6 Factors to Consider When Evaluating an Investment Destination for Risk Diversification
For many companies, the natural trajectory of growth involves expanding their business footprint overseas. Apart from pursuing these ambitions for growth, companies also choose to invest in overseas expansion as a way to diversify their business risk. This means that investors often turn to foreign destinations to balance out the risk that comes with running a company—more specifically, one that’s beholden to certain market conditions and region-specific regulations. By spreading out their investments across various countries, businesses can reduce their reliance on a single market while mitigating the risks that are beyond their control.
That said, there may be a few factors that companies need to consider before choosing an investment destination. Expanding business presence in any foreign country will be expensive, and the desire to increase profit and diversify risk may backfire if a company isn’t careful about their choice of country or region. If you’re one such enterprise that’s looking into foreign markets for risk diversification, here are six things you need to consider:
Different countries can have vastly different legal systems, and a foreign business must comply with all the laws that a host country will impose. These laws run the gamut from property rights and labor restrictions to intellectual property protection, so it would be wise to check for major regulatory hurdles before establishing your operations.
For this reason, you may want to opt for destinations that have more relaxed laws on foreign ownership and operations. The Philippines, for example, is often considered an attractive investment destination because of its strong government support for foreign investments. The Philippine Economic Zone Authority (PEZA)—an agency created to promote investments in the country—even offers tax incentives for foreign investors doing business in the country along with assistance on registration matters.
If you choose to do business in a PEZA zone such as one of Aboitiz InfraCapital’s economic estates, you could also take advantage of non-fiscal benefits such as visa privileges and simplified import and export procedures. With the Philippine government’s strong enthusiasm for foreign investment, it’s no surprise that the country is considered to be a highly viable destination for projects such as infrastructure development. With the country’s status as an emerging economy and its fast pace of production, there is no shortage of opportunities for private entities seeking to partner with the public sector in the large-scale development of transport, water, and digital infrastructure.
Type of Market
There are three main market types that foreign investments typically fall under. Each of them comes with a range of benefits and varying degrees of risk. Developed markets, for one, are those in highly industrialized and stable economies, making them the least risky markets for diversification. However, they offer less potential for growth compared to emerging and frontier markets.
For the most part, emerging markets have a high potential for investment returns because of their strong economic position. These markets differ from frontier or “next-wave” markets, which are usually smaller and tend to be in regions with restrictions on foreign investments. Both emerging and frontier markets tend to be riskier to invest in, with factors such as political instability being a potential detriment to business. Still, these markets may offer attractive returns along with the higher risk they may pose. It is up to you to determine your business’s risk appetite and to let that reflect in your choice of investment destination.
Financial and Economic Posture
Another factor that investors should be looking at is the economic risk that a country might be embroiled in. These risks include national debt, currency fluctuations, interest rate changes, GDP growth, and inflation rate. Overall, it would be wise for an investor to assess a country’s economic policies and conditions to avoid potential decreases in investment return when attempting to expand operations and diversify risks.
A country’s political landscape has broad implications on the level of risk your portfolio might face. Political events, for instance, might instigate changes in government policies and related matters such as foreign alliances. This, in turn, could cause operational restrictions and potentially impact the profitability of your investment. From insurrection to acts of war, the many forms of political unrest could result in certain markets exacerbating risk rather than preventing it.
Most companies, especially those in the manufacturing industry, rely heavily on a network of suppliers and their efficiency in product and service delivery. When assessing your options for an investment destination, you also need to look at factors pertaining to logistics and operational flow.
For example, does the country have multiple regions and a difficult geography that corresponds to hefty distribution expenses? If so, will you be able to bypass these obstacles, perhaps through government support? These things matter to most businesses, so you also need to make a thorough evaluation of a country if you want to keep logistical risks at bay.
Some enterprises are still left surprised by the vast differences in countries’ cultures, especially between those of Western and Asian countries. Beyond the language barrier, certain cultural aspects could significantly affect international partnerships and work relations between two different nations.
Still, some destinations are more attuned to Western culture, and that may make it easier to run your operations there. The Filipino people, for instance, have strong cultural and historical ties with the United States and are known for their fluency in the English language. On top of that, Filipino society values hospitality and hard work—two cultural traits that most foreign investors find agreeable.
All in all, diversifying your portfolio also entails being able to adapt to other cultures. You may find in your research that some areas might be easier to navigate culturally than others, and that’s a consideration you should make before finalizing your venture.
The Bottom Line: Due Diligence Pays Off
As with any business venture, whether it’s foreign or local, comprehensively assessing the risks will help you stay prepared for any potential obstacles you might face. You may want to seek the advice of experts before bringing your operations to another country so that you’ll know what you’ll be signing up for when diversifying your portfolio.
Of course, you also need to do your due diligence as an investor. In the end, it pays to regularly monitor the economic, cultural, and sociopolitical landscape of your investment destination. This will ultimately help you avoid long-term risks to your business and your overall reputation.