How to Do Business in Developing Countries – Two Approaches

Editor’s note: “International Business Corner” is a weekly column written by Joan Keston and providing information for people involved in or considering international operations. Keston is an international business consultant. Over the next several months she will be writing about important issues that international businesses face as they compete in the 21st century global business environment. This article address the various forms of doing business in foreign countries with some incites for developing countries.

RALEIGH — Business in foreign countries can be done either in a direct or indirect manner.

Direct Approach: The American company would form a strategic alliance with a foreign entity or become a 100% owner of a foreign subsidiary.

The strategic alliance could be in some form of a partnership or division of ownership of a foreign entity with the American company owning less than 100% of that entity. The determination of the percentage of American ownership is sometimes directly controlled by foreign regulatory prohibition, or by beneficial treatment available to entities with a certain percentage of foreign ownership.

Indirect Approach: The American company would enter into a contractual relationship with a foreign business or person(s). The role of the foreign entity or person could be one of the following: representative, distributor, agent, support provider.

The most difficult issue in this relationship is exclusivity. The American company will be reluctant to enter into an exclusive relationship with an entity over which it has no control or which has no proven track record of performance. On the other hand the foreign entity will be reluctant to invest time and resources without the assurance that it will reap the benefits of its efforts. Getting the foreign entity to maintain focus on your company’s products and services is a major challenge.

An important consideration here is the necessity of providing adequate support for your products in the foreign country, even in the indirect approach.

Which Way, Direct or Indirect?

In order to determine how to do business in a foreign country, you must conduct a costs / benefits analysis. Following are some factors that are considered in that analysis:

Direct

Benefits:

• greater growth opportunities
• higher profit potential
• greater market penetration
• greater control
• cultural understanding

Costs:

• higher up-front costs
• fiscal and legal costs
• management issues
• higher risk
• complicated exit
• greater financial commitment
• repatriation of funds

Indirect

Benefits:

• limited investment
• less risk
• quick entry
• easy exit

Costs:

• limited growth opportunity
• lower profit potential
• limited market penetration
• no control
• branding
• collectibles & receivables
• restrictions
• tariffs

Developing Country Considerations

Although some if not most of these factors are present in all international transactions, they take on a different and more intense perspective in developing countries. The direct presence is often very important in developing countries.

Historically due to colonial exploitation, developing countries value the commitment, investment and contribution to the local economy that a foreign company will make by establishing some aspect of their business in that country.
Since developing countries are extremely relationship-based, the direct presence will help enormously in building essential relationships. In addition by establishing a presence, that entity can assist in the surveillance and enforcement of legal protections for its business such as in the area of Intellectual Property.

For several reasons, in a developing country the eventual costs of an indirect approach might far outweigh the benefits, making the direct approach less costly in the long-run.

About the author: Joan Keston is the managing principal of Keston & Associates, Ltd., an international business consulting firm located in Raleigh, N.C., and a partner at Paladin and Associates, Inc. She has 25 years of experience with mature as well as entrepreneurial companies, domestically and internationally, coupled with an executive managerial and legal background. Her firm facilitates international business transactions, and assists companies establish, grow and integrate their international operations. She can be reached at (919) 881-7764 and jkeston@kestonassociates.com.