Domain4,Task1.

1: ReadingsandResources

KnowledgeStatement ................................................................................................. 2 Goal ................................................................................................................................ 2 LearningObjectives ..................................................................................................... 2 Introduction .................................................................................................................. 2 CulturalIssues.............................................................................................................. 3 CorporateRisks ............................................................................................................ 3 CountryRelatedRisks ................................................................................................ 5 PoliticalRisk ............................................................................................................. 6 DocumentaryRisk ................................................................................................... 7 TransferRisk........................................................................................................... 10 EconomicRisk ............................................................................................................ 10 ConvertibilityRisk ................................................................................................. 10 ForeignExchangeRisk .......................................................................................... 11 TranslationRisk...................................................................................................... 11 CulturalRisk............................................................................................................... 12 Summary ..................................................................................................................... 13 Resources..................................................................................................................... 13

Domain4,Task1.1: ReadingsandResources

Knowledge Statement
KnowledgeofPoliticalandEconomicRisksCausingLateand/orNonpayment fromOverseasMarket:Cancellation/FailuretoGrantUSExportLicense,Civil Unrest,ForeignCurrencyDelays/Shortages

Goal
Thegoalofthesematerialsistointroduceyoutothepoliticalandeconomicrisks thatarisewhenoperatinginaglobalenvironment.Theseincludefinancialrisks associatedwithslowornonpaymentaswellasthefinancialconsequencesofthe failuretoperformcontractualobligations.

Learning Objectives
Youwillbeableto: identifytherisksofslowornonpaymentininternationaltrade identifytheeffectoftheriskofslowornonpayment identifythedifferencebetweenadomesticriskandariskasaresultof internationaltrade identifyingeneraltermswhatismeantbyacountryrelatedrisk,its categoriesandcomponents.

Introduction
Internationalbusinessrequiresaseriesofscreeningsofthefourmajorareasof business:finance,marketing,personnelandproduction.Theinitialscreeningis toevaluatethebasicneedorpotentialforforeigntradeandinvestment.The marketingdepartmentofacompanyisresponsibleforthisevaluation domestically.Thefactorsusedinthisevaluationprocessmayhavetobe modifiedfortheforeignmarketbutareusuallysuccessfulwhensuchisdone. Thestudiesdonefordomesticmarketsdonotapplyintheforeignmarkets becauseofthedifferentsocioculturalandsocioeconomicforcesthatcomeinto play.Economicandfinancialsourcesareevaluatedbythefinanceareaofa company.Thisareadoestheplanningandforecastingtoevaluatecostsand outputwhichcanbeeasilyadaptedtotheforeignmarketsbyaddinginthe additionalcostsassociatedwithinternationaltrade.Investigationsofpolitical andlegalforcesareoftenoutsourcedbycompaniesandareadequatelycovered bydoingso.Severalscreeningsthatareoftenoverlookedwhichcannegatively impactacompanyifnotproperlyevaluatedaresocioculturalforcesand 2

Domain4,Task1.1: ReadingsandResources

competitiveforces.Anotherfactorisnotknowingtheforeignenvironment.This assessmentusuallyrequiresapersonalvisit.

Cultural Issues
Anthropologistsviewcultureasthesumtotalofthebeliefs,rules,techniques, institutions,andartifactsthatcharacterizehumanpopulations(BradyandIsaac, AReaderinCulturalChange,vol.1).Culturaldifferencescanbeasignificant barriertounderstandingandcanleadtorisksforbothbuyerandseller.You mustexploresomeofthemorecommonproblemsthatariseincrossborder transactionsasdifferentlanguages,businesspractices,religions,histories,and waysofdoingbusinesscollide.Youwillneedtheabilitytoidentifyandtofind sourcesofinformationtodeterminewhatthelevelofriskmaybeinconducting crossbordertransactionssothatyoucanprotectagainstsomeoftheserisks.For example,thesize,shape,language,color,materialcontentandpriceofaproduct tobesoldareimpactedbysocioculturalforces.Theseforcesplayanintegral partinthedecisionsofbuyers.Neglectingtoevaluatethewaybuyerswill respondtotheproductcanbeverycostlyforamanufacturer.

