Organization: Central Michigan University
Newsgroups: bit.listserv.seasia-l
Date:         Thu, 28 Jan 1993 13:23:22 EST
From:         Elliott Parker <3ZLUFUR@CMUVM.CSV.CMICH.EDU>
Subject:      Asia: Business pitfalls to avoid

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                  Copyright 1993 Times Business Publications
                                 Business Times

                                January  21, 1993

SECTION: The Law Page; Pg. 25


HEADLINE: Pitfalls to avoid when venturing overseas

BYLINE: Paulson Ching

    BUSINESSMEN often toy with the idea of "going overseas". Sometimes,
governments urge them to do so. Other times, economic imperatives may dictate
expansion abroad.

   On the economic side, escalating operating costs at home can make it
worthwhile looking at markets where outgoings are lower. This especially applies
to labour-intensive industries in the newly industrialised countries. Also,
firms may wish to venture into lucrative overseas markets due to limited

possibilities for growth at home.

   It is now being said that companies can only prosper and remain competitive
in the next century by going global, as dependence on one market is no longer
feasible and practical. If you believe this, expansion overseas is inevitable.

   Though venturing overseas can offer great opportunities, it is not without
some peril. For one thing, the legal and operating framework in another country
is likely to be quite different.

   For instance, an investor may not know whether he can repatriate his profits.
Also, if there is an investment dispute, what recourse does he have?

   In view of such difficulties, a businessman must take into account a couple
of essential considerations before deciding to venture overseas.

   First and foremost, he should inquire with the relevant authority in the host
country whether his proposed business is permissible. Indeed, certain economic
sectors in some countries are totally closed to foreign investors or are open
only with certain conditions.



   For instance, the gambling business is totally closed to foreign investors in
 Indonesia.   But in Thailand, there are few restrictions and a foreign investor
can practically undertake any project.

   Another question facing the would-be overseas investor is the mode of market
entry. A foreign investor would usually like to establish a wholly owned concern
so he will have full control of the business and enjoy the full profits.
However, this is not always feasible as most countries impose restrictions on
foreign ownership.

   In Malaysia, for instance, a joint venture with a local partner is generally
required if a foreign investor wants to operate a manufacturing business.

   In China, a foreign investor can enter into an equity or contractual joint
venture with a Chinese partner or set up a wholly owned subsidiary. The tax
laws, however, encourage an equity joint venture by giving such an entity more
favourable tax treatment than is given to a wholly foreign-owned enterprise.

   Also, a wholly foreign-owned enterprise can only be established if it
benefits the Chinese economy and is involved in high-tech or export-oriented
projects. At the same time, the State Council (the China Cabinet) is authorised
to specify which sectors are prohibited or restricted to such a wholly

foreign-owned business.

   A prospective overseas investor is therefore well advised to obtain
information in advance from the foreign investment agency in the country that
interests him. In the case of Malaysia, this is the Malaysia Industrial &
Development Authority. In Thailand, it is the Board of Investment.

   As most countries require a foreign investor to joint-venture with a local
partner, the prospective foreign investor has to find the right local partner to
form a strategic alliance.  The success of the business will depend on the
synergy between the two.

   Most importantly, the local partner should have the same goal and commitment
as the foreign investor. The local partner can provide the necessary market
know-how and contacts and smooth things over if necessary. The foreign partner
can provide capital and technology.

   The respective country's foreign investment agency, such as the China
International Trust and Investment Company (Citic) in China, can usually provide
some assistance in finding a local partner for a foreign investor.



   But the investor should do his own assessment. To help him, there are
business consultants who specialise in headhunting appropriate local partners
for foreign investors, especially in  Indonesia.

   Another consideration for a foreign investor is to find ways to protect his
interests in a joint venture. In certain countries, such as Thailand and
Malaysia, this can be done by drafting clauses into a company's by-laws -the
articles of association -and the joint-venture agreement.

   For instance, the articles of association can stipulate that all company
resolutions require a three-fourths majority vote. In  Indonesia,  the law
requires that a majority foreign shareholding in a company be divested to
Indonesians within a certain period -15 years after the start of commercial
operations.

   To comply with this, a foreign investor can float the company's shares. The
public offer would ensure compliance with the laws and also protect the minority
foreign interest as the majority of shares would not be concentrated in one pair
of hands.  Furthermore, a public offer can be profitable for the foreign
investor.



   The minimum start-up capital required by the host country is a crucial
consideration for a foreign investor. He must ensure that he can at least fulfil
the minimum start-up capital requirement to get his business up and running.

