Due Diligence: Evaluating Offshore Destinations

• Author: David A. Steiger
• Pages: 77-97

Overview: Where in the World Do

You Want to Do Business?

Based on the attention they have received in the media in recent years, it is

easy to get the impression that China and India are the only places where

U.S. businesses are investing overseas. To be fair, as both of these mam-

moth economies have deregulated key market sectors and relaxed foreign

investment caps, they have seen a ood of new businesses set up within

their boundaries. But as mentioned earlier in this text, they are not the only

game in town. As Harvey Cohen, of Dinsmore & Shohl, observes, a lot of

foreign investment continues to go to Europe, Mexico, and Canada.

As a matter of fact, virtually every country in the world beckons inves-

tors to come to their environs. Depending on the industry and your need

for quick repatriation for capital, infrastructure requirements, and so on,

there are likely to be dozens of potential locations for a new subsidiary,

joint venture, or distribution network. The question is: How do you choose

the right location? This chapter will assist you with this crucial decision.

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Chapter 5

Due Diligence: Evaluating

Offshore Destinations

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Purely Exogenous versus Semi-Exogenous Factors

Many authorities have arrived at various factors for determining which

venues to choose and which to avoid, and, if nothing else, they serve as a

good starting point for an examination. Indian outsourcing mainstay Neo-

Group (formerly known as Neo IT) has offered a straightforward approach

to classifying and analyzing the risks faced within various overseas business

destinations for their clients. They classify the key factors as either purely

exogenous—that is, pervasive factors that generally cannot be mitigated—

or semi-exogenous—that is, factors that can be at least partly offset through

individual strategy, investments, hiring decisions, and employee develop-

ment practices.1

The purely exogenous factors identied by NeoGroup are prevailing labor

costs, socio- and geopolitical risks, physical and time zone displacement,

ecosystem and trade options, and business environment. The semi-exoge-

nous factors are communications, culture, infrastructure, and prevalence

of distinctive competencies.2

Prevailing Labor Costs

Clearly, cost savings and the wage arbitrage that makes them possible are

an important, if not paramount, concern for many companies doing busi-

ness across borders.3 It is worth noting however that even if costs are the

sole or primary driver, it is still necessary to be looking beyond the pre-

vailing hourly wage in a given country or region. That is to say, it is not a

given that if wages in China are 50 cents per hour while in Vietnam they

are 40 cents per hour, you should always choose Vietnam. That is because

the gross wages in a given country do not in themselves tell what the true

net labor cost really will be.

Take, for example, productivity of the workforce. If as in the previous

example, wages are 50 cents per hour and 40 cents per hour in China and

Vietnam, respectively, and it takes a given Vietnamese workforce 50 percent

longer to turn out the same amount of goods or services as a given Chinese

1. NIT, N. , M O M, O I, 2 (April 2003).

2. Id.

3. Id.

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