How Do I Evaluate Foreign Investment Risk?

Overseas investment risk refers to the risks and challenges faced by multinational companies in making overseas investments.

Overseas investment risk

Right!

Overseas investment risk refers to the risks and challenges faced by multinational companies in making overseas investments.

Chinese name

Overseas investment risk

Object

Investment decision

Corresponding

enterprise

Nature

Lack of an overseas investment environment

Investment decision-making risk Due to the lack of effective risk assessment of overseas investment environment and investment projects, foreign investment may be blind, which may lead to risks. At present, there is no specialized overseas investment risk assessment agency in China to help overseas investment companies analyze and evaluate the feasibility of overseas investment projects. It is difficult for companies to correctly judge whether a project is abroad due to factors such as information channels, self-evaluation or judgment capabilities. Whether it has development prospects. Due to the inadequate and unscientific preliminary investigation of investment projects by some overseas investment enterprises, operating losses after project investment have been caused.

Operational management risks In recent years, although transnational operations of Chinese enterprises have made some progress, they are still lagging behind compared with developed countries. According to incomplete statistics, 55% of China's overseas enterprises are profitable, most of which are non-productive enterprises; balance of payments is 28%; losses are 17%, and most of them are productive enterprises. Chinese enterprises lack experience in transnational operations and management, and the management system is not yet adapted to the needs of international operations, which often makes enterprises encounter unexpected risks in the process of "going global", which is even more obvious in state-owned enterprises.

From the perspective of the management system, some foreign-owned enterprises have not yet established a complete legal person governance mechanism, the owner's representative supervision is not in place, and there is a serious "internal person control" phenomenon. In the implementation of transnational business decision-making, there is a lack of risk awareness and risk control mechanisms. In terms of investment projects, environmental analysis, location selection, partner selection, and formulation and implementation of business strategies, there is a lack of sufficient scientific evidence, which often results in major decisions. Mistakes have led to severe erosion of state-owned assets. The "Aviation" incident is the best example.

From the perspective of training management talents, Chinese enterprises also lack a set of human resource management mechanisms that meet the needs of international market competition. Many companies engaged in transnational operations have not yet established a modern concept of human capital, and their knowledge of human resource management still remains at the level of personnel system management, resulting in the expatriate's professional competence and enthusiasm are not high, and it is far from adapting to the international The need for market competition.

Decentralized operation and vicious competition risks The decentralized operation of overseas enterprises established in China is serious, making enterprises not only unable to achieve resource sharing and complementarity in terms of capital, technology, market, information, and production, but it will even cause increasingly serious internal issues. Excessive competition. This shows the lack of linkage and cooperation between the investment mothers of these enterprises.

On the other hand, under the current trend of economic globalization, multinational enterprises have adopted mergers or established strategic alliances as a means of development to achieve economies of scale, and Chinese enterprises have clearly not kept up with this trend of transnational operations. As China's main body engaged in international operations is mainly state-owned enterprises, a fragmented management system still exists, making it difficult for overseas state-owned enterprise branches to conduct effective cooperation and information even if they have similarities and intersections in their operations. communicate with.

There is a large gap between the state-owned enterprise's own mechanism and the prevailing system of international multinational companies, which restricts and constrains the operating vitality and business philosophy of overseas enterprises, making it difficult for overseas Chinese-funded enterprises to merge and merge in various ways like the subsidiaries of multinational companies Alliance operation. In the competition of the same project, Chinese enterprises often compete with each other for price reduction and vicious competition. It is difficult to establish a strategic alliance, which also further increases the risks of transnational operations of the enterprise from the inside.

Due to the complexity of the international operating environment and management, China's overseas investment faces many risks. According to different research perspectives, its main risks are represented by corporate overseas financing risks. Investment decision risk. Government supervision and service risk, overseas investment protection risk. Investment environment risks, etc. From the government perspective, there are mainly regulatory and service risks. Investment protection risk; from the perspective of the country where the investment is located, it is mainly investment environment risk; from the perspective of the enterprise, it is mainly financing risk and investment decision risk. The degree of risk is restricted by the environment of the country where the investment is located and the strength of government supervision, service, and protection. The specific analysis is as follows:

1. Overseas financing risks of enterprises

The shortage of funds in Chinese enterprises' overseas investment is generally caused by the following reasons:

First, the financing channels in the daily operations of overseas investment enterprises are mainly local bank financing and global credit granting. There are three ways of receivables and discounts. Compared with domestic financing channels, the financing channels for overseas investment are relatively narrow;

The second is that companies have insufficient research and attention on the international financing environment, are not familiar with the international financing environment, and have insufficient ability to use international financing;

Third, China's support for overseas investment enterprises is insufficient. For example, the imperfect domestic financial market cannot form a financing mechanism for transfusion of overseas companies, and the government has not established a sound financing support and facilitation service system.