   In  Indonesia,  the operating licence of an American company was revoked on
the grounds that the company failed to meet the start-up capital requirement.
This case is now under adjudication -and it is a lesson that all prospective
foreign investors should heed.

   Before starting a business, a foreign investor has to consider the
appropriate vehicle to operate the business. The relevant vehicles are a branch,
representative office or subsidiary.

   A branch is usually used by banks as the asset can be consolidated. A
representative office is used only to perform promotional and liaison functions.
It cannot be used to conduct business such as taking sales orders.

   A subsidiary is the most relevant vehicle for a foreign investor. He can
incorporate a private limited company, as the liability of such a company is
only limited to its paid-up capital.



   At operational level, a foreign investor may wish to bring in his own
personnel to manage and run the project. But some countries have very
restrictive policies on employment of foreigners. Generally, they can only be
hired if there are no qualified locals.

   However, a foreign investor is generally required to train a local to take
over the post eventually. As such, a foreign investor should try where possible
to employ local people, not only to comply with local policy but also to win
favour from the host country. Besides, locals are often as competent as their
foreign counterparts but cost much less.

   One of the most important considerations for any foreign investor is whether
he can repatriate the profits he makes in the host country. Most countries
- Indonesia  and Malaysia, for example -have a liberal foreign-exchange control
policy whereby profits can be freely repatriated.

   In Thailand, however, the central bank -the Bank of Thailand -has the right
to limit repatriation of funds to a mere 20 per cent of the initial capital
investment if the country faces balance of payment difficulties.

   A foreign investor should take note of this, for he may not be able to
repatriate the money from his profitable business overseas at the end of the

day.

   A foreign investor may be able to take advantage of any double taxation
agreement between the home country and the host country. Depending on the
contents of the agreement, the profits or dividends remitted will be subject to
a lower tax rate or even no tax at all in the relevant country.

   For a foreign investor who needs to bring intellectual property to a host
country, the degree of local protection for such property protection is crucial.
In most of the countries, patent law (invention and industrial design),
copyright law (artistic and literary works) and trademark law has been enacted.
However, the laws differ in terms of scope of coverage and right of remedy.

   For instance, Thai patent law does not extend protection to pharmaceutical
products, and there is doubt whether computer software is covered. Besides, the
enforcement of intellectual property law remains lacklustre and ineffective.
Some companies have even gone to the extent of not venturing into a particular
foreign country if the intellectual property protection there is found wanting.

   Finally, a foreign investor should consider the investment protection regime
available in the host country in the event that there is an investment dispute
or the venture goes sour.  Thus, an investment protection treaty between the

host country and the investor's home country provides an important safety valve.

   Such treaties usually provide for compensation to a foreign investor in the
event of nationalisation, expropriation or non-convertibility of the host
country's currency. A foreign investor, however, should not dispense with his
own country's risks assessment.

   A foreign investor would have additional protection if the host country has
signed one of the international conventions on commercial arbitration, as any
investment dispute can be adjudicated by an impartial and independent
arbitration rather by a national court.

   Also, it is easier to enforce a foreign arbitral award than a foreign
judgment as recognition and enforcement may be governed by international
convention.

   For instance, if the host country has signed the Convention On the Settlement
of Investment Disputes Between States and Nationals of other States -which is
administered by the International Centre for the Settlement of Investment
Disputes (ICSID) in Washington -the foreign investor can submit the investment
dispute to arbitration by that centre.


   In this respect, the ICSID convention maintains panels of qualified
conciliators and arbitrators from which the disputing parties can choose from
and also makes available facilities for the settlement of investment disputes
between the parties. In addition, contracting states are required to recognise
and enforce the monetary obligations imposed by the awards.

   Another important international convention which is ratified by many states
is the New York Convention on the Recognition and Enforcement of Foreign
Arbitral Awards.  This convention aims to make the enforcement of a foreign
award simple in another contracting country where the award is sought to be
enforced.

   All in all, it can be said that venturing overseas is never an easy affair.
And a prospective foreign investor is well advised to check all the facts about
a host country before committing his money. A careful and thorough consideration
of these facts will go a long way to ensure a successful venture overseas.

    Checklist for foreign investors

    Can the proposed business be undertaken in the host country? Can the
business be 100 per cent foreign-owned or must it be undertaken through a joint
venture? How to find a suitable local joint-venture partner?  How to protect

the foreign interest in a joint venture?  What business vehicle should operate
the business? Can the funds or profits be freely repatriated?  Is there any
double taxation agreement between the host country and home country? Can foreign
personnel be employed?  How strong is the intellectual property protection?
What investment protection is available?


    The writer is a legal officer in a regional company.
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