Risks Faced by International Businesses in Developing Countries

Political Instability

The recent case involving GMR Group in Maldives wherein the new government cancelled the license of the company for the Male Airport illustrates the biggest risk that international businesses face when they operate in developing countries.

It is often the case that the change in government leads to a reevaluation of the contracts with the result that some of them are scrapped. This kind of approach must be avoided as international businesses operate under the assumption that the contractual obligations that they have entered with a particular government have to be honored by subsequent governments.

Added to this is the political instability in many developing countries like Nigeria where the continuous churn in the political landscape makes the operation of international businesses difficult.

In other words, the policy paralysis and the bureaucratic logjam because of political instability pose the biggest risk to international businesses.

Economic Risk

The second category of risk that international businesses face is the prevailing economic structures in developing countries. For instance, many multinationals flocked to countries like Indonesia, Thailand, and Malaysia with great expectations. However, the Asian financial crisis of 1998 put paid to their economic activities because of the impact of the crisis on the economic structure of the country.

Indeed, prudent economic management is the key aspect here. In these countries, due to the mismanagement of the economy, the economic crisis ensued and this led to capital flight from these countries.

The key point here is that international businesses must be prepared to sudden changes in the economic situation in developing countries since the economies of these countries are not as deep and resilient like those in the West. Of course, the recent global economic crisis affected the resilience of the West as well but that is another topic altogether.

Societal Risk

The third type of risk is societal which is to with the prevailing social situation in the developing countries. Because a certain section of the populace has benefited from the international businesses, the other sections feel left out and marginalized and they resort to pressurizing the government to include them in the developmental process.

As some authors have put it, the world is on fire because of ethnic hostility to the operations of the international businesses. This was the case in many countries in Africa and East Asia where the minorities who lost out from the opening up of their economies resorted to social unrest and societal pressure to jeopardize the operations of the international businesses.

Moreover, this risk has metamorphosed into outright rejection of international businesses in many countries. The spree of nationalization and taking over the operations of international businesses in many countries across the world has made life difficult for international businesses in those countries.

Closing Thoughts

International businesses face many risks when they operate in developing countries and this article has discussed a few of those risks. The subsequent articles would go into detail about each of these risks.

It would suffice to state here that astute management and business friendly policies are needed from the governments of the developing countries if they are to attract foreign capital.