2. Investment decision risk

Decision errors are the biggest mistakes of an enterprise. In overseas investment activities, the correctness of the decision often determines whether the company's goals can be achieved. The risks of China's overseas investment decision are mainly manifested in:

(1) Blind decision-making, did not establish the necessary decision-making risk analysis and control procedures. The decision-making process is usually to formulate multiple alternatives based on the determined goals, then evaluate the risks and benefits of each option, and select a decision based on the results of the risk assessment, otherwise it is difficult to ensure the correctness and scientificity of the decision.

(2) The decision-making process is out of control, and there is no supervision and control procedure in the matter. Many overseas-invested companies have not established supporting procedures for in-process supervision and control, cannot guarantee that decisions are correctly implemented in accordance with pre-plans and plans, and when the decision-making environment and specific circumstances of the enterprise change, there are no timely remedial measures, which further worsens investment risks. .

3. Government supervision and service risk

From a management perspective, due to problems such as long-term management, complicated approval procedures, lagging government management systems, and unclear overall strategic planning of overseas investment in China, companies face difficulties in going out and blindly going out. Risks From the perspective of supervision, the weakening of government supervision makes overseas investment face the loss of state-owned assets. Risks of poor bank credit control and lack of prior supervision mechanism;

From the perspective of government services, since the Chinese government's macro-control of overseas investment is basically a project approval system, it supervises post-investment supervision. Tracking and statistics. Management services such as analysis are weak and lack guidance for overseas Chinese-funded enterprises. Public services such as information consulting have caused many overseas investment companies to face inadequate understanding of the laws, regulations, foreign exchange policies, tax policies, and environmental protection policies of the countries where they invest, and to understand their changes in a timely manner. insufficient. Asymmetry risk.

4. Overseas investment protection risks

In addition to the normal production and operation risks encountered by domestic investment, enterprises also face political risks from the host country. If a country lacks an overseas investment protection system, then in addition to the commercial risks, foreign-invested enterprises must also bear political risks. On the one hand, due to China s lack of overall strategy and industry guidance for overseas investment, Chinese enterprises have a certain degree of blindness and disorder when investing abroad; on the other hand, due to the absence of a reasonable investment protection agreement, enterprises also suffer due to host country political risks The loss of overseas investment cannot be compensated, which increases the security concerns of enterprises' overseas investment.

5. Investment environment risk

This is the risk to enterprises due to changes in the environment of the country where the investment is made. It includes political risks, such as the instability of the national political situation and frequent regime changes. It is the largest and most unexpected risk of overseas investment. Are risks that the operator cannot control; economic risks such as exchange rate risks, credit risks of partner companies, and risks of rapid changes in the economic situation; legal risks such as the protection of intellectual property rights and technical standard barriers, etc., are due to external laws of the enterprise Changes in the environment, or risks arising from the failure of the company and the parties concerned to effectively exercise their powers and perform their obligations in accordance with legal provisions or contractual agreements; natural risks such as earthquakes, tsunamis, floods, freezing disasters, and other irresistible human-induced damage risk.

Prevention of overseas investment system risks

Overseas companies cannot determine the political and economic situation of the country where the investment is made. Therefore, systemic risks can only be avoided, and their adverse effects can be minimized:

1. Make a good assessment of the political and economic situation of the country where the investment is made, and pay attention to the professional strength of large international investment consulting companies

Before investing, enterprises should conduct a comprehensive assessment of the economic development status, political stability, and preferential policies for foreign investment of the country where the investment is made through field inspections and expert consultations. After the establishment of an overseas enterprise, overseas managers should also be required to provide local Intelligence on various policy trends and analysis by specialized agencies. The evaluation work is highly specialized. Due to the limited strength of general enterprises, we must pay attention to the expertise of intermediary agencies such as consulting companies. With the development of foreign multinational corporations, a large number of large consulting companies dedicated to overseas investment have emerged. For example, the largest Hamilton consulting company in the United States was founded in 1914 and has 1,500 consultants, including more than 800 experienced experts. People, their services have significantly improved the efficiency of customers' overseas investments. As there are currently no mature overseas investment consulting companies in China, for large overseas investment projects, although the consulting costs are relatively expensive, in order to reduce investment risks, it is still necessary to entrust a large foreign investment consulting company to conduct an evaluation.

