American companies operating in Asia face distinct challenges affecting their profit, productivity, and potential to develop in the fast-growing markets. In particular, there are potential barriers to entry for new companies in East and South-East Asia.
With so many opportunities for business and investment across Asia, American companies and investors stand to greatly benefit. Here are five challenges they may face along the way.
1. Limited financial regulation and enforcement
The less robust financial regulation system in Asia presents corruption risks and legal compliance issues for American companies that must comply with the Foreign Corrupt Practices Act. The ownership of wealth in Asia is generally highly concentrated, which contributes to the acceleration and agility of domestic businesses and the economy.
Yet, this relative economic transformative speed encourages corruption and back-channel methodologies, and American companies operating under compliance protocols may be less competitive in this particular climate. For instance, the government in China established five to ten year plans for local businesses to grow and has high concentrations of wealth among members of the Communist Party and related business families.
U.S. firms that try to enter or grow within this specific environment struggle and business-to-business contracts might not comply with FCPA as bribery to hasten or ease up processes may be involved from either side.
2. Currency convertibility issues and domestic economic manipulation
The diverse banking and financial landscape of the region presents another challenge for U.S. enterprises. With no singular regulator, different trading centers and diverse currency rates, Asian nations can keep their currencies low to promote export growth.
Economic zones like those in China and India challenge American enterprises, as they do not operate under national or even provincial regulations, but a set all their own. American companies must deal with local currencies and multifaceted regulatory schemes in business-to-business contracts, which presents a further challenge to their profit and potential growth.
3. The different legal systems
The legal systems in nations such as China and Malaysia heavily restrict the operations of foreign companies. For example, intellectual property protection is highly limited as technology theft and counterfeiting products are common in the region, and widely accepted by the authorities. The Impact of International IP theft report has determined that the U.S. loses over $300 billion per year on exports to Asia.
This reveals the need for companies to develop innovative products and services that can differentiate their enterprises from the competition and prevent intellectual and technology theft. However, american enterprises are not protected under the local legal system and struggle to adapt to this unstable environment and thriving counterfeit market. Questions exist about the impartiality of the judiciary and its ability to set meaningful precedent.
4. The unique business culture
The unique business cultures and non-Western political ideologies in Asia intensify protectionism towards the domestic economy, particularly in China and Japan. The interference of the government in the private sector can impede business contracts, erode partnership stability, as well as pressure American companies to incorporate domestic interests in their local partnerships.
South Korean government has heavily regularized foreign investments and favors domestic industrial conglomerates, the chaebols, to drive the country’s rapid economic growth. Thus, it has become the norm for American companies to create partnership with domestic enterprises in South Korea to enter the particular market, at the cost of losing total control of management.
Executives in American companies must adapt to the particular business ethics in Asia and adapt to the heavy clout of political and business connections that can impact their market performance.
In addition, to match the increasingly sophisticated consumer demands in Asia and adapt to the different business cultures, companies must heavily invest in development of their own corporate culture, via infrastructure and people, as a means of mitigating detrimental impacts of the domestic business culture. The development of a corporate culture within a non-Western business environment is a significant expense and reveals the difficulty for American companies in dealing with different political and business cultures in Asia.
5. Regional geopolitics and relations with the West
Inter-Asian foreign relations, as well as their changing relationship with the U.S., can pose challenges to American companies. South Korea has faced difficulties in recent years to balance its beneficial trading relation with China and demands from the U.S. in trade, security and foreign policy issues, particular in regards of its infamous neighbor, the Democratic Republic of Korea.
American companies must demonstrate foresight when it comes to surveying political, economic and social developments on the Asian horizon. For example, the tense relations and disputes between China, Vietnam and Japan over the South China Sea and natural resources production can harm American companies involved in the energy or technological sector that depend on these disputed resources.
In addition, ASEAN members are attempting to establish a major trading block that would compete with China’s current role in the region, which may affect American companies’ businesses with new regulations, exchange rates etc…
Moreover, American companies are often constrained by U.S. foreign policy when expanding their businesses in Asia. The U.S. government may identify important threats and consider specific foreign policies, such as economic sanctions and product-specific trade disputes (i.e. solar panels), and this may in turn place pressure on U.S. companies or local governments in Asia. This intervention can prevent companies from pursuing their enterprises there.
Therefore, with a fast growing market and increasingly sophisticated consumer demands in Asia, American companies compete among themselves and with domestic booming enterprises in a complex, emerging region. U.S. companies can prosper but they face real challenges for which they need to be prepared for as they consider conducting short- and long-term business in Asia.