Corporate Risks
Investinginassetsoverseasisaformofdirectforeigninvestmentthatcanbe donethroughsubsidiaries,jointventures,manufacturingorlicenseagreements. Thepoliticalenvironmentwilloftendictatewhichformcompaniespursueorthe levelofriskaninvestingcompanyiswillingtotake.Thepursuitof manufacturinginaforeignlocalepresentssomeuniqueproblemsforacompany. Incentivesareoftengiventoencourageinvestment.Itisalwaysimportantto evaluatethecostsassociatedwiththeseincentives.Oneexamplecouldbethat governmentlandisbeingdonated.Butinordertoaccessthislandtheroads, utilitiesandlaborhavetobesuppliedbythepotentialmanufacturerinorderfor thelandtobeuseful.Housing,transportationandfoodmayhavetobesupplied aswellassomeotheressentialstoenticelabortocomeandworkforthe company. Internationalbusinessgenerallyisaseparationofsocietiesnotonlybyborders butterrain.Thisseparationbyocean,mountainsordesertscreatesmoredistance thanjustphysicality.Overcomingthechallengestopleaseabuyerdoesnot ensurepaymentonthedebtincurred.Theabilitytocollectonadebthasadded problemsbecausethelawsinthecountryofthebuyermaynotbethesameas thoseinthecountryoftheseller,therebycreatingadditionallegalexpensesin ordertocollectthedebt.Thereisalsoanexchange/lossriskpotentialifforeign 3

Domain4,Task1.1: ReadingsandResources

exchangecontractsweremadetocovertheuncollecteddebt.Therecoveryof merchandiseiscostlyasistransportbacktotheseller.Suddenpoliticalorcivil unrestmaypreventthepaymentfrombeingdeliveredtotheseller.Theseare onlyafewofthepotentialproblemsthatsellersfacewhenextendingcredittoa foreignbuyer. Theuseofforeigncreditinsurancecanprovidemanyoptionsforaseller.The foreigncreditinsurerwillevaluatetheforeignbuyersandprovidecreditlimits tothesellerforthem,thuseliminatingtheneedforaninternalcreditdepartment toevaluateandcollectonthedebts.Italsoallowstheforeignreceivabletobe eligibleforfinancingbyabank.Itallowsthesellertoexpandintotheforeign marketswithmuchlessrisk.ExImBankoriginallywastheonlyresourcefor foreigncreditinsurance,butnowmanyprivatecompaniescompeteforthis business.Theannualdeductibleforthisinsuranceisgenerallylessthanthecost ofhiringacreditclerk. Lettersofcreditbothcommercialandstandbyareoftenusedtocontrol corporaterisk.Lettersofcreditdonotpreventfraud,sothereisstillaneedto knowthebuyer.Ataminimum,lettersofcredittellyouthatabuyerhasa relationshipwithaparticularbanktotheextentthatthebankwillissuetheletter ofcredit.Thebuyerwilleitherhaveputupcashcollateralfortheamountofthe letterofcreditorhaveacreditfacilityfortheamountoftheletterofcredit. Rememberthatthebankpromisestopayifthereisnotstrictcompliancewiththe termsoftheletterofcreditandisamorereliablesourceofpaymentthanthe buyer. Cashpaymentinadvanceprovidesthemostprotectionandtheleastcostfora sellerbutthemostofriskforthebuyer.Sellingonopenaccountisatthe oppositeendofthepaymenttermspectrum,providingtheleastprotectionfor theseller.Documentarycollectionsaremoreriskythanlettersofcreditbutnot asriskyassellingonopenaccount.Documentarycollections,whenthe shipmentisunderanegotiabletransportdocument,willensurethattheseller willmaintaintitletothegoodsuntilpaymentismadeatsight.Documentary collectionsunderanacceptedtimedraftaresimilartosellingonopenaccount. Theonlydifferenceisthatthebuyersbankisengagedtoactasthecollecting agentforthesellerbutprovideslimitedcommunicationandcollection processingcapabilities.Thecollectingbanktakesnofinancialresponsibilityin thetransaction,afactthatasellermustalwayskeepinmind. Wheneverapurchaseorsaleismade,therearerisks.Thistypeofriskisreferred toascommercialrisk. 4

