With the advent of the age of globalization, the hurdles to expanding overseas have dropped dramatically. In order to do business overseas, risk management is necessary. We have summarized the necessity and methods of risk management.
Importance of risk management when expanding overseas
The Teikoku Databank’s Survey of Industry “”Survey of corporate attitudes toward overseas expansion”” conducted a survey in 2014 to find out what companies think about expanding overseas. About 27.0% of the companies surveyed reported expanding overseas either directly or indirectly.
Data that cannot be overlooked even during this survey is that approximately 40% of companies entering directly have experience withdrawing or considering withdrawing. In particular, there have been cases in which legal systems and administrative procedures have been seen as hindrances to business dealings with companies entering China. In addition, the difficulty of recovering funds from overseas operations, the treatment of local staff, and the working style are also mentioned as future issues.
Looking at the size of enterprises by size, many large enterprises cite the issue of recapture of funds and legal systems in overseas operations, while many SMEs cite the exchange rate as an issue.
According to data from the Ministry of Economy, Trade and Industry, about 2% of companies withdraw from overseas every year. While there are various reasons for companies to withdraw from overseas operations, there are also cases in which companies may suffer losses due to lack of preparedness and risk management.
Overseas, there are circumstances such as the culture, business practices and legal system of the country. It is recommended that you understand the risks that may occur on site and deal with them with a long-term vision.
Reference: Teikoku Databank’s Industrial Research Department
“”Survey of corporate attitudes toward overseas expansion“”
Things to consider before expanding overseas
To consider expanding overseas, first clarify the purpose of your overseas business. For example, when developing overseas businesses, such as lowering costs and entering overseas markets due to a decline in domestic demand, there may be problems in domestic businesses. Extensive labor is also required to expand overseas. You should also consider whether the effort and purpose match.
It is also important to determine whether the company has the basic strength and management resources to meet its objectives. In order to successfully expand overseas, you need to understand your company objectively. For example, if you have a competitive edge such as an inquiry from overseas or an intellectual property right, which is a patent right, it can be a good weapon.
In addition, you should understand your company’s strengths and weaknesses in advance when you plan your overseas business. In addition to the strengths and weaknesses of doing business in Japan, we need to consider in advance the opportunities and risks that we can gain by expanding overseas. Many companies are expanding overseas, so you can’t expect success if you do the same thing later. Use overseas expansion as an opportunity to analyze your company and develop new strategies.
PDCA for risk management of overseas operations
Risk management is necessary regardless of whether the overseas business is a one-off operation or a continuous operation. The Plan for risk management in overseas business is to identify risks. We will pick up the risks of the countries and companies in which we are expanding. For example, political instability in the country, exchange rate, and relationships with local business partners. Once you’ve identified the risks, take action on each one.
In risk management, “”Do”” refers to risk management. If there are foreign exchange risks, we can deal with them to a certain extent by making transactions denominated in yen and making foreign currency-denominated receivables and payables equal. Also, let’s consider buying trade insurance for companies expanding overseas.
Check is also essential for risk management. You should check regularly whether the project is progressing as planned. Especially when it comes to overseas corporations, support and management from the head office in Japan tend to be insufficient. Create a forum for regular reports and meetings to discuss and deal with any delays or problems in your overseas business plans at an early stage.
Action takes necessary actions in accordance with the progress of business. For example, if the business is slow, take necessary measures such as increasing the number of raw materials and staff. The PDCA cycle will be reviewed and measures will be taken each time the business begins operations. Risks vary from time to time and from time to time. Try to adjust your plan accordingly. Establish the PDCA cycle along with the business plan.
When you go overseas, don’t be confused by the impression and atmosphere of overseas, and try to judge risks and business prospects objectively. In order to do business overseas, flexible responses are required. It is necessary to manage the risk so that the head office can cover the delay of the schedule, troubles with local partners, poor business performance, etc. For risk management of overseas business, please consider utilizing the know-how of a consulting company familiar with the local area.