International business risk management and mitigation strategies

International Business Risks

The Risks of International Business

There are a number of challenges in conducting business internationally that are not issues for local companies. While each foreign country may have its investment potentials, many also harbor risks only associated with global business activity. Sometimes the risks involved in doing business in a particular country exceed the benefits.

Here is a brief overview of some of the risks multi-national corporations face while doing business in foreign countries. 1) Strategic risk involves the ability of a firm to make strategic decisions in order respond to the forces that are a source of risk. These forces, such as the threat of new entrants in the industry, threat of substitute goods and services, intensity of competition within the industry, bargaining power of suppliers, and bargaining power of consumers, impact the competiveness of a firm. 2) Operational risk is the threat caused by the breakdown of machineries, supply and demand of resources and products, shortfall of the goods and services, lack of perfect logistic and inventory which leads to inefficiency of production. 3) Political risk involves the instability and actions of host governments that may make it difficult for companies to operate efficiently. A firm cannot effectively operate to its full capacity in order to maximize profit in an unstable country's political turbulence. A new and hostile government may replace the friendly one and expropriate foreign assets. 4) Country risk is the hazard the culture of a country creates that may make it difficult for multinational companies to operate safely, effectively, and efficiently. Country risks come from government policies, economic conditions, security factors, and political conditions. 5) Economic risk comes from the inability of a country to meet its financial obligations. Changes of foreign-investment or/and domestic fiscal or monetary policies may effect of exchange-rate and interest rates, making it difficult to conduct international business. 6) Financial risk is influenced by the currency exchange rate, the host government's flexibility in allowing firms to repatriate profits outside the country and devaluation and inflation. These issues impact s business's ability to operate at an efficient capacity. Countries may make it difficult for foreign firms to repatriate funds, forcing them to invest at a less then optimal level. As mentioned earlier, sometimes a firm's assets may be confiscated, contributing to financial losses. 7) Terrorism risk involves attacks that may stem from ideological differences, differences in culture and/or religious philosophy, or merely hate of companies by citizens of host countries. Potentially these hostile attitudes may lead to sabotage of foreign companies and/or the kidnapping of their employees making it difficult to operate safely in these countries (Okolo).

AU.S. firm investing in China would face some of the risks mentioned above. Investment is further complicated by the weak dollar in comparison to the Remnimbi. A nation's exchange rate is the rate at which its currency can be exchanged for the currencies of other nations. Foreign exchange rates are influenced by a number of factors, including domestic economic and political conditions, central bank intervention, balance of payment position, and speculation over future currency values. Currency values fluctuate depending on the supply and demand for each currency on the international market. In this system of floating exchange rates currency traders create a market for the world's currencies based on each countries relative trade and investment prospects. In theory, this market permits exchange rates to vary freely according to supply and demand. In practice, exchange rates do not float in total freedom as National governments often intervene in currency markets to adjust their exchange rates.