2. Change investment methods, implement localization strategies for overseas companies, and strengthen public relations strategies for the countries where the investments are made

Implement a "win-win" strategy in overseas investment. As far as possible, use the form of joint venture in the investment method, in order to obtain a certain domestic enterprise status, so that the joint venture partners share a part of the investment risk; investments in sensitive areas such as resource development can be invested in the form of debts according to the situation in the country, and gains are obtained through product sharing to avoid direct The risk of nationalization brought by obtaining the controlling right; if the investment subject has the brand, technology, and management advantages, it can also take the form of franchising like McDonald's, so as to save money, avoid direct investment risks, and occupy the market. Adopting localization strategies in the operation of overseas companies, on the one hand, more local employees are hired, and on the other hand, localization of procurement is achieved as much as possible. Overseas companies must pay attention to shaping their good "public image" in the local area, have a clear public relations strategy for the investing country, and actively integrate their development into the economic development of the investing country.

3.Reduce losses from system risks through insurance

Enterprises can reduce the risk of overseas investment by joining insurance and other methods. For example, the World Bank established a multilateral investment insurance agency in 1988. It, together with multilateral treaties between countries, provides treaty guarantees for systemic risks such as nationalization in foreign direct investment. When a multinational company becomes a member of the convention or institution, some of the systemic risks in overseas investment can be controlled to a certain extent, and when losses occur, international compensation can be applied to provide international guarantees for the company's overseas investment.

Prevention of Overseas Investment and Operational Risks

Operating risks stem from corporate decision-making errors and ineffective management. They may occur in any department of an overseas enterprise and also run through the entire process of overseas investment. Preventing business risks requires attention to the following issues:

1. Overseas investment should focus on strengthening the core capabilities of investment entities

Core competence refers to the organic integration of the multi-faceted skills, complementary assets, and operating mechanisms of a company with competitive advantages in a particular operation. It is an organic organization of different technology systems and management systems, and a knowledge system that recognizes and provides competitive advantages. The strength of core capabilities is the primary constraint on overseas investment, and it is also an important indicator that determines the ability of foreign companies to resist operating risks.

Regardless of whether a new company is set up overseas or overseas equity is acquired directly, the key to the success of overseas investment lies in whether the core competence of the investment entity is exerted and enhanced. If it is just blind mergers and acquisitions and diversification, it often leads to business failure. At present, many domestic companies only pay attention to the external effects of overseas investment, such as the concentration of capital and the expansion of scale, but they rarely analyze the essence of core competencies, especially some companies with financial strength but not competitive advantages. Overseas investment is equivalent to a slight expansion of the siege city, which leads to excessive bids when acquiring overseas equity, and also affects the actual income of overseas investment.

2. Implement internal diagnostic system to improve the governance and management structure of overseas enterprises

Overseas operations without a sound competition mechanism and incentive and restraint mechanisms have a significantly higher risk than domestic operations. Therefore, the formation of a sound governance structure is a prerequisite for overseas enterprises to deal with operational risks.

First of all, by strengthening the financial supervision of overseas companies to improve their internal control mechanisms, domestic investment units currently assign financial and accounting personnel to foreign enterprises, especially experienced financial and accounting supervisors. The internal accounting management and accounting systems of many overseas companies are not complete, and the problem of "multiple books" is serious. Some overseas branches even save money and even accountants and cashiers. Such irregular financial systems often become corrupt and fraudsters. The available loopholes caused a large loss of state-owned assets. This kind of situation requires that investment entities cannot leave their overseas companies alone. They must have a special audit department to conduct regular and irregular audits of overseas subsidiaries. In particular, they must prevent the use of state-owned assets and foreign exchange funds for overseas speculative speculation.