 Therisksincludetheobviousones:

Domain4,Task1.1: ReadingsandResources

abuyerbeingunableorunwillingtopaytheseller abuyerplacinganorderthatmustbedeliveredataspecifictimeandthe sellerbeingunableorunwillingtofulfilltheorder asellerbeingunableorunwillingtoprovidethenecessarywarrantee service asellerbeingunableorunwillingtorefundadvancepaymentsordeposits abuyerbeingunableorunwillingtoacceptdeliveryofproductwhenitis readyforshipment asellerbeingunabletocollectpayment,necessitatinglegalactionthatis costlytopursue.

Theserisksarecommontoalltransactionsinvolvingthepurchaseandsaleof goodsorservices.Someofthepaymentvehiclesmentionedhelpmitigatesome oftheserisks.

Country-Related Risks
Boththesellerscountryandthebuyerscountryhavelawsgoverningcross bordertrade.Theselawsmayaddress: theneedforexportandimportlicenses customsandimportduties limitationsonsendingmoneyoutofthecountry(currencycontrollaws andregulations) embargos.

Therearetransnationalrulesandagreementsthatmayalsoaffecttrade: protocolsandcommonpracticesforbankingtransactionsthatmaybe foundinInternationalChamberofCommercepublicationsforcollections, lettersofcreditandSWIFT(SocietyforWorldwideInterbank Telecommunicationssystems)procedurestoexecutepaymentsandto communicateoncollectionsandlettersofcredit termsofsaleasdefinedinIncoterms,anotherInternationalChamberof Commercepublicationthatdetailswhenthecosts,risksand responsibilitiesfortransportinggoodstransferfromsellertobuyer.

Domain4,Task1.1: ReadingsandResources

Someexamplesofcountryrelatedrisksillustratepaymentriskissuesincross bordertransactions.Sovereignorcountryrelatedrisksstemfromtheactionsof oneormoregovernmentsandgovernmentagenciesorbycivilwar,civilunrest andstrikes.Asellerhasacontracttodeliverperishablegoodstoabuyerin anothercountry.Thereareactionsbythegovernmentthatcouldpreventthe deliveryandthecompletionofthetransaction.Warbyathirdcountrywith eitherthebuyersorsellerscountrycouldcausethegoodsnottobetransported and/ordeliveredbyoneofthewarringcountries.Anembargoorblockadecould barthedeliveryofthegoods.Astrikeinthelogisticpipelinecouldalsostopthe goodsfrombeingdelivered. Purelypoliticalactionsliketransferandconvertibilityrisksmustalsobe consideredasapartofsovereignrisk.Transferandconvertibilityrisksariseas theresultofissueswithcurrencyusedbythebuyer,seller,orotherparties involvedinthetransaction.Itshouldbekeptinmindthattransferand convertibilityrisksarenotthesameasforeignexchangeriskwhichwillbe discussedlater. Itisimperativetoevaluatethepotentiallevelofriskbyusingseveraldifferent approachesandtechniques,whichrangefromrelyingonexpertstomakingyour ownjudgments.Additionalrisksmayariseinthecourseofinternationalor crossbordertransactions.Theserisksfallintoseveralgeneralandcommon categories:sovereign,documentary,foreignexchange,andcultural. Political Risk Sovereignorcountryrelatedrisksfallintoseveralmajorsubcategories:political, transferandconvertibility.Politicalrisksarethoserisksthatarisefromthelegal andforeignrelationsactionsofthenationalgovernmentsofaseller,abuyerand sometimesthirdcountries,especiallythirdcountriesthroughwhichcargomay travel.Transferandconvertibilityrisksalsorelatetothebuyerandsellers countries,butmorespecificallyintermsofthemanagementofthecurrencyand theavailabilityofforeigncurrencies,alsoknownasforeignreserves. Sometimeswhenacountry,usuallythroughitscentralbank,needstorationthe foreigncurrencyithasavailabletoit,itwillplacecontrolsontransfercurrency, sometimesevenitsowncurrencyoutofthecountry.Thissituationiscalled transferrisk.Thebuyerordebtoriswillingandabletopay,butrestrictionshave beeninstitutedthatpreventthepaymentfromtakingplace. Convertibilityriskissomewhatsimilar.Thebuyerordebtoriswillingandable topaywithlocalcurrencyandthecurrencymaybetransferredoutofthe 6

