Internationalization Risk Factors for Multinational Companies

Introduction

Although the multinationalization of corporations began in earnest following the end of World War II, multinational companies were active in Europe from the 14th century and in the United States since around the turn of the twentieth century. Today, a growing number of enterprises of all types and sizes have found their home markets saturated and are seeking expanded business opportunities abroad. This trend has been fueled by recent innovations in telecommunications and transportation that facilitate expansion into foreign countries. In their haste to launch a subsidiary abroad, however, some corporate managers may be overlooking fundamental risks associated with internationalizing their operations.

To gain fresh insights into the types of risks that can adversely affect the launch of a new enterprise in a foreign country, this paper reviews the relevant literature concerning intellectual property theft, governmental corruption, foreign exchange rate instability, terrorism, a lack of technological infrastructure, cross-cultural conflict, and limits on foreign ownership. A summary of the research and important findings is presented in the conclusion.

Intellectual Property Theft Risk

In the Digital Age, intellectual property — frequently consisting of little more than ones and zeros — becomes increasingly difficult to protect. According to Miller, "The same technological advancements that have been instrumental in the globalization of markets have also resulted in expanded opportunities for the theft of intellectual property" (1999, p. 75). Not surprisingly, the problem of protecting intellectual property rights is most severe in emerging nations where relevant laws may be vague, nonexistent, or poorly enforced. As Miller notes, "As demand has increased in developing countries for telecommunications and information-age technologies, it has created a large secondary market for pirated products and services. With the expanding digitization of information flow, this form of theft has become extremely difficult to contain" (1999, p. 75).

Although the costs associated with intellectual property crimes to U.S. enterprises remain unclear due to the secretive nature of these activities, some analysts estimate the figure at between $15 billion and $40 billion, while others place the worth of intellectual property stolen each year at as much as $200 billion (Miller, 1999).

Not only developing nations, but some industrialized nations are also risky with respect to intellectual property rights. For example, intellectual property rights are weak in Russia and the Czech Republic (Nivett, 2004). Grigg (2003) suggests that China is among the worst offenders, noting that "Every firm that sets up for production in China has to turn over its technology [and] intellectual property theft by the Chinese is very common" (p. 13). These concerns are especially salient for U.S.-based companies doing business in this burgeoning economic powerhouse. Indeed, Pershern (2007) goes so far as to assert that "China is notorious for tolerating rampant intellectual-property theft" (p. 698).

Government Policy Corruption Risk

One of the harsh realities of doing business abroad is the high incidence of corruption that can extend to the highest levels of governmental authority. When corruption is institutionalized in this fashion, bribery and kickbacks can become a practical necessity for doing business. While corruption exists in all countries, the problem appears to be particularly acute in developing nations. Wilhem and Milewicz point out that "Entrepreneurial development in transitional economies has been hindered by underdeveloped legal and financial infrastructure and considerable administrative corruption in different government offices" (2000, p. 57). Moreover, corruption represents a significant risk because it can derail a company's honest efforts to promote its products and services, and the problem tends to feed on itself in a self-perpetuating manner. As Wilhem and Milewicz add, "Without a legal regulatory framework, both efficiency and equity are adversely affected while crime and corruption are allowed to grow" (2000, p. 57).

Although emerging nations are frequently characterized by high levels of corruption, the problem also extends to transitional economies such as China. According to Grigg, "Any investment banker familiar with the Chinese system will tell people preparing to set up over there that they should pad their expenses by at least 40% to allow for the graft, bribes, and other payoffs involved in doing business over there. Given the pandemic corruption of the Chinese system, the federal government's role in socializing risks and losses for U.S.-based firms looms even larger" (p. 13). Likewise, although many former Soviet-bloc nations continue to be plagued by corruption, Nivett points out that "Russia is more affected by corruption than Central Europe" (p. 4).

Conclusion

All business ventures are risky to some extent, but the research was consistent in showing that companies seeking to internationalize their operations face some truly daunting risks. These risks include, but are not 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 represent profound threats to profitable operations in some foreign countries.

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 frequently in the literature on corporate internationalization risk, 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 majority local owners who may act in their own best interests. Therefore, it is axiomatic that companies of all sizes and types intending to internationalize their operations should "look before they leap."

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