Secondly, when the external governance mechanism of the country where the overseas company invests is sound, the parent company can use the strong supervision role of the external governance environment to arrange internal governance to achieve effective governance and control of overseas companies. For example, many multinational companies are on the board of overseas companies. Introduce the positions of local creditor banks and independent directors to strengthen supervision of overseas subsidiaries. Finally, the parent company should take the internal diagnostic system as an important means to improve the governance structure of overseas enterprises, set up specialized agencies, conduct regular internal assessments of the operation and management of overseas enterprises, and propose corresponding improvements.

3. Strengthen the management of overseas enterprises while maintaining the flexibility of their operations

The investment entity should clarify the authority of the multinational company's internal risk decision-making, on the one hand, to prevent completely allowing overseas subsidiaries to make their own investment decisions, resulting in excessive authority of the subsidiary, and the investment to run out of control; All must be reported to the company's headquarters for approval, affecting the normal operations of overseas companies.

What companies should do

1. Correct assessment of the political and economic situation of the country where the investment is made. Before investing, an enterprise should make a comprehensive assessment of the economic development status, political stability, and preferential policies of foreign investment in the country where the investment is made. After the establishment of an overseas enterprise, overseas managers should also be required to provide timely information on various local policy trends and be analyzed by specialized agencies. The evaluation work is highly specialized. If the strength of the company is limited, it is necessary to pay attention to the role of intermediary agencies such as consulting companies.

2. Improve corporate governance structure. Enterprises need to strengthen and improve corporate governance institutions, strengthen internal incentive and restraint mechanisms, actively cultivate talents, and improve talent management. The development of international operation and management requires not only professionals in finance, law, finance, technology, marketing, etc., but also managers with strategic thinking and familiarity with modern enterprise management. At present, China is relatively short of talents who are familiar with international rules and host country market laws. We can make up for the lack of self-cultivation by recruiting excellent international talents.

3. Give full play to the comparative advantages of the enterprise itself. Actively developing industries and products with comparative advantages for enterprises is an important strategy for the international operation of Chinese enterprises. Through independent development, joint venture development, strategic alliances and other forms, we vigorously promote technological innovation and strive to form core technologies of independent intellectual property rights and a strong corporate brand image. Through mergers, acquisitions, strategic alliances and other methods, the use of marketization and internationalization methods to enhance the ability of dialogue with foreign multinational companies on an equal basis.

4. Implement a localization strategy for overseas companies. Chinese enterprises should strengthen their public relations strategies in the countries where they invest. As far as possible, use the form of joint venture in the investment method to obtain a certain domestic enterprise status, so that the joint venture can share part of the investment risk; investments in sensitive areas such as resource development can be invested in the form of debt according to the situation of the host country, and gains can be obtained through product sharing. This way, you can avoid the risk of nationalization caused by directly obtaining a controlling right. If the investment subject has brand, technology, and management advantages, it can also take the form of franchising to save money, avoid direct investment risks, and occupy the market. Adopting a localization strategy in the operation of overseas companies, on the one hand, more local employees are hired, and on the other hand, localization of procurement is achieved as much as possible.

5. Arrange investment structure reasonably. Multinational companies can reduce political risks to a minimum by adjusting operating and financial policies. The focus of the adjustment is to turn a single risk into multiple companies and even link the interests of the home country and the host country. The following measures can be taken: Multinational companies should try to find stakeholders internationally, especially by using the opportunity to raise capital to reduce risks Scattered among host or other countries, as well as shareholders and customers of international financial institutions or companies. In the event of any political or economic risk in the host country, the company will not take too much risk and it will also be protected internationally. Try to link the raw material, parts and other markets of the domestic subsidiaries of the host country with the markets of other countries, and also concentrate the unique technology and key parts of research and development equipment in the home country, so that once national political or economic risks occur, they can Let the host country pay the due price.

6. Perform periodic international investment risk analysis. For investors, international investment risk analysis is not just a pre-investment job, it runs through the entire investment period. For labor-intensive enterprises, due to the large employment of local labor, the risk of government confiscation may be low, but there are other risks, such as fundraising and expansion of enterprises' production. The external and internal environments of investment companies are constantly changing, and international investment risks are also constantly changing. Therefore, investors should pay close attention to the changes in various risk factors and regularly conduct investment risk analysis.