Domain4,Task1.1: ReadingsandResources

country;however,thereisnoreadymarkettoconvertittoacurrencytheseller orcreditorcanuse.Thebuyerordebtormaybepreventedfromlegally exchangingthecurrencyinhisowncountrybecauseofcurrencycontrols imposedbyhisowncountry,usuallythroughthecentralbank.Ifthebuyer sendshislocalcurrencytotheseller,thesellercouldbefacedwithhavingto exchangeitforausablecurrencyatdeepdiscountornotbeingabletoexchange thecurrencyatanyrateofexchange.Foreigncurrencyexchangeunderafree floatingenvironmentcanbeveryvolatileovertimeandshouldbehedgedbythe inexperienced. Documentary Risk Documentaryrisksaretheprimarycauseofslowornonpaymentin internationaltrade.Initssimplestform,documentaryriskarisesfromamissing orincorrectlyprepareddocumentthatisrequiredtocompletethebuy/sell transactionand/ormakepayment.Crossbordertransactionsveryofteninvolve manydocuments,butjustonemissingdocumentoradiscrepancyinadocument canstopapaymenttemporarilyorpermanently. Someofthemorecommondocumentproblemsarecausedby lettersofcredit importandexportlicenses certificationssuchascertificatesoforigin customsdocuments transportationdocuments otherbankandlegaldocuments.

Hereareexamplesofletterofcreditdocumentproblems.Asellerhasreceiveda letterofcreditthatisdenominatedinhis/herowncurrency.Thesellerhas eliminatedtheriskthatthebuyerwillbeunableorunwillingtomakepayment whenitisduebecausethebankthatissuedtheletterofcreditnowhasthe paymentobligation.Theletterofcreditstatesthatthesellerwillbepaidupon presentationofcertaindocumentsthatneedtobeinconformitywiththebanks (andbuyers)requirementsundertheletterofcredit.Documentsrequiredby commerciallettersofcreditforpaymentmayincludebutarenotlimitedto: oceanbillsoflading airwaybills

 certificateofthecountryoforigin invoice packinglist insurancecertificate

Domain4,Task1.1: ReadingsandResources

certificationsofweight,quantityortechnicalspecification.

Thedocumentsrequiredenablethebuyertoclearthegoodsthroughcustoms andcomplywithanyothercontractualagreements.Alloftherequirementsfor acceptabledocumentationexaminationaresetforintheICCUniformCustomsand PracticeforDocumentaryCredits(UCP)publishedbytheInternationalChamberof Commerceinitslatestversion.Anymodificationoramplificationto acceptabilityofrequireddocumentswillbefoundonthefaceoftheletterof credit.Ifanyoneoftherequireddocumentsismissing,isnotexactlyin complianceasrequiredintheUCPandonthefaceoftheletterofcredit,is inconsistentwithotherdocuments,orisnotproperlyendorsed,theissuingbank willnotpaytheseller.Somecommonproblemswithdocumentsbeingusedfor paymentwithaletterofcreditincludethefollowing: Weightsmaybeinpoundsononedocumentandinkilogramsonanother. DescriptionofgoodsintheletterofcreditisinSpanish,buttheinvoices and/orpackinglistsdescribethegoodsinEnglish. Goodsarenotshippedinthequantityortimeframerequiredunderthe letterofcredit. Therearemisspellingsintheletterofcredit,butotherdocumentshave thosewordsspelledproperly. Negotiabletransportationdocumentsarenotproperlyendorsedor consigned. Toomuchortoolittlehasbeenshipped. Thenameandaddressofthebuyerorsellerisnotinstrictcompliance withtheletterofcredit. Documentsarenotproperlylabeledtomatchthedocumentsrequired undertheletterofcredit. Thereareinconsistenciesbetweendocumentsforcarton,weightor numbercounts.

