International BusinessInt'l business risks

Professor: Marc Arza marza@rjce.net

1. Int'l business risks

There are specific difficulties around international business that differentiate global operations from regular national market activities.

This difficulties can be summed up in six different risks:

- Cultural risk- Political risk- Information risk- Transport risk- Foreign exchange risk- Payment risk

2. Cultural risk

Cultural risk: Cultural differences around the world create difficulties in many different areas of business practice.

Different languages, values, religions and attitudes make it difficult to manage areas as different as marketing, human resources and finances.

There are many approaches towards the analisys of global cultural differences but Hoftede's cultural dimensions is one of the most accepted and applied to business practice.

3. Political risk

Political risk: The risk of loss when investing or doing business in a country caused by changes in a country political structures or policies.

Political STABILITY (the lack of abrupt changes in policies and political structures) is a very interesting quality when analysing international markets.

Many international insurance companies cover up political risks for companies operating in unstable and risky markets.

3. Political risk

Emerging markets yearn to be boring, at least politically. The Global Political Risk Index, which is produced by Eurasia Group, a global political risk advisory and consulting firm, rates Hungary just in front of South Korea as the most stable country in a 24-strong field. The index uses a range of qualitative and quantitative indicators to measure both the capacity of countries to withstand shocks and their susceptibility to internal crises. Pakistan comes bottom of the list, because of mounting political and security tensions, and Eurasia Group is not expecting things to improve. Nigeria and Iran also jostle at the foot of the table. But stability should not be confused with pluralism: China outranks South Africa, India and some other democracies.

Source: Economist, Sep 13th 2007

3. Political risk (protectionism)

Protectionism is also a strong political risk for international business. Protectionism is the economic policy directed to restrain international trade and investment.

Protectionist tools include:

- Tariffs: Taxes charged on imported goods. - Quotas: Limits to the amount of imported goods allowed to cross the border.- Non-tariff barriers: Any meausure other than tariffs directed to restrain the entrance of foreign goods into the market.

3. Political risk (protectionism)

Most common non-tariff barriers:

a) Sanitary barriers: Sanitation and health requirementsb) Domestic content specifications: Requirements to use/buy national goods.c) Import licenses: Specific license requirementsd) Import state trading enterprises: Controling and auhorizing any importe) Exchange rate controls: Undervalued/overvalued exchange ratef) Subsidies: Subsidizing national products (unfair competition)

4. Information risk

Sourcing reliable quality information about international markets may be more complicated and difficult than acquiring information at a national level. Companies know about their home market naturally, out of their experience and contacts but sources of international information are not as obvious.

Failing to get reliable information is a risk as it forces businesses to take blind decisions.

5. Transport risk

Transport plays a key role in international business. International trade is always defined by longer and more complicated transport that trade at a national level. Lost goods, damaged goods, delayed shipments and other specific risks are high when talking about international transport and international trade involves a set of practices and documents directed to reducing these risks.

6. Foreign exchange risk

Those international exchanges in between companies from a different currency area are subject to foreign exchange risk.

The risk that currency exchange rates of the involved currencies may change in between price negotiation and payment execution,

7. Payment risk

Payment risk, the risk of not being paid, may not be specific of international business bi but it is certainly higher.

Information about costumers may be less reliable and legal tools to recover unpaid invoices are more expensive and les reliable than at a national level.

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