Challenges Faced by Foreign Firms doing Business Cross-borders

Running head: DOINNG BUSINESS ACROSS BORDERS
Challenges Faced by Foreign Firms doing Business Cross-borders
Name
Institution

DOINNG BUSINESS ACROSS BORDERS 2
Table of Contents
1.0 Introduction..........................................................................................................................3
2.0 Formal Systems...............................................................................................................3
2.1. Political Systems.............................................................................................................3
2.1.1. Government political systems..............................................................................3
2.1.2. Political Instability...............................................................................................4
2.1.3. Conflicts between host countries and other countries..........................................5
2.2. Economic Systems.......................................................................................................5
2.2.1. Category of the Economic Systems.....................................................................5
2.3. Legal Systems..............................................................................................................9
3.0. Informal Systems..........................................................................................................10
3.1. Cultural Differences..................................................................................................10
3.2. Social Norms.............................................................................................................12
3.3. Language Barrier.......................................................................................................12
4.0. Conclusion.....................................................................................................................13
5.0. References.....................................................................................................................14

DOINNG BUSINESS ACROSS BORDERS 3
1.0 Introduction
Due to increasing rate of globalization and technological advancements, commercial
activities like foreign direct investments (FDI), emergence of multinational companies
(MNC), and joint international ventures (JIV) as well as strategic alliances have been moving
on upward trajectory. Globalization has improved interaction and foreign trade across many
countries. However, a number of factors have slowed down foreign business activities. These
factors are broadly compartmentalized into two: formal and informal systems. Formal
systems include factors like political systems, economic systems, and legal systems and
informal system, while informal system encompass cultural, social, and linguistic aspects.
This paper analyses the risks, costs, and uncertainties that these factors impose towards
undertaking foreign business activities.
2.0 Formal Systems
2.1. Political Systems
2.1.1. Government political systems
There has been increasing academic concern on the relationship between international
business and political environment. One of the most fundamental issues in this context is the
type of the political risks that may hamper foreign investment. In most instances, when
political risk depicts government interference with market operations. According to Ghosh
(2015), political risk emanates from the government’s action to prevent or interfere with the
business transactions by either changing the terms of agreement or confiscating partially of or
the foreign owned business assets. Farnell and Crookes (2016) define political risk as
“government or sovereign interference with the business operations.” Some scholars equate
political backlash with the environmental aspects like direct violence, instability, and
competition (Cavusgil et al., 2017). Ghosh (2015) identifies the dynamic feature of political

DOINNG BUSINESS ACROSS BORDERS 4
environment but contends that progressive and gradual changes that are unexpected do not
define the political risk. However, political uncertainties affect the business in terms of
transfer— technology, people, payments, and capital uncertainties; operational— business
regulation uncertainties; and control— uncertainties concerning policies that relates to the
management control (Kaur and Sandhu, 2013). Operational and transfer uncertainties flow
from the political-economic events to ownership-control events.
2.1.2. Political Instability
According to Ma et al (2013), political activities have great influence on the economic
activities of a country, and as such, a shift in regime may dramatically transform the economy
socialism to capitalism. Similarly, power concerns affect the economic policies that a country
adopts. For a regime that has been installed through coup may adopt radical socialism that
strip all foreign-owned companies their assets. Political expropriations may also be in form of
inclusion of forceful renegotiation of contracts with public enterprises, violating the
agreement on tax benefits, revisiting business regulatory rules to the detriment of the private
investors, and nationalization of private assets without redress (Immarino and McCain, 2013).
Uncertainty about the regime change may affect the value of the business expected returns
and influence their variations. Political systems have great influence the investment strategy.
Countries that experience consistent political instabilities are prone to political
violence and have quintessentially weak institutions. In such scenarios, the investment
decisions are underpinned on the risk of asset destruction, sporadic changes in the domestic
demand, and the poor infrastructure. In addition, countries that undergo political conflicts
tend to have slow economic growth and low income per capita. Political instability may also
result to destruction of properties and looting. In most times, political unrest culminates to the
state of anarchy, which is another factor inhibits foreign investment. Political instability is the