Domain4,Task1.1: ReadingsandResources

Thereareincorrectconsignmentornotificationpartiesonthebillof lading. Theseareonlyafewofthepotentialdiscrepanciesthatoccurwitha commercialletterofcredit.

Standbylettersofcreditareissuedtoasellerbythebuyersbanktocoverfor noncompliancewithagreeduponpaymentterms.Thestandbyletterofcredit virtuallystandsbytopayifthebuyerdoesnotmeethis/herpayment obligations.Thedocumentaryrequirementtoclaimunderastandbyletterof creditisasimplestatementdeclarationmadebythesellertotheissuingbankof thestandbyletterofcredit.Standbylettersofcreditareusedwhenshipments aredoneconsistentlyonarevolvingbasistothesamebuyer.Thecostofdoinga standbyoveracommercialletterofcreditneedstobeevaluatedbeforedeciding whichpaymentinstrumentshouldbeused. Otherdocumentaryrisksariseastheresultofexportandimportlicensesaswell ascurrencycontrolrequirements. Asellerhasacontracttodelivergoodstoacustomerinanothercountry.The buyerhasthefinancialstrengthandcharactertobewillingandabletomake paymentwhenthegoodsaredelivered.Thebuyerhas,however,failedtoobtain animportlicense.Thegoodsareheldbycustomsinthebuyerscountry,and thusthedeliverycannotbecompleted. Asellerhasacontracttodelivergoodstoacustomerinanothercountry.The buyerhasthefinancialstrengthandcharactertobewillingandabletomake paymentwhenthegoodsaredelivered.Thebuyerhasavalidimportlicense permittingtheimportationofaparticularquantityofgoodsduringaparticular timewindow.Thesellershipsthewrongquantityand/orthegoodsarenot shippedintothebuyerscountryduringthespecifiedtimewindow.Thegoods areheldbycustomsinthebuyerscountry,sothedeliverycannotbecompleted. Asellerhasacontracttodelivergoodstoacustomerinanothercountry.The buyerhasthefinancialstrengthandcharactertobewillingandabletomake paymentwhenthegoodsaredelivered.Thesellerhasfailedtoobtainarequired exportlicense.Thegoodsmaybeheldbyauthoritiesinthesellerscountry, and/ortheremaybesevereciviland/orcriminalpenaltiesimposedontheseller. Asellerhasacontracttodelivergoodstoacustomerinanothercountry.The buyerhasthefinancialstrengthandcharactertobewillingandabletomake paymentwhenthegoodsaredelivered.Thebuyerhas,however,failedtoobtain

Domain4,Task1.1: ReadingsandResources

appropriateauthoritytoconverthislocalcurrencytothatofthepurchase contract.Thegoodsmayornotbeheldbycustomsinthebuyerscountry,but thesellerwillgenerallynotbepaidwhenpaymentisdue,and/orpaymentmay notbemadeatall. Transfer Risk Transferriskscanoccurwhenabuyerhasreceivedthegoodspromisedandis readytomakepayment.Thegovernmentofthebuyerscountryseesitsforeign reservesrapidlyleavingthecountry.Thelaworcentralbankinstitutes regulationstostopallmovementoffundsoutofthecountrywithoutspecific approval.Thisprogramhaltsthetransferoutofthecountryofthebuyers currencyaswellasthecurrencyofanyothercountry.Thebuyeriswillingand abletomakethepaymenttotheseller;however,bygovernmentintervention, thepaymentisblockedfromtakingplace.

