Internationalization Risk Factor Analysis Term Paper

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This problem is particularly acute among many impoverished African nations, although some African countries such as South Africa have made significant progress in developing their technological infrastructure in recent years (Tucker, Bachman, Klahr, Meza & Walters, 2008).

There have been some innovations in recent years, though, that may make the lack of a technological infrastructure in a given country of less import than in years past. For example, Hindman (2008) reports that, "Wireless services such as satellite systems may make the lack of technological infrastructure less of a factor" (p. 550). Nevertheless, there may be some country-specific cultural factors involved that hinder the widespread adoption of recent innovations in technology that will slow the development of a modern technological infrastructure. In this regard, Hindman adds that, "The emphasis on tradition rather than innovation, and the local orientations of rural citizens are likely to result in resistance to ideas imposed from outside the community. This culture of resistance would be expected to persist as a barrier to adoption and use of information technologies" (p. 550).


Cross-cultural conflict risk.

Companies desiring to internationalize their operations are faced with some significant challenges when it comes to overcoming potentially disruptive cross-cultural differences between their home country and the targeted country. These differences can not only derail negotiations and other business dealings, they can also affect perceptions of risk (Meyers, 1999) and decision-making preferences by local nationals (Yi & Park, 2003) that can adversely affect the company's foreign operations. Scholars have termed the incongruence between cultures "psychic distance," and in some cases, the differences can be profound. According to Pitelis and Sugden (1999), "Psychic distance is defined as [those] factors preventing or disturbing the flows of information between firms and market. Examples of such factors are differences in language, culture, political systems, level of education, level of industrial development, etc." (p. 153).

An important issue concerning psychic distance is the manner in which it is perceived by a company's leadership team. In this regard, Zanger, Hodicova and Gaus (2008) report that, "The demarcation of the term psychic distance requires the inclusion of not only individually perceived differences between countries but also perceived consequences of these differences with regard to a specific way of examining the particular foreign market" (p. 40). In other words, countries that are perceived to be vastly different in terms of culture by a company's leadership team may not be the most suitable for internationalization efforts irrespective of other potential benefits that could be potentially achieved (Zanger et al., 2008).


Limits on foreign ownership risk.

Although not on the level of many of the other risks discussed above, limits on foreign ownership can present some particular challenges for companies seeking to internationalize their operations because of the need to locate suitable joint venturers or strategic partners that will be required to retain majority ownership in the foreign subsidiary (Woodward & Nigh, 1999). In Mexico and Costa Rica, for example, foreigners are prohibited by law from owning a majority share of property. The risk involved with limits on foreign ownership, though, can involve some unexpected problems depending on the foreign partner or partners that are involved. For example, Tseng (2007) points out that, "Although allying with local partners compared with setting up sole ventures allows some savings on initial asset-seeking activities, such a benefit is commonly outweighed by the sizable challenges and costs encountered in managing joint tasks as well as dealing with interpartner diversity and the threat of opportunism" (p. 121).

While it may be preferable -- and less risky -- to pursue a strategic partnership or joint venturer in a foreign country in some cases, Tseng suggests that, "Wholly-owned subsidiaries are more likely to be an efficient entry mode than joint ventures when multinationals are capable of seeking host technological assets by exploiting extant technological innovative competencies. Wholly-owned entries are also preferred when firms can utilize corporate scale and bargaining power to effectively access local natural resources in the host country" (p. 121). In sum, then, the potential exists for strategic partners and joint venturers to act in their own best interests to the detriment of the minority foreign owners.


All business ventures are risky to some extent of course, but the research was consistent in showing that companies seeking to internationalize their operations are faced with some truly daunting risks. These risks were shown to include, but not be limited to, intellectual property theft, governmental corruption, foreign exchange rate instability, terrorism, a lack of technological infrastructure, cross-cultural conflict and limits on foreign ownership. While some authorities argue that terrorism represents the greatest risk, the research also indicated that lax laws concerning intellectual property and corruption also represent profound threats to profitable operations in some foreign countries. Likewise, depending on the setting, the potential for cross-cultural misunderstandings can lead to failed negotiations, while a lack of technological infrastructure can prevent a company from even becoming operational. Finally, although discussed less in the literature concerning corporate risk in internationalization, an inability to own property outright in some foreign countries may hamper the ability of multinational corporations to achieve their corporate goals and introduce instances of opportunism on the part of the majority foreign owners who may seek to act in their own best interests. Therefore, it is axiomatic for companies of all sizes and types that intend to internationalize their operations that they should "look before they leap."


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