With so many pitfalls awaiting them, CFOs establishing or managing foreign subsidiaries should expect that things will go wrong. Harding suggests building in a buffer, budgeting 2 to 3 percent of international revenues to deal with potential regulatory hazards, accounting misjudgments, and other mishaps. If a problem does arise, an immediate, aggressive response is best. "You will probably use resources that are out of proportion to the size of the entity involved," says Koch of AlixPartners. "You need to throw a lot of resources at these kinds of problems to wrestle them to the ground."

Kate O'Sullivan is a senior writer at CFO.

A Window on Risk

The risks of operating foreign subsidiaries should be evaluated and managed just as other risks are, says Joel Kurtzman, a senior fellow at the Milken Institute. Companies first need to determine the level of risk in the locations where they choose to do business, and then make sure the reward justifies the risk incurred.

But how do you measure the risk? Kurtzman and Glenn Yago, director of capital studies at the Milken Institute, do so through an "opacity index." They begin by assuming that the less transparency there is in a given economy, the greater the risk of doing business there. They then evaluate a country's risk according to five areas of opacity: corruption, legal, enforcement, accounting, and regulatory. The result is a country's "CLEAR" score.

An advantage of this approach is that it gives an appropriate weight to high-frequency, low-impact risks, says Kurtzman. "The old methods of looking at country risk were politically oriented. But for every high-impact, low-frequency event like a political coup, there are thousands of instances of corruption," he says. "The high-frequency, low-impact risk can have a much greater effect on a business over the long term."

According to Kurtzman and Yago's index, a company making an investment in China should earn a premium of 6.5 percent over the U.S. rate of return for the same investment. By contrast, the same investment in the United Kingdom, which has a better CLEAR score than the United States, would need to earn about 1.7 percent less than the U.S. rate. Kurtzman and Yago's approach is described in their recent book Global Edge: Using the Opacity Index to Manage the Risks of Cross-Border Business (Harvard Business School Press, 2007). — K.O'S.

Need Help?
If you're new to the overseas game, you don't have to go it alone.

Few companies have the resources or connections they need to conduct the due diligence on relationships that is recommended prior to completing an overseas acquisition. But there are several firms that have developed networks of contacts on the ground to provide these services.

• The BIG FOUR. Each of the largest accounting firms has a transaction advisory services practice that can conduct due diligence on overseas deals and advise on cross-border M&A.

• HIGH STREET PARTNERS. A small firm that relies on a network of carefully vetted local partners to provide back-office support to companies' foreign subsidiaries.

• NAIR & CO. A boutique firm that provides general and administrative support to venture-backed and public companies establishing overseas operations.

• U.S. COMMERCIAL SERVICE. A division of the Department of Commerce that provides background and credit checks on international companies.

Additionally, many countries have reputable professional-services firms that specialize in helping U.S.-based companies get up and running overseas. — K.O'S.

Coming Clean

Transparency International, a global anticorruption organization, annually ranks 180 countries by their perceived levels of corruption, as determined by expert assessments and opinion surveys. For 2007, the United States ranked 20th (with the No. 1 rank going to the least corrupt country). China and India tied with Morocco, Mexico, Peru, and Suriname for 72nd place. Russia ranked a dismal 143rd. Here are the year's best and worst:

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