Economic Risk
Economicriskscanendangertheabilityofasellertogetpaymentforgoodsor servicesinmanyways.Thistypeofriskcansometimesbeforecastbutisoften completelyoutofthecontrolofeitherthebuyerorseller.Purchasingtransaction insuranceisessentialforabuyertominimizeeconomicrisk.Elementsof economicriskincludebutarenotlimitedto: convertibilityrisk foreignexchangerisk translationrisk centralbankactivities(interestratefluctuation,availabilityoffunds) economicindicatormovement(GDP,unemployment,purchasingpower, inflation,etc.).

Convertibility Risk Convertibilityriskisanissuewhenabuyerhasreceivedthegoodspromised andisnowreadytomakepaymentbutcantbecause,foranynumberofpossible reasons,thebuyersgovernmentbarstheconversionofitslocalcurrencytothat ofanyothercountry.Thereasonsforthisactioncouldbeapossiblewar,amajor buildinginfrastructureprogram,oramassivenegativetradebalance.Thebuyer naturallyhasthecurrencyofhisowncountryinhisbankaccount.Whenthe buyergoestothebanktoexchangethelocalcurrencytothecurrencyspecifiedin thepurchasecontractortothecurrencyofthesellerscountryorforthatmatter 10

Domain4,Task1.1: ReadingsandResources

thecurrencyofanyhardcurrencycountry,theconversioncannotbemade withoutproperauthorization.Convertibilityrisksusuallyoccurwhenthe buyerscurrencydoesnothaveareadyworldmarket.Althoughthetransferof thelocalcurrencyoutofthebuyerscountrymaynothavebeenspecifically barred,itprovideslittlevaluesincethesellermaynotbeabletofindabuyerfor thefunds. Foreign Exchange Risk Foreignexchangeriskisnotthesameaseithertransferriskorconvertibilityrisk. Foreignexchangeriskoccurswhentherateofexchangebetweenthesellers currencyandthebuyerscurrencychangesdramaticallybetweenthetimethe orderisquotedandthetimethefinalpaymentisreceived.Whenpaymentisnot madeinacrossbordertransaction,thedifficultyofcollectioncanbe compoundedsignificantly,especiallyifthetransactionishedged.Therefore,itis muchbettertoassessthelevelofriskandknowwaystomitigate,manage, transferoraccepttherisks. Forexample,asellerandbuyeragreethatthesellerwillbepaidinthesellers currency.Thebuyerhasthefinancialstrengthandcharacteratthetimeofthe contracttobewillingandabletomakepaymentwhenthegoodsaredelivered. Betweenthetimetheorderisplacedandthetimethebuyeristomakepayment, however,thebuyerscurrencydropssignificantlyinvalueagainstthesellers currency.Thecostofthegoodsmaynowbemorethantheprofitmarginofthe buyer,orthebuyermayhavetopaymuchmorethananticipatedinthebuyers localcurrency.Itmaytakethebuyermuchmoretimetoobtainenoughlocal currencytobuyenoughofthesellerscurrencytomakefullpayment.Itmaybe thatthebuyerwillneverbeabletomakeafullpaymentforthepurchase. Hedgingagainstforeignexchangeriskisthebestsolutionforthistypeof problem. Translation Risk Translationriskinvolvestherevaluationofforeignassetsthatareheldina foreigncurrency.Theremaybeadifferenceinthecurrentforeignexchangerate fromthetimeoftheoriginaltransactiontotimeofthefulfillmentofthesales contract.Assetsheldonthebalancesheetinforeigncurrencymustperiodically berevaluedtothecurrentmarketpriceofthatcurrency.Thiskindofrevaluation tothecurrentmarketwillcreateanexchangelossorgain.Thisexchangegainor lossisunrealizedbutstillimpactsthevalueoftheassetsheldoverseas.An examplefollows: 11

Domain4,Task1.1: ReadingsandResources

Plantandequipmentofaninternationalcompanyaremarkedtomarketatyear endforfinancialreportingpurposes.Conditionsthroughouttheyearhave causedadeclineinthevalueofthecurrencyoftheirforeignholdingsof20%. Thisdeclinehastheimmediateaffectofreducingthevalueoftheseassetsby 20%,whichthenhasthedirectimpactofreducingthecompanysprofitabilityfor theyearbythesamevalueeventhoughnodirecttransactionhasoccurredother thantherevaluationtocreatethisloss.

