Risk Involved in Doing Business Internationally

The two main risk involved in doing business internationally are political risks and

commercial and financial risk. Political risk are those risks that involve disruption

of contracts or payments due to sudden political developments such as coups,

and wars. As a consequence, contracts may be cancelled, payments withheld,

business expropriated and so on. There have been situations where after having

supplied goods as per contract, payments were delayed due to coups, in some

instances; the goods supplied were looted in the political upheaval, but to

documentary evidence available and some persuasion, the payments were

released. A number of Indian companies, which had contracts with Iraq before

the Gulf war in the 1990s, had to abandon the contracts held way through due

to the outbreak of war. They were subsequently compensated by the

government of India through the ECGC.

Financial risks involve the failure of the buyer company to pay as per contract

due to bankruptcy. Commercial risks involve the sudden change in the situation

in the buyers country like a sudden shortage of foreign currency to pay the

invoices, although the equivalent local currency may be available.

A trader/ importer in an African country faced a situation wherein he was

unable to pay for his imports and released the goods from customs due to the

sudden failure of the BCCI in the 1908s The importer had his account with the

BCCI and the documents from the seller were sent to the bank, which had
suddenly closed, the money in his account was also frozen. While such situations

may not be common, these risks are higher when dealing foreign countries

where one may not have all the information about various developments.

In another instance involving some exports to Uganda, an Indian exporter could

not be paid despite the importer having deposited the local equivalent in the

bank, due the central banks restrictions on release of foreign exchange for the

transaction. In many countries, such occurrences have happened with letters of

credit issued by local banks recent examples being Nigeria and Iran. In such

cases, it is safer for the importer to ask buyer to open a letter of credit confirmed

by a prime international/ European bank, so that the liability for payments is with

the international/ European Bank.

Many such risks are covered by agencies like the ECGC (Export Credit

Guarantee Corporation) has office in all the main cities and state capitals in

India. The willingness to cover such risk on the value of the transactional and the

credit exposure to the country/ company as well as the rating which is

frequently reviewed and updated.

Conducting business internationally carries many risks that domestic business

does not. International business involves exposure to local economic conditions,

fraud, and bribery. Business can be interrupted by political problems such as

insurrections, problematic diplomatic relations, hostility from locals, and volatile

foreign governments. Unstable currency exchange rates and exchange

restrictions can also complicate international dealings. Finally, foreign earnings

and investments are subject to restrictions, and tariffs, foreign withholding, and

other tax issues can further restrict returns.

With all of these challenges in play, companies operating internationally should

keep a careful eye on local conditions and internal logistics. Regular visits by an

internal audit team will help make sure risks are effectively controlled and will

secure the financial interest of the parent company. Ultimately, preparation and

constant attention are the best protection against threats to international

business.

Logistical Risk

International business complicates supply chains and presents other logistical

concerns. Your ability to deliver your product on time and on budget requires

capable suppliers.

Two common tactics to mitigate logistical risk are supply chain

diversification and granting exclusivity to one trusted supplier. On the one hand,
if you diversify your supply chain extensively with suppliers from multiple nations

or regions, you may reduce risks local to each region, such as severe weather

and political unrest. This tactic is only feasible for businesses that have the

resources to cover diverse work and resources.

Granting single supplier an exclusive license might get you into their territory, but

it can also limit your growth. If you do grant a company an exclusive distribution

agreement, make sure to set clear terms within the agreement. Terms should

clearly state that exclusive distribution is intended to develop the entire

geographical market in no more than two years. Set challenging business goals

for your exclusive licensee, and plan a way out if the supplier fails to meet goals.

Regulatory Risk

There are many types of regulatory risk, but two of the most common involve

environmental regulations and taxes. Environmental regulations can affect the

entire bottom line, and many countries have stricter environmental standards

than the United States. International business ventures that consider and respect

local environmental attitudes are often more successful. As a result, local filing

and permit regulations can be confusing; it is ultimately most efficient and

cheapest to collaborate with local businesspeople, accountants, or lawyers.

Corruption Risk
For years many U.S. companies have regularly engaged in bribery, fraud, false

bookkeeping, and other corrupt business practices in international business. The

international business scene is dominated by a dont ask, dont tell culture,

which is contrary to popular domestic speak up policies that encourages

whistleblowing and ethical leadership. A serious anti-corruption compliance

program is a crucial component for any business operating internationally.

In recent years the Department of Justice has emphasized the requirements for

an adequate Foreign Corrupt Practices Act (FCPA) compliance program. So

far, the vast majority of investigations have not gone before the SEC, but it is still

extremely important that your company handle incidents properly. FCPA

violations, before the SEC or not, are expensive and damage your business. In

particular, routine violations cause employees and investors to lose confidence

in corporate leadership. This is particularly true in the case of bribes; although

government officials may be the end target, company officials often profit from

the corruption as well.

Health and Safety Risk

Detailed knowledge of a countrys health and safety risks is a prerequisite for low

level business travel, let alone establishing a permanent company presence.

Ensure employees are up to date on all recommended vaccinations and that

they take all prophylactic medications as directed. The

Legal Issues

When you conduct trade in another country, you'll have to be familiar with that

country's laws. You may also have to pay additional taxes and import duties in

the United States if you are importing products from other countries. The legal

complexities of international business can be challenging, and without proper

legal advice you might be subject to fines and penalties. Make sure you have

excellent international lawyers who have a firm grounding in the laws of their

home countries.

Language Issues

Language barriers are an obvious downside to doing business internationally.

You may need to rely on translators when speaking to business contacts, and

the intricacies of what your contacts say may be lost in translation. If you are

outsourcing customer service to another country, your customers may struggle

to understand people whose first language is different than your own.

Cultural Barriers

Different cultures have different values, and sometimes these differences can be

stark. Gender, for example, could prove problematic in countries where women

are not given equal rights to men. You may find yourself wondering if you can

safely send female employees to certain countries. Marketing styles in other

countries may differ, and polite behavior in the United States may be impolite

elsewhere. Some cultures don't take contracts as seriously as others, and many
cultures view the group as more important than the individual. It's important to

learn the cultural intricacies of the places you do business.

Supervisory Oversight

Whether you're opening a factory in another country or simply buying and

selling property, distance reduces your oversight. It's wise to employ people who

can tell you about the status of your business in other countries and who can

warn you of any potential problems. Without proper oversight, you may find

you're paying for sweatshop labor or signing an unfair deal. There have been

instances involving unsafe products imported from other countries, and it's vital

to ensure the products for which you are paying don't put your customers in

danger.

Political Problems

Many people are strongly opposed to outsourcing, globalization and other

international business practices. You may lose some of your customer base if you

begin trading in other countries. Moreover, if your company is involved in human

rights abuses in other countries -- even if you had no idea these abuses were

occurring -- you may be subject to an onslaught of bad publicity and lost

business.