Constructing an early warning system for overseas investment risks

From a technical perspective, the establishment of an overseas investment risk early-warning system is a specific method to prevent the above risks. With the effective operation of the system, it is possible to strengthen the ex-ante management of overseas investment risks. As we all know, the risk early warning system is a feedforward control system, which is an activity that keeps the system stable in a dynamic environment or causes the system to change from one state to another. The operation of the overseas investment risk early warning system should go through four procedures:

(1) Monitoring

Most risks are predictable. It has a process from incubation to outbreak, from quantitative change to qualitative change. The monitoring procedure of risk early warning is to continuously track risk performance and elements in order to grasp the first-hand material of the risk in time. . It should be pointed out that monitoring is not an all-encompassing detection of corporate phenomena, its goals should be very clear, and the ultimate object of monitoring is risk; the procedures and methods selected for monitoring should reflect the changes in risk in a timely and sensitive manner; the information obtained by monitoring Not more is better, because the more monitoring information, the easier it is to make the main problem less prominent, and the more information the more complicated the cost of obtaining the information will be. The more the cost of filtering and processing the information will be, so the monitoring system Cost-effectiveness principles should be used to obtain the most useful information with as little expenditure as possible.

(2) Identification

This procedure can help managers identify, classify and preliminary analyze the information obtained by monitoring, make it more organized and more prominently reflect changes in risk. It should be pointed out that due to the large amount of basic information monitored, it contains both useful and real information, and it is inevitably mixed with a large number of misleading and distorted information. The information can be checked and filtered through the identification program, and the misleading information can be eliminated to find useful and real information that can reflect risks. In addition, early warning depends on monitoring, and monitoring cannot be separated from indicators. The key to establishing an identification system is to determine the indicator system of the warning situation in order to observe whether there is any hidden danger of risks in overseas investment.

(3) Alarm

After designing the warning indicators of the early warning system, the key issue considered by the system is how to predict the warning situation and determine the alert degree according to the changes of the early warning indicators. The basic tasks of the program: First, analyze the warning signs. Before the outbreak of the police situation, there are always certain warning signs, that is, warning signs. The risk early-warning system is to use the analysis of the change trend of financial indicators, combined with certain experience and methods, to determine whether there are warning signs, so as to make the next decision plan. The second is the pre-alarm degree. The pre-alarm level is the fundamental purpose of early warning. According to the change of warning signs, contact the police boundary of the police situation, refer to the warning degree evaluation standard, and modify it in combination with actual or future conditions to warn the severity of the actual police situation. The third is to find police sources. The alarm source is the cause of risk formation, the source of risk alarms, and the prerequisite for implementing pre-control countermeasures. In the analysis of early warning sources, attention should be paid to monitoring the early warning objects and determining the source of the warning according to the characteristics and changes of the early warning objects.

(4) Pre-control

The risk pre-control procedure is a planned, step-by-step, and targeted action. It has foresight and planning, clear action goals and directions, and it is a plan and plan for dealing with various risks prepared in advance. For example, as far as the overseas investment management coordination mechanism is concerned, its risk pre-control plan should fully consider: how to improve the efficiency of overseas investment approval, conditionally relax the control of overseas investment, and create convenient conditions for domestic companies to go global; How to rationally formulate a special law to adjust the basic relationship of foreign investment, including from the approval of foreign investment projects, after-the-fact supervision, to the promotion of foreign investment, and service measures, so as to effectively prevent risk warnings during the operation of the management coordination mechanism and improve government Macro-level management of overseas investment.

What the government should do

1. Improve China's overseas investment insurance system. At this stage, China should establish a complete overseas investment insurance system, which is a prerequisite for effective protection of China's overseas investment. The application of China's overseas investment insurance system should be based on the bilateral investment guarantee agreement signed between China and the host country. At present, China has signed bilateral investment guarantee agreements with more than 20 countries, and it is mainly concentrated in developed countries. Therefore, China should accelerate the conclusion of bilateral investment guarantee agreements with foreign countries, especially the majority of developing countries, and rely on domestic legislation and international bilateral and multilateral agreements. Work closely to provide guarantees for China's overseas investments.

