International business still under threat in wake of economic uncertainty
06 Aug, 2013
International transactions and cross-border deals are continuing to pose concern to some businesses due to increasing political uncertainty and stringent regulatory restrictions present within the international environment.
New research from global law firm Reed Smith, conducted by The Economist Intelligence Unit (EIU), reveals that current global economic conditions dominate worries surrounding ease of doing business internationally.
Concerns surrounding the economy are particularly prevalent in the media and technology sector and more broadly in Western Europe. Increased domestic competition from other investors, and the sophistication of products and services on offer, is also making life harder for international companies seeking growth in the fast-growing economies of Asia, “Smoothing the path: the challenges of operating internationally” found.
However, on the eve of the most significant cross-border trade deal in history – the EU/US free-trade agreement – some businesses around the world are beginning to express renewed optimism over international trade. The EIU report also revealed that the greatest proportion of respondents felt international transactions are likely to become easier over the next two years, with the highest amount of hopefulness coming from the North-American and Asia-Pacific markets. This is likely to be due to both regions being in the middle of negotiating significant trade deals (Trans-Atlantic Free Trade Area and the Trans-Pacific Partnership), which is likely to aid and boost investment.
The EIU findings are drawn from a survey of more than 450 senior executives from multinational businesses worldwide.
Key findings include:
- 47% believe that international transactions will become more difficult in the next two years
- Over one-half (55%) of executives from the energy and natural resources sector think cross-border deals have become more difficult
- 54% from the financial services sector said that the challenging international environment made international transactions more difficult
- 54% of total respondents say international transactions are likely to become a little or much easier over the next two years
- 53% cite current global economic circumstances as the dominating worry about the ease of doing business globally in the economy, rising to 60% among companies from Western Europe
- 73% of companies within the media and technology sector point to the economy as responsible for the increased difficulty of doing business in their most important foreign market
- 37% and 45% of respondents who reported an interest to invest in China and southeast Asia respectively over the next two years cited domestic competition as a reason why cross-border transactions have become more difficult
- 41% of companies cited familiarity as the reason it has become easier to do business in their most important foreign market
- 47% of small companies (annual revenues less than US$250m) believe knowledge and experience is a particularly important driver of success, while 38% of large companies (annual revenues in excess of US$10bn) see the fact that their chosen markets have become friendlier towards investors as equally important as acquiring knowledge and experience of their target markets
- Within the shipping and transport and the energy and natural resources sectors 46% and 50% respectively, report that increased due diligence efforts when entering a new market has eased international expansion
- Executives from shipping and transport also think international investors’ rights are better protected (36%, compared to 18% overall)
Claude Brown (pictured), Partner at Reed Smith, specialising in Business & Finance in the Financial Industry Group said:
“Over the past five years, the impact of the financial crash has rippled across the world, causing tough economic conditions and also some stern government responses. We are also seeing new political threats emerge, such as the unpredictable ‘spot-volatility’ in countries like Egypt, Turkey and Brazil which is also making lenders more cautious and as a result. We are starting to see alternative sources of finance emerge, often from other businesses operating in the same sector that are keen to support market growth and are more informed about the risks.
“Whilst there are attempts in place to secure new free trade zones between Europe and North America and in Latin America, which will improve trading conditions, there are several things businesses can do to improve their chances when operating in foreign markets. These include putting the traditional form of due diligence ahead of the investment, constantly monitoring activity in target markets and expanding into several areas or secure several sources of supply. By taking some of these steps, businesses can smooth out some of the speed bumps to successful international investment.”
Tamara Box, Partner at Reed Smith and an expert in structured finance said:
“It is not unexpected to see that the biggest concern for business is still the state of the global economy, according to the EIU survey conducted on our behalf. There are still very real concerns and about the health of the European economy in particular. The uncertainty of the regulatory landscape – particularly in the EU – has led to greater perceived difficulty of cross border transactions, and means businesses need to invest more heavily in their internal resources to deal with increasingly strict regulatory compliance.
“However, there are some glimmers of hope for cross-border investment. For example, faced with reduced liquidity available from banks, corporate institutions are looking to the international capital markets for support, fuelling growth in the high yield bond markets.
“Ultimately, more regulation is likely, so companies looking to operate internationally and in new jurisdictions need to do the relevant due diligence and be aware that compliance must be taken seriously. The reality is, however, that even in the face of a heavily regulated environment, there is limited scope for businesses to grow if they don’t consider expanding internationally.”
The new report is part of Reed Smith’s ‘Business Across Borders’ research series conducted by the EIU.