortex blog, entitled, “Risk is in the Eye of the Beholder,” on how and why Chinese companies measure risk differently than do Western companies. I have often wondered about this, but without the business background even to know on what I was wondering.
One of the things I have noticed and am forever complaining about is how American companies are so often late in going into emerging market countries. (I have intentionally shifted from talking about Western companies to talking about American companies because the overwhelming bulk of my own personal experiences in this area come from working with American companies.) The high margins American companies expect and their high labor costs are no doubt factors, but I also wonder if it is not just plain and simple risk aversion based on an unwillingness to risk jeopardizing that which has already been achieved. All I know is that I have worked with an untold number of companies over the years that have come to the brink of going into an emerging market country (including China), but then backed down at the last minute because of some (often very small) risk that would not be present stateside.
So many times when American companies have been unwilling to go in, companies from other countries do go in and succeed. Then, at that point, the American company begins looking anew at going forward. Reminds me of the passing game on my 10 year old daughter’s basketball team where the kids so often see the open girl but fail to pass it to her until she is completely covered. The problem with waiting until a country “stabilizes” or becomes “low-risk” is that so often by the time it has done so, it is already too late for you to make your mark. I see this happening in China’s wine industry, where the French and Australian wineries are already establishing their distribution networks and their reputations while American wineries are, for the most part, still dithering.
Am I, of the inherently risk averse lawyer class, way off base here in criticizing American companies for an unwillingness to assume developing country risk? How do American companies compare with those from other Western nations? How does economics explain all this and is American company behavior rational? Conversely, who am I to complain when it is this very same aversion to risk that causes American companies to hire lawyers and when I am constantly complaining about how Asian companies take so many riskes by not using lawyers here in the United States?

  • Law Office of Todd L. Platek

    Dan, the “wait and see” attitude is not altogether bad. American companies actually keep a close eye on the initial entrants in a given market/industry, and try to gain intelligence from the various aspects of those entrants’ experience in the foreign market.
    A bit like you and me relying on precedent, and looking at court files in similar but unrelated cases to see how lawyers fashioned their litigation documents, then tailoring them and hopefully improving them along the way, and resulting in a marvelous outcome for our side.
    Being the first through the door of a foreign market is no guarantee of success — do it wrong, and the foreign market will associate your name with failure, not with audacious risk-taking or brave perseverence or your mighty name in your home market. In China, the snickering among the locals about the crowded graveyard of foolish, overanxious foreign investors can be deafening.

  • Bill

    May be new startups has nothing to loose and will bet the non-existent farm in new ventures, while companies with something to loose will not take that risk. Limited liability is a wonderful thing in risk management.

  • Duncan

    My impression was rather than the US firms were usually among the first to go into new markets where they have few existing ties to leverage. It’s hard to generalise as each country’s different, but one should remember that the first really successful FDI wave in China was from ethnic Chinese investors (HK, Taiwan and Chinese from ASEAN states) who were often investing in places with which they had kinship ties. The Japanese were the first bold and early non-Chinese investors – and lost millions (if not billions).

  • Dan,
    Perhaps one reason US companies seem unique in how they determine risk is because they face a different scenario from their competitors from “Western” countries. These include factors such as difficulty in getting Chinese customers and employees stateside (stricter visa rules), less trade promotion assistance and, for some, more opportunities at home, in the US market. That’s a superficial list, my main point being that US companies may face different potential risks, potential benefits.
    Re the wine comment, “French and Australian wineries are already establishing their distribution networks and their reputations while American wineries are, for the most part, still dithering.”
    Most wineries team up with distributors such as ASC or Aussino, so they’re not “establishing” networks, at least not in terms of ownership. I think this is good for US wineries, because the system is performance-based and if US industry can do some proper promotion, opportunities yet exist to gain market share.
    Cheers, Boyce

  • Dan, I’ve been hearing your sentiments around the Beijing block lately. Just to throw a little more gasoline on the anti-American-business-practice firestorm:

  • Dempsey

    Dan, Other non-US based companies also often have the explicit financial backing of their home governments, as well as insurance and other risk mitigating programs backed by their home governments. Bi-lateral investment treaties (BITs) between several European countries and China have often been the impetus for the early mover advantage that many European companies hold today, especially in technology, enviro and energy cooperation. Japan is the obvious leader in G2G relations with China, followed by Korea, Germany, and Italy. So perhaps the question you should be asking is why has the US government been so hesitant to engage the emerging market regulators.

  • A lot of American companies do move into emerging markets slowly. That could be attributed to the fact they are often struggling on there own home soil.
    American business has got better at this over the years but the current slow economy does nothing to speed this process up.
    There is also associated risks involved as others posters have mentioned. Such as Google most recently being in the news from moving out of a market and then moving back in. Now, that is bad PR in anyones book. Other corporate giants such as McDonalds are also guilty of the same issues, moving into emerging markets is more difficult than most understand.

  • I agree that American companies normally do not take risk in new markets. But this way they save a lot on account of advertisement of a particular product (which might be new for that market). This job is done by other companies, once the product becomes famous; American companies jump into the market and stand out by providing the best quality.

  • Marky mark

    This is very interesting and true. Chinese companies are different than US companies when it comes to taking risks. I have always ascribed this to the differences in where the funding comes from.