Currently, evaluating the return on investment (ROI) for overseas projects requires consideration of both economic indicators and non-economic factors.
The global foreign direct investment (FDI) regulatory environment is continuously tightening, and macroeconomic restructuring driven by industrial policies is forcing capital to reprice supply chains, input costs, and market access.
This convergence of "FDI scrutiny and economic security" is evident not only at the policy level, such as regulatory reforms in Europe and the United States, but also deeply permeates practical operations. For instance, EU regulatory bodies have adopted more interventionist remedial measures, extending their scrutiny to a wider range of industries and demonstrating unprecedented sensitivity towards corporate ownership structures and data governance.
In this environment, as Chinese enterprises explore opportunities abroad, accurately assessing and calculating each "compliance premium" and utilizing legal tools to navigate regulatory uncertainty has become crucial for successfully operating in complex international waters.
An expert with over 22 years of experience in cross-border mergers and acquisitions stated that, overall, the methods Chinese enterprises use to address regulatory risks have become highly diversified, and their preparatory work for overseas expansion is increasingly meticulous. "While no single approach can solve all problems, through preemptive self-assessment and filing strategies, strengthening legal structures, utilizing insurance tools, and preparing diplomatic channels, Chinese enterprises have made significant progress in the breadth and depth of their risk mitigation considerations," the expert noted.
Explicit and Implicit Compliance Costs
According to a World Bank study, to meet the compliance standards of destination countries for exports/investments, companies on average need to bear additional fixed costs equivalent to 4.7% of their value added. In the legal practice of overseas expansion, how can companies find the balance between returns and the friction caused by regulatory hurdles?
The expert views current ROI assessment for overseas projects as requiring a dual focus on economic metrics and non-economic factors, categorizing compliance costs into two types.
The first type is quantifiable costs. These are explicit costs, including regulatory filing fees, substantial fees for legal and advisory teams, and most importantly, the "time cost." Under the current intense regulatory cycle, the filing process can take up to 6 or even 12 months. Additionally, operational expenditures for mandatory compliance with local environmental, health, and safety (EHS) standards, and eco-friendly packaging requirements can be quantitatively assessed before project initiation. Companies should directly incorporate these costs into their ROI calculation models and match them rigidly against expected returns.
The second type comprises costs that are difficult to quantify, primarily stemming from policy uncertainty. This "compliance risk" is hard to estimate in specific monetary terms or percentages but represents a hidden cost companies must face. The expert believes: "Even in markets with relatively mature legal frameworks like Europe and the U.S., regulatory policies can adjust; in emerging markets like Southeast Asia, Latin America, or Africa, uncertainty is even more pronounced. This includes not only policy volatility due to government changes but also the objective reality of unpredictable legal and regulatory directions as these jurisdictions are still developing their legal systems."
Regarding balancing returns and risks, the expert advises companies to adopt a strategic perspective.
"First, assess the strategic significance of the investment. If an investment serves strategic purposes beyond financial returns, such as global positioning, technological upgrading, or market preemption, the company's tolerance for potential cost increases due to uncertainty can be appropriately higher," the expert stated.
Secondly, prepare contingency plans for worst-case scenarios. The expert cautioned: "When sudden legal or regulatory changes cause costs to surge, making the investment unsustainable, companies must have response mechanisms ready early, rather than waiting until a crisis occurs."
Finally, and most critically, is regional risk hedging. The expert provided an example: "When making overseas investment decisions, it is advisable for companies not to concentrate all their bets on a single country or region. By diversifying investments across different legal jurisdictions and markets with varying risk profiles, companies can effectively balance compliance friction in specific areas, achieving a robust overall distribution of risk and return."
Practical Strategies: From CFIUS to FSR
At the practical transaction level, the expert emphasized that it is difficult to prescribe a one-size-fits-all solution for all projects; "tailoring the approach to local conditions" is key.
The expert compared the two most representative regulatory systems in the U.S. and Europe. Using the U.S. market as an example, while the Committee on Foreign Investment in the United States (CFIUS) is seen as a major hurdle for U.S.-bound investment, it is not insurmountable. "In recent years, we assisted a battery company in establishing a joint venture project with a local U.S. firm. Considering previous similar projects faced obstacles, we recommended a more flexible filing strategy. A characteristic of CFIUS rules is that they do not mandate 'sign first, file later,' which provided us with operational flexibility," the expert explained.
The expert elaborated: "Often, projects fail because signing and public announcement generate pressure from politicians, media, or the public, which in turn pushes regulators towards stricter scrutiny. Therefore, we decided to file with CFIUS *before* the formal signing of the agreement, proactively communicating and making every effort to address their concerns. In this relatively low-profile environment, CFIUS ultimately granted conditional approval. Subsequently, we announced the project, and the entire process proceeded much more smoothly."
In Europe, the situation is entirely different. The expert contrasted: "European regulatory rules are highly fragmented. The focus of many regulatory processes is more on information gathering rather than directly blocking transactions. Taking the Foreign Subsidies Regulation (FSR) as an example, aside from public procurement projects, in the realm of merger control reviews, there has been only one case approved with conditions after scrutiny."
Consequently, the expert stated frankly that for Chinese enterprises, the real challenge lies in the extent of information disclosure. Some disclosure requirements fall into a grey area between trade secrets and reasonable information requests, which Chinese companies often find sensitive or even抵触. Therefore, when dealing with European regulators, the key lies in early self-assessment: first determining if a filing is triggered, and then pre-judging one's own acceptance threshold for information transparency. As long as a company is willing to provide satisfactory responses within the compliance framework, it is highly likely to pass the regulatory review smoothly.
For emerging markets with higher uncertainty, the expert recommended leveraging the protection offered by Bilateral Investment Treaties (BITs). "Since regulations often don't follow predictable patterns, we now tend to focus more on structural protection and risk dispersion. Previously, setting up investment structures might have primarily considered tax planning, such as using offshore centers to reduce tax costs. But now, maximizing protection under BITs has become equally important. If an investment dispute arises, even if it doesn't necessarily proceed to arbitration, the potential legal pressure remains effective against developing country governments that need to maintain a positive investment image," the expert said.
Furthermore, transferring risk through financial instruments is also an option. "For example, purchasing political risk insurance from Sinosure or the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, covering risks like exchange rates, legal changes, or geopolitics. This essentially involves paying a fixed premium to avoid potentially massive, uncertain losses. Lastly, remedies outside the legal framework are essential. For instance, many Chinese companies now assess before investing whether effective inter-governmental diplomatic channels could be utilized to resolve issues should extreme problems occur," the expert concluded.
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