2. Establish an investment industrial park. It is difficult for companies to go global, especially SMEs, to successfully avoid policy risks on their own. If there is a good domestic intermediary service agency or organization, you can set up an investment industrial park overseas and gather investment consulting and legal consultants to invest abroad. If policy risks arise, the government can bilaterally sign trade and investment agreements to avoid possible risks. Policy risks, or even exchange rate risks, the State Planning Commission, the Ministry of Foreign Trade and Economic Cooperation, the State Economic and Trade Commission, and the State Administration of Foreign Exchange can coordinate or even set up a specialized agency to do this work.

3. Establish a new coordination and cooperation relationship between overseas investment consulting agencies and the government and enterprises. The problems encountered by enterprises in the process of going global are complex and diverse, and the types and degrees of risks they may encounter are also different in different investment destination countries. Some countries have high political risks, some have high economic and financial risks, and some have high exchange rate and debt risks. If an enterprise wants to discern in time whether there are policy risks in overseas investment, it needs a lot of data and research to make judgments. The government has established a risk assessment and advisory agency that will help and support companies' overseas investments. At the same time, the government can set up a specialized agency that provides information consulting services for enterprises' overseas investment to provide enterprises with information, legal, financial, intellectual property and certification services.

(I) Vigorously cultivate overseas investment entities with competitive advantages

China's overseas enterprises are facing the fierce market environment of global competition. Therefore, overseas investment should change the previous small-scale and decentralized situation. Through joint and restructuring, actively develop large-scale enterprises as the core, and integrate capital, production and technology. Modern enterprise group, and use it as the main body of overseas investment, so as to better prevent various overseas investment risks.

(2) Provide comprehensive information services based on the intermediary service network under the guidance and support of the government

Due to the current limited ability of investment entities to prevent overseas investment risks, it is urgent to establish a comprehensive overseas investment intermediary service network. Because overseas investment management departments such as the Ministry of Commerce have a large amount of information resources, they can consider establishing a market-based overseas investment intermediary service department under the guidance and support of the government to provide enterprises with consulting services and necessary technical assistance for foreign market information, and gradually Developed as a risk diagnostic institution for overseas companies.

(3) Improve China's Overseas Investment Insurance System

In order to reduce the influence of uncertain factors in overseas investment and promote enterprises to "go global" to open up international markets, China's overseas investment insurance system should be established as soon as possible. This practice is very common in developed countries. For example, France entrusted the national foreign trade insurance company to engage in policy insurance business to support overseas investment. It is divided into policy insurance and market development insurance. It is mainly for the nationalization of the country where the investment is located, foreign exchange and dividends cannot be remitted, Systematic risks, such as war and riots, and some business risks encountered by small and medium-sized enterprises overseas provide guarantees.

(4) Establishing a risk diagnosis system to promote the improvement of the operation and management level of overseas enterprises

Facts have proved that trying to replace the internal requirements of enterprises with external government behaviors, that is, trying to promote the company to strengthen project feasibility studies and risk prediction in overseas investment decisions through government-level audits, the results are often not ideal. To solve the shortage of government supervision, it is necessary to make full use of the power of professional intermediaries to cultivate an experienced enterprise management consulting army, form a systematic risk diagnosis system in overseas enterprises, and urge them to improve their management level and overall overseas investment. s efficiency.

(5) Further simplifying the approval procedures for overseas investment

Various overseas investment authorities have adopted a series of measures to streamline the approval procedures for overseas investments and support enterprises to "go global" to open up international markets. In order to adapt to the recent trend of increasing investment in resource development, the approval procedures for overseas investment should be further simplified. The combined annual inspection of overseas investment can be combined to provide strong and standardized investment entities with autonomy for overseas investment within a certain limit, without prior notice. Examination and approval only need to be filed after the fact, in order to increase the flexibility of China's overseas investment management system, which is also conducive to the rapid response of investment entities to changes in the international market, and enhance the ability of overseas enterprises to resist risks.

(6) Continuously improving the macro management level of overseas investment based on statistical analysis of information

China should strengthen the statistical system for overseas investment based on the balance of payments. In this way, combined with the annual inspection data, we can accurately grasp the current overseas investment stocks and flows. Through classified statistical analysis, the competent department can fully grasp the scale, region, and industry characteristics of an enterprise's overseas investment, understand the survival status of overseas enterprises in a timely manner, and then formulate corresponding policies to guide the investment direction of the enterprise and reduce the risk loss of its overseas investment.