INTERNATIONAL BUSINESS RISK

Too often business owners jump when they see opportunities abroad without conducting research and training their employees for the challenges they may face.

When a business engages in international activities, they take on risks as well as opportunities.

Although the environment for international trade has changed substantially over the years, the risks that exporters face when selling their products and services in other countries remain essentially the same.

POTENTIAL RISKS Political Legal Bribery, graft and corruption Quarantine compliance Exchange rate Other financial Strategic Operational Terrorism

We will look at these to some degree in the following slides

POLITICAL RISK This is what you will be talking about in your political stability

section The political actions and instability may make it difficult for

companies to operate efficiently in these countries due to negative publicity and impact created by individuals in the top government.

A firm cannot effectively operate to its full capacity in order to maximise profit in such an unstable country’s political turbulence.

A new and hostile government may replace a friendly one, and therefore remove foreign assets.

Trade embargos affect the flow of goods and services and could affect your delivery of goods and getting paid.

Civil disorder could affect your personal safety The country may not comply with international laws such as human

rights, trade sanctions, recognition of personal property rights. Some countries will request additional funds or tariffs in exchange

for the right to export items into their country.

LEGAL RISK Each country has its own set of laws and

regulations when it comes to importing goods, taxes, and selling online.

Differences between legal systems – Australia has common law, other places may have civil law.

Exporters or services need to take OH&S laws into consideration.

BRIBERY, GRAFT & CORRUPTION RISK Graft: an unscrupulous use of a politician's

authority for personal gain. Most governmental systems have laws in place to prevent graft although this does not always halt political corruption

It is a criminal offence to offer a benefit which is not legitimately due with the intention of influencing a foreign public official

Australia’s Criminal Code Act applies extraterritorially

QUARANTINE COMPLIANCE RISK Most countries have strict quarantine

requirements Before exporting, you need to be aware of

what is and what is not allowed under the relevant quarantine laws of your destination

Also ensure any exports are permitted to enter your destination

Failure to do so can result in forfeiture or destruction of goods, fines and restrictions your business

EXCHANGE RATE RISK Exchange rate risks occur due to fluctuations in the value of

a currency Many exporters have lost money due to exchange rate

changes When a domestic currency appreciates against a foreign

currency, profit or returns earned in the foreign country will decrease after being exchanged back into the domestic currency

For example, if an Australian receives a lot of its business in Japan, when the Japanese yen depreciates against the Australian dollar, and yen profits become less in Australian. Lets say Y1 = $5 In 1999 your company makes Y1,000,000 (= $5,000,000) In 2000 the yen changes to Y2 = $5 So, making Y1,000,000 now = $2,500,000

This is why prices of foreign products sometimes change

OTHER FINANCIAL RISK Tariffs and quotas:

Countries add taxes or restrictions to particular products coming into their country in order to give their own businesses a higher advantage

Lower GDP countries cannot afford the same prices as higher GDP countries

Governments (in)flexibility in allowing firms to repatriate funds/profits Many governments make it difficult to repatriate

money, forcing them to invest elsewhere

STRATEGIC RISK The ability of a firm to make a strategic

decision in order to respond to forces that are a source of risk

These can also indicate the competitiveness of a firm

They can include: Threat of new entrants Threat of substitute goods/services Intensity of competition in the industry Bargaining power of suppliers Bargaining power of consumers

TECHNOLOGICAL RISK Lack of security in electronic transactions Cost of developing new technology The fact that new technologies may fail Out-dated technology

TERRORISM RISK Terrorism risk can make it difficult to do

business in a country The higher the risk of terrorism, the harder it

may be

OTHER RISKS TO CONSIDER Inexperienced management team No local marketing contacts or partners Inadequate infrastructure within the foreign

country Cultural and language barriers Company is not flexible Pricing is not optimised for the country Does not provide after sales services

Information on these can be found at : http://voices.yahoo.com/10-international-business-risks-challenges-for-7526598.html?cat=3

REFERENCES/USEFUL SITES Austrade. "Risk Management: Managing International

Risk." Austrade. Australian Government, n.d. Web. 16 Oct. 2012. <http://www.austrade.gov.au/Risk-management/default.aspx>.

Larmore, Carrieanne. "10 International Business Risks and Challenges for Small Businesses." Yahoo! Voices. N.p., 16 Jan. 2011. Web. 16 Oct. 2012. <http://voices.yahoo.com/10-international-business- risks-challenges-for-7526598.html?cat=3>.

Okolo, Sidney, Dr. "Risks in International Business." Ezine Articles. N.p., 16 July 2008. Web. 16 Oct. 2012. <http://ezinearticles.com/?Risks-in-International-Business&id=1331702>.

Sargeant, Nicola. "What Risks Do Organizations Face When Engaging in International Finance Activities?" Investopedia.

Investopedia US, 10 Nov. 2006. Web. 16 Oct. 2012. <http://www.investopedia.com/ask/answers/06/international

financerisks.asp>.