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Foreign Investment in Emerging Markets

Let’s suppose you are advising the owner of a business, who would like to take advantage of business opportunities in an unfamiliar market in the so-called ‘developing world’.

It is probable that one of the first things the business owner will want to do, is learn about the market itself: the demographics in that market, the size of the population, its buying-power and GDP, the kinds of product and/or service which are available there, and where the gaps in availability lie.

Carrying out that kind of due diligence may be comparatively simple, and the business owner may be able to make most of the necessary enquiries by way of informal interview, and discussion with one or more parties.

But it is equally possible that the business owner may want or need to obtain in-depth, reliable, up-to-date and accurate information about the local market and the opportunities available; and this may require the engagement of specialist professional services. The business owner may require a formal technical, operational, or other kind of due diligence enquiry to be carried out. The business owner’s Board, may even dictate the need to carry out a formal preliminary due diligence exercise of this sort.

Assuming the business owner has a product or services, or both, to sell into the new market, he or she will want to know if there is scope for gaining a foothold in that market, and building a successful business there.

If the answer to that last question is in the affirmative, then almost certainly the business owner’s next question will be ‘what are the options available to me under local law and regulation, to establish that foothold?’

Most developing markets will present business owners with only a limited number of options to do so.

Regulation in the new market, may require that any new entrant to the market, let’s call them a ‘foreign investor’, will need to form an incorporated joint venture with a local participant first, before being able to carry out business there. Regulation may even dictate the minimum amount of investment capital the foreign investor must contribute to any such joint venture, and/or the minimum proportion of share capital which the local participant must own.

Regulation may enable prospective ‘foreign investors’ to tender for certain kinds of ‘project’ or business activity in the market, and some jurisdictions will require that even that must be done in joint venture with a local participant, at minimum as the foreign investor’s local ‘agent’.

As a consequence, the parties to that joint venture may decide to negotiate the terms of a collaboration or teaming agreement, or perhaps an agency contract, setting out the framework for their contractual relationship.

Regulation may even dictate the form or content of any such collaboration or teaming arrangement, or agency contract.

Naturally, therefore, the foreign investor would do well to ensure compliance with any such formal restrictions.

It may be a regulatory requirement for the foreign investor to agree a standard-form joint venture contract with their designated local ‘partner’.

If public tender is the required ‘route in’, it is quite likely that the jurisdiction in question will contain regulation with respect to the form and procedure of any public tender by a foreign party. This may include registration with the appropriate local public tender board, or governmental agency. For certain kinds of project, it may be necessary to open a dialogue with the relevant government ministry or department, for example for certain kinds of project in upstream oil and gas, or electric power generation, or waste water treatment, and so on.

Following all this, it may be necessary for the foreign investor to incorporate a local entity in the new market, typically a limited liability company, subject of course to the applicable regulation for limited companies in that jurisdiction.

It may be necessary to open a local corporate bank account, tax registration, and the like.

It may be necessary to engage local management, or ‘second’ or transfer ‘foreign’ personnel to manage the new entity. There may be a need to employ one or more people to run the business there, and local regulation may dictate the numbers and nationality of the people to be appointed. Local employees will almost certainly be subject to applicable local employment regulation. Foreign personnel may be subject to regulation applicable in their home country, as well as the local jurisdiction.

All these steps will take a considerable amount of planning, and preparation.

Due diligence will clearly be at the heart of that process, but there will also be a need to be fully familiar with local law and regulation with regard to issues such as public tendering, foreign capital investment (the market in question may indeed have law and regulation for this), permitted and prohibited business lines, manpower services, local taxation, foreign exchange transactions, and more.

We will publish more detailed posts in the forthcoming weeks, covering specific aspects of these business, and regulatory requirements, for specific jurisdictions in the emerging markets.

This blog is for information purposes only. It is not intended to provide legal advice.

DECEMBER 13, 2020

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