(Yicai) May 6 -- Economic indicators and non-economic factors both need to be thoroughly considered when assessing the return on investment of overseas projects, as scrutiny over global foreign direct investment continues to tighten, according to a partner at UK multinational law firm Freshfields.

Another essential aspect that needs to be taken into consideration to assess an overseas project’s ROI is the establishment of a diversified investment strategy across jurisdictions to hedge against regulatory risks, Shen Yuxin, who has more than 22 years of experience in cross-border mergers and acquisitions, told Yicai.

Compliance costs for overseas expansion fall into two categories, according to Shen. The first includes quantifiable explicit costs, such as regulatory filing fees, legal advisory fees, and filing wait times of up to 12 months. The second one encompasses indefinite implicit costs that mostly arise from policy uncertainty, particularly in emerging markets such as Southeast Asia, Latin America, and Africa, where legal trends are difficult to predict.

Companies should incorporate these two cost categories into their investment decision-making framework, prepare contingency plans for worst-case scenarios in advance, and avoid going all-in on a single country or region when making overseas expansion plans, Shen suggested.

“Tailoring to local conditions is key,” he said. For example, Freshfields assisted a battery company in forming a joint venture project in the United States with a local firm by filing with the Committee on Foreign Investment in the US before signing the agreement. This approach allowed them to secure conditional approval in a low-profile manner, thus avoiding the pressure from politicians and the media that often arises from the ‘sign first, file later’ approach.

Meanwhile, the regulatory framework in Europe is very fragmented, with many regulatory processes focusing on information collection rather than blocking transactions, Shen explained. So far, there has only been one case of conditional approval for M&As under the Foreign Subsidies Regulation.

The real challenge for Chinese companies lies in the scale of information disclosure, Shen believes. Some disclosure requirements fall into a gray area between commercial secrets and reasonable information demands, which Chinese firms are often sensitive to and may even feel resistant towards.  Therefore, they should clarify their acceptance of transparency during the early self-assessment phase.

For emerging markets with higher uncertainty, Shen recommended leveraging the protection offered by bilateral investment treaties to obtain legal safeguards and purchasing political risk insurance from institutions such as Sinosure or the Multilateral Investment Guarantee Agency under the World Bank to transform potential losses into fixed premium expenditures.

“While no single measure can address all issues, Chinese companies have made significant progress in the scope and depth of risk response measures,” Shen noted. “Through proactive self-assessment and filing strategies, strengthening legal frameworks, leveraging insurance tools, and reserving diplomatic channels, companies are better prepared to manage risks.”

Editor: Futura Costaglione