Risks companies face when entering international export markets

Risks in Export Market

There is need for companies to develop a professional approach before venturing into the exporting business. The management of the company is supposed to be committed extremely as well as devoting time and money in commencing the campaigns of export. A company is supposed to be ready to face greater competition as well as more stringent rules and regulations concerning products and packaging due to the variance in rules to which or across which the company will be exporting.

In the process of exportation, there are a number of risks that the company will face. These elements of risks are encountered in every commercial transactions as well as the complexity of the environments that exporters operate in. The content of this paper will analyze risks that a company can face while entering the field of exporting as well as discussing the roles of intermediaries in the field of trade.

Some of the risks involved include: credit risk, poor quality risk, transportation and logistics risks, legal risks, political risks, unforeseen risks, and cultural and language risks as indicated by Andrew Bernard B. et.al, (2007).

Credit risks

This is where a counter party to a transaction fails to perform as per the contracts' terms and conditions, resulting in loss by the holder of the claim. Banks all over the world tend to be very sensitive to credit risk in various financial sectors such as trade financing, loans, foreign, equities, bonds, swaps as well as inter-bank transactions. In many occasions, majorly as a result of long distances and alien environments that are involved, the exporter always finds it difficult to verify the importer's creditworthiness and reputation. In any case the creditworthiness of a foreign buyer is unknown, there is increased risk of late payment, or even fraud. This makes it very essential for an exporter to determine the credit worthiness of the foreign buyer. This can be done through the help of commercial firms by checking credit of the foreign companies.

Poor quality risks

This always happens when the goods to be exported don't get inspected prior to shipment through an independent third party. It may turn out that the entire shipment of the exporter could be rejected after arriving at the premises of the exporter because of poor quality of goods resulting in massive losses for the exporting company. An unscrupulous importer is able to do such a thing when they want to put pressure on the exporter so that they can negotiate at a lower price. For the experienced importers, they will request for a pre-shipment inspection to be carried out by an independence inspection company so as to guard against such mischief down the export chain.

This can be countered through shipping one or two samples of the goods produced to the importer through an international courier company. Even if the importer is not present during the dispatch for inspecting the quality of goods, they can still use the service of the independent inspection company.

Transport and logistics risks

When goods are being moved from one continent to another or within the continent, there are possibilities that the goods face various hazards. The risks could be damage, theft and the goods may sometimes not reach the destination at all.

It is of importance of for the exporter to understand every aspect of international logistics, especially the carriage contract. Such a contract is always drawn between a carrier and a shipper. The importer and exporter are supposed to understand their legal rights for them to claim against carriers incase of loss or damage. The party that will pay the main carrier can be either the importer or the exporter, depending on the export agreements.

Legal risks

Due to frequent change in international laws and regulations or within the country of the exporter, these international laws and regulation that change may affect the exportation negatively. Many of the exporters try to prevent this change of laws and regulation from affecting them through drafting a contract which is in conjunction with a legal firm, to make sure that their interest are taken care of. They make sure that they draw up a checklist containing legal questions that are basic which aim at prior to signing any formal contract, which is a safeguard against impromptu changes in terms of export and incase there are to be any changes, then ample time must be availed for the exporter to accordingly adjust (Cornelius Bothma, 2012).

a good instance is the exporter is supposed to be certain of whichever law and dispute-settlement procedure should be applied to what contract.

The legal environment should be considered more when an exporter wants to do trade with some countries such as the Muslim governed countries like Saudi Arabia. An exporter is supposed first to approach legal organizations in such countries before entering into any determined negotiation.

Moreover, when an exporter wants to appoint middlemen or intermediary, which can be agent or trading house, the exporter is supposed to have knowledge of many issues and responsibilities that influence these intermediaries appointment. The agreement must include a list that clearly states these issues, by providing specification of the duties and rights of the parties who are part of trade traction for this can prevent any serious legal conflicts that may arise at later stage.

Political risks

Political risks come about due to politics of a country. When the country where the exporter is to carry out trade with experience political instability, there are various risks that an exporter might face. Any exporter has to have knowledge of the policies of the foreign government so that they are in a position to change their strategies of marketing tactics accordingly, to take the necessary steps for the loss of business and investment.

Within countries that experience instability, they may end up in a loss due to wars. Additionally, exporters are supposed to be aware of the intervention of the government within the targeted market, for example, many of the countries operate under capitalist system within which the volumes as well as value of goods and services be it of local provision or through way of imports tend to be pegged on the forces of supply and demands.

Several countries still have their government play intervention role in their export and import. Some of the countries that practice these economies are like Cuba, Vietnam, North Korea among others. Some other countries have already achieved partial liberalization of trade; however, there is still need for an exporter to investigate the extent of such liberation before trading with them.

On the other hand, some countries that tend to have advanced towards a more open market, still have some constrains that may arise, like in their foreign currency reserves. Within these countries, their Reserves or Central Banks may not have such enough foreign exchange that can allow the progress of the payments; this may result in a risk of non-payment for the exporter.

Unforeseen risks

This is where natural disasters or terrorists attacks may occur destroying completely an export market for a company. This situation may make the exporter to suffer a big loss that can hinder the progress of the company, (Jitena Kumar Rawat, 2012). Another risk that an exporter may face under unforeseen risks can be where unexpected occurrences may just increase the transportation cost and because of that the exporter may suffer a great loss. This explains why it is important for an exporter to make sure that a force majeure clause has been included in any international contract that the exporter has to commit to.

Exchange rate risks

This is where a fall happens in the currencies, some of the currencies gain strength while others loose strengths. As a result one party who is involve in the trading may benefit over the other and the exporter is not an exception of these, it can affects the exportation costs and even the profit margin might come down. Because the exporter may not be in apposition to identify when there will be a fall or gaining of strength in the currencies, they can quote their currencies before trading. They can go to an extent of approaching the foreign Exchange division of their banks before they quote any prices internationally, for them to be advised. Another direction which the exporter can take in avoiding this exchange rate risk is through purchasing a forward exchange rate contracts.

Culture and language risk

This is where there is language as well as culture barriers between the exporter and the importer. Sometimes it can be a misunderstanding in terms of communication and in international trade transactions, majorly because the importer and exporter originate from different cultures and express themselves in different languages. Many a times business practices, such as rules and regulations, tax systems, accounting methods, customs systems and currency tend to differ from the one exporter to another.

Theoretical Background

There are three theories which can be used in discussing export intermediaries. They are: Transaction Theory, Agency Theory and Resource-Based Theory. Transaction cost theory give explanation as to why an exporter may opt to use intermediaries in the first place. Agency theory explains the costs and benefits that are associated with intermediaries. Resource-based theory gives explanations why some intermediaries outperform others.

Transaction Cost Theory

This theory refers to the way firms come up with governance choices, depending on the choice that minimizes their transaction costs. It concentrates on the ex-post costs that are associated with haggling and maladaptation in addition to costs