Cultural Risk
Culturalrisksoccurastheresultofdifferentexpectations,misunderstandings andmiscommunicationsbetweenabuyerandtheseller. Asellerwantstomakealargesaletomeetaquarterlyquota.Thebuyer wantstobepoliteandmaybesayingyes,acknowledgingthesellers explanationofthefeaturesandbenefitsoftheproduct.Thesellerasksfor thepotentialbuyersstandardshippinginstructions,whicharethen promptlyprovided.Thesellerenterstheorder,andtheshipmentis made.Butthebuyerhasneverplacedaproperorderandthereforerejects theshipment. Arequestforaquotationarrivesthatismisinterpretedtobeapurchase order.Alackofcommunicationresultingfromlanguageproblemsresults inashipmentbeingmadethathasnotbeenordered. Abuyerpromisestopaypromptlywhenthegoodsaredelivered.What thesellerfailstorealizeispromptlywillbeafterthemonthlongholidayin thebuyerscountryduringwhichthegoodsmaybeshippedbutwillnot bepickedupbythecompanyuntilaftertheholiday.Thuspaymentis delayed,anddemurragecostsmayaccumulate. Aseller,bynotdoingextensivemarketingresearch,exportsaproductfor distributiononlytofindoutthatforreligiousandculturalreasonsitwill notbepurchasedandthereforeisrenderedworthless.

Riskisaninherentpartofallbusinesstransactions.Thereisriskofslowornon paymentindomestictransactionsthatariseprimarilyfromtheunwillingnessor inabilityofabuyertopayasellerwhenpaymentisdue.Wheninternational transactionstakeplace,morerisksareaddedbecauseofthelaws,regulations andpoliticsofthebuyersandsellerscountriesaswellaspossiblethird countries.Thefinancialconditionofabuyerscountrymaycausedelayedor blockedpayments.Changesintherelativevalueofbuyersandsellers 12

Domain4,Task1.1: ReadingsandResources

currenciesposerisks.Thenumberofdocumentsrequiredinmanycrossborder transactionsopensthepossibilityofmissingdocumentsordiscrepanciesinthe formstobefiled,leadingtosloworblockedpayment. Therearemanymisunderstandingsthatcanoccurinbusinesstransactions negotiatedamongcountriesindistanttimezones,withdifferentlanguages, varyingculturalpracticesanddissimilarethicalvalues.Anyorallofthesecan contributetopaymentsnotbeingreceivedwhendue.

Summary
Therearemanyformsofriskassociatedwithbusinessandmoresowith internationalbusinessbecauseoftheaddedpressurecausedbysovereign governments,geographyandculture.Asuccessfulinternationalbusiness managerdoesnotgointobusinesswithablindeye.He/sheidentifiesthe potentialrisks,assessesthepotentialprofits,andputstheappropriaterisk mitigationtoolsintoplace.Thereareavarietyoftypesofriskassociatedwith internationaltransactions,political,economicandcommercialrisk,allofwhich mayrenderabuyerorsellerincapableofconductingbusiness(gettingpaidor receivingshipment).Youmustunderstandthecomplexinteractionsofthe variouskindsofrisk.Asimplewaytodifferentiatecommercialandcountryrisk isprovidedbelow: countryrisk=politicalrisk+economicrisk commercialrisk=businesstransactionrisk

Resources
I.BradyandB.Isaac,AReaderinCulturalChange,vol.1(Cambridge,MA SchenkmanPublishing,1975)p.x. V.Barnouw,AnIntroductiontoAnthropology(Homewood,IL,DorseyPress, 1975)p.5. FITTSkillsInternationalTradeFinanceParticipantsManual,Forumfor InternationalTradeTraining(FITT) InternationalBusiness:TheChallengeofGlobalCompetition(7rded.)Burr Ridge,IL:Irwin/McGrawHill. TheGlobalEntrepreneur,JamesFoley,2ndEdition,JamricPress,2004.

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