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International Risk Analysis, China Style

By Dan Harris and Steve Dickinson

Brilliant post over at Paul Denlinger's China Vortex blog, entitled, "Risk is in the Eye of the Beholder," on how and why Chinese companies measure risk differently than do Western companies. I have often wondered about this, but without the business background even to know on what I was wondering. One of the things I have noticed and am forever complaining about is how American companies are so often late in going into emerging market countries. (I have intentionally shifted from talking about Western companies to talking about American companies because the overwhelming bulk of my own personal experiences in this area come from working with American companies.) The high margins American companies expect and their high labor costs are no doubt factors, but I also wonder if it is not just plain and simple risk aversion based on an unwillingness to risk jeopardizing that which has already been achieved. All I know is that I have worked with an untold number of companies over the years that have come to the brink of going into an emerging market country (including China), but then backed down at the last minute because of some (often very small) risk that would not be present stateside. So many times when American companies have been unwilling to go in, companies from other countries do go in and succeed. Then, at that point, the American company begins looking anew at going forward. Reminds me of the passing game on my 10 year old daughter's basketball team where the kids so often see the open girl but fail to pass it to her until she is completely covered. The problem with waiting until a country "stabilizes" or becomes "low-risk" is that so often by the time it has done so, it is already too late for you to make your mark. I see this happening in China's wine industry, where the French and Australian wineries are already establishing their distribution networks and their reputations while American wineries are, for the most part, still dithering. Am I, of the inherently risk averse lawyer class, way off base here in criticizing American companies for an unwillingness to assume developing country risk? How do American companies compare with those from other Western nations? How does economics explain all this and is American company behavior rational? Conversely, who am I to complain when it is this very same aversion to risk that causes American companies to hire lawyers and when I am constantly complaining about how Asian companies take so many riskes by not using lawyers here in the United States?

Full post as published by China Law Blog on January 27, 2008 (boomark / email).