Generalisations, impatience and lack of communication are the most common mistakes made when investing in a foreign country, in what can be the difference between a successful overseas venture and a costly failure. Investment Monitor assesses the biggest pitfalls to avoid in the world of foreign direct investment (FDI).
1. Not considering why you need to expand internationally
A common logic goes that a successful company must want to expand abroad, but why? A frequent misstep by companies is walking blindly into international expansion because it is ‘the done thing’ without fully assessing what the reasons and motivations are behind such a move, according to Douglas van den Berghe, an expert on FDI.
Globalisation was seen as a recipe for success during the 1990s and early 2000s, he adds, and companies were flocking to overseas locations without thinking of why they were doing this.
“FDI is not a necessity, and shouldn’t be an obsession,” says Van den Berghe, going on to explain that in this time it was common for small and mid-sized companies to point at saturation in their domestic market as a reason to set up shop abroad. The question to pose in such cases, he adds, is whether the market is actually saturated or whether it is that the products and services offered by the company are not good enough to reach a wider domestic market.
FDI is not a necessity, and shouldn’t be an obsession. Douglas van den Berghe, FDI expert
Van den Berghe stresses that it is important to fully assess why FDI is considered a solution to a business challenge. “FDI need not be a necessity when you operate in a big market such as the US, China, Nigeria, Iran or Saudi Arabia,” he says. “You have a huge consumer market, and you can be very profitable [on a domestic level]. This is the case in Europe too, where you have a huge domestic market. Going abroad is not a necessity to be successful.”
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2. You can’t rush FDI
FDI projects often need time, and results do not come overnight, points out Van den Berghe. Managing expectations and setting realistic targets is key.
Daniel Nicholls, managing director of consultancy Destination Strategies, explains that impatience is a mistake often made on both sides of an investment, as governments and host locations can be in a hurry to meet their own targets or to land a deal.
Van den Berghe explains that it is important to manage expectations and take into consideration long time frames that often transcend political cycles.
In the case of large FDI projects, it is possible that government bodies will try to speed up the process, because if the project lands it will be politically advantageous for them. Van den Berghe advises that a company should take its time and make sure that all the bases required are covered.
3. Not communicating with IPAs or local authorities
Eschewing the services of investment promotion agencies (IPAs) is another avoidable mistake that is easy for foreign investors to avoid, says Riccardo Crescenci, professor of economic geography at the London School of Economics. “Sometimes IPAs are seen as [akin to] advertisement agencies or like brokers, but they play a very important role in building the ecosystem for the investment,” he adds.
An avoidance of IPAs and local authorities is particularly prevalent in developed countries where data is easily accessible and there is no obligation to contact such bodies, according to Karim Lamaaizi, an FDI and economic development specialist.
Sometimes IPAs are seen as [akin to] advertisement agencies or like brokers, but they play a very important role in building the ecosystem for the investment. Riccardo Crescenci, London School of Economics
He says: “While consultants or law firms can bring insights on the strategic or legal/tax aspects of the incorporation process, IPAs may provide investment facilitation services that can be critical: presenting alternative locations, facilitating or accelerating procedures through fast-tracks, providing strategic information on the location, introducing a company to key contacts, and so on.”
IPAs, especially on a more local level, and when they work in conjunction with local authorities, can be a powerful ingredient in the recipe for FDI success.
4. Not considering developing economies for high-added-value activities
When it comes to FDI and site selection, overlooking developing economies for projects that require a highly educated workforce, such as in research and development, can be a mistake, according to Lamaaizi.
“Some developing countries have significantly increased their higher education offer and the expertise of their training programmes during the past decade,” he says. “However, some international investors still may not perceive developing economies as relevant or competitive locations for research activities.
“Yet, developing economies are able to offer highly trained and specialised talents. These locations are also attractive for highly qualified workers coming from developed countries, willing to acquire work experience abroad and looking for new challenges. Developing economies may also offer a robust and safe legal system that effectively protects intellectual property and technology ownership.”
5. Not analysing sub-national differences
It is a common mistake to view a country as one homogenous mass with no discernible regional differences, says Crescenzi.
“This reflects the fact that business schools mostly train people to think about countries as a whole, not paying enough attention to internal erosion and how conditions might be very different across regions, or even cities, in the same country,” he adds, explaining that although an investor may think of a country as being abundant in terms of human capital, some areas may be less desirable than others, meaning that the country’s citizens will be unwilling to move to certain regions.
FDI is a complex venture and these are some common examples of the many things that can upend an FDI project. Each is an avoidable mistake, however, and with patience, local knowledge, good communications with an IPA and an open mindset as to where an investor wants to invest and why, these complications can be minimised.