Executives at multinational companies consider investing in China, India and South East Asia almost as risky as investing in Africa, according to a survey commissioned by Marsh, Mercer, and Kroll for their report M&A Beyond Borders: Opportunities and Risks.
Despite the perceived risks, China, India and South East Asia were identified as the most attractive destinations globally for M&A activity over the next 18 months, with 57% of deal makers surveyed describing potential interest as significant or very significant.
The issues identified as the most risky in the China, India and South East Asia region were questionable business practices, environment, intellectual property protection, and insufficient financial recourse.
Surveyed earlier this year about their attitudes to cross-border deals, executives at multinationals based around the world gave China, India and South East Asia an average risk rating of 5.3 out of a maximum 8 for a range of business-critical risks. The average rating for Africa was 5.5, Latin America 3.8, the Middle East 3.5, Eastern Europe 2.8, North America 2.1 and Western Europe 1.9. The Australia, Japan and Korea region was considered the least risky place to invest, with an average risk rating of just 1.6.
While intellectual property risks, especially in China, are widely acknowledged, the report makes clear that the opening up of the economy in other sectors raises new concerns, especially around the environment. The Chinese government has introduced a raft of measures designed to improve environmental quality. While the degree of environmental litigation and statutory enforcement in China still lags well behind North America and Europe, companies need to be aware of the increased regulatory scrutiny of their operations and the stricter enforcement of environmental legislation.
In Japan, M&A activity has jumped after the government further eased regulation of foreign investment. In so-called triangular mergers, the law now makes it possible for foreign-owned companies to invest in Japanese companies by means of stock-for-stock exchanges with the Japanese subsidiaries of those companies. Coupled with the country's low interest rates, a favorable financing condition has ensued, attracting more foreign investors.
In Western Europe, 44% of respondents had either significant or very significant appetites for investment into Eastern Europe. Chris Morgan Jones, Head of Kroll's Private Equity and M&A Practice in Europe, the Middle East and Africa, said: "Central Eastern Europe is perceived by many as one of the most fertile areas of investment opportunity. Confidence in the region is strong among both domestic corporations and multinationals contemplating investments. Nevertheless, a number of significant issues including dependable judicial systems and political influence on business do require more attention if Eastern Europe wants to have a risk profile similar to those of its Western neighbors and other developed states."