Asia’s desirable yet risky foreign investment environment
April 22, 2008 | BY
clpstaff &clp articles &Several high-risk areas outlined in M&A report
Executives see local ineffectual intellectual property regimes, questionable business practices, and insufficient financial recourse against sellers, as the factors that increase the risk of investing in China, India and South East Asia.
However, despite the perceived risks, the three regions have been identified in a survey as the most attractive destinations globally for M&A activity over the next 18 months.
Those surveyed cited financial recourse against counterparties when deals go wrong is a significant business risk in the region, said Chris Leahy, managing director for Kroll.
“The lack of an independent judiciary and creaky and in some cases non-existent bankruptcy laws mean that enforcing contracts in some countries in the region can be very difficult. This leads some investors and financiers avoid doing business in certain countries with the resulting loss of valuable foreign direct and portfolio investment which can be a harsh cost to bear for developing economies,” he said.
M&A practitioners Marsh, Mercer and Kroll's conducted the survey and recently released a report, M&A Beyond Borders: Opportunities and Risk. The report focused on the challenges and opportunities available to both strategic and financial deal makers and the results show that China, India and South East Asia are the most desirable regions for foreign investment.
Though the Chinese government has introduced a raft of environmental measures, the degree of environmental litigation and statutory enforcement in China still lags well behind North America and Europe, according to the report. Companies also need to be aware of the increased regulatory scrutiny of their operations and the stricter enforcement of environmental legislation the report added.
According to Pete Walther, managing director of Marsh's Asia Pacific Private Equity Merger and Acquisitions practice, "Chinese companies are liquid, ambitious and in an excellent position to take advantage of cross-broader expansion opportunities - however failure to mitigate risks exposes them to deal failure and unnecessary damage to their reputation”
“Comparing with other competitive developing markets, China is still a more attractive place for foreign investments,” says Kevin Zhou, partner at GFE Law Office. “The continuous increase in foreign direct investment reflects that China is still attractive for foreign investors, even though there is a tax increase for foreign enterprises,” he added.
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