(Yicai) Jan. 12 -- Since China joined the World Trade Organization in 2001, Chinese companies have undergone a historic transition from tentative overseas expansion to strategic international operations.

By the end of last year, the total number of Chinese enterprises operating abroad had reached 52,000, with the total number of overseas employees exceeding five million, according to official statistics.

However, the rapidly changing geopolitical landscape, complex business environments, and potential cultural and technological barriers pose significant challenges for companies venturing abroad. To ensure stable overseas development, businesses must elevate risk management to a strategic level and establish a proactive, systematic, and resilient risk response system.

Main Risks Faced by Chinese Companies Venturing Abroad

Political risk is the primary challenge faced by companies venturing abroad.

The political stability of the host country, changes in policies, and international relations can all affect business operations. For example, political conflicts may lead to trade wars and sanctions, resulting in market access restrictions or asset freezes for companies. Additionally, businesses operating in politically unstable regions may encounter social events, including strikes, which can disrupt production.

The economic risks faced by companies venturing abroad include exchange rate fluctuations, inflation, and changes in economic cycles. Specifically, exchange rate fluctuations can significantly reduce overseas revenue when converted back into the home currency. Inflation can drive up the costs of raw materials and labor, thereby squeezing profit margins. Additionally, changes in economic cycles may result in weak market demand and a decline in orders.

Companies operating in host countries also face legal risks. In practice, differences in legal systems can lead to compliance challenges. For instance, countries with strict environmental protection and labor regulations may impose hefty fines or enforce shutdowns on non-compliant businesses. Moreover, if the host country lacks strong legal protections for intellectual property and contract enforcement, this can also adversely affect companies.

Cultural risks faced by companies include differences in language, customs, and values in the host country, which can lead to communication barriers and management conflicts, affecting team collaboration. Additionally, religious and ethnic factors may also trigger social tensions.

Five Recommendations for Chinese Enterprises to Mitigate Risks When Expanding Abroad

Firstly, compliance management should be at the core of the strategy. Companies must be familiar with and proficient in the commercial laws of the target country, conducting thorough research on the “red lines” within the legal system, such as product safety, environmental protection, anti-corruption, and labor rights protection. Enterprises should establish a legal team with an international perspective and leverage local legal expertise to proactively identify and mitigate risks.

Secondly, companies should accelerate the diversification of their business operations. Enterprises expanding abroad should avoid over-concentrating resources in a single market and adopt a dual-track development strategy that includes both mature and emerging markets. Additionally, they should promote diversification in their operational models, such as through joint ventures, technological collaborations, or localizing the supply chain to integrate into the local economic ecosystem.

Thirdly, companies should build a moat around their technology and intellectual property. Before expanding abroad, enterprises must complete overseas registration of their core trademarks and patents to mitigate infringement risks. With the tightening of global data regulations, companies must also establish a comprehensive security management system that covers the entire data lifecycle. Additionally, they should proactively assess the compliance of emerging technologies such as artificial intelligence and biometrics to prevent ethical and privacy risks.

Fourthly, companies should make good use of policy and financial tools. Enterprises expanding abroad should promptly study country-specific investment guides and risk alert reports released by the Chinese government and use them as references for decision-making. On the financial side, they should utilize policy products such as export credit insurance to hedge against overseas risks and protect accounts receivable and project investments.

Finally, companies expanding abroad should deepen localization efforts and focus on sustainable development by actively recruiting and nurturing local management and technical talent to gain market insights and build relationship networks. Additionally, enterprises should proactively collaborate with local suppliers, distributors, industry associations, and communities to integrate into the local industrial chain, thereby enhancing resilience to unexpected challenges.

The author of this article, Hu Xiaopeng, is the deputy director and a researcher at the Shanghai Academy of Social Sciences’ Institute of World Economy.

Editors: Dou Shicong, Emmi Laine