Domestication' can be a potential political risk for a firm that operates in a foreign market

Technology and globalisation brought the world closer and business expansions became easier more than ever. However, in spite of the emergence of free trade and the global market, there are still restrictions that multinational companies observe especially when they enter a new region.

Domestication happens when a company expands to a new country and in order to be given the permit to operate, it needs to follow a set of rules that will benefit the host country. As a foreign investor, the company will then be considered as a partner instead of a competitor.

The following are examples of operational restrictions that can be applied to a foreign company:

1. Partial ownership transfer - The company needs to partner with local investors to ensure that the ownership is not 100% exclusive to foreign nationals
2. Prioritise local production - Companies are also required to manufacture their products within the host country to boost its local economy.
3. Prioritise local hiring - Foreign companies are mandated to hire locals which can cause communication problems especially if the locals do not speak the preferred language of the company (example is a French company based in a non-French speaking country).
4. Retain large portion of profit in foreign country - Host countries allow foreign investments because these result to economic growth, increased exports, capital flow, and competitive market. However, for the companies, this means that they have to maximise their spending and profit-sharing within the host region.

Foreign investments are good for the host country but at the same time, it can also be a problem to the company. Therefore, proper management and sound company policies are not just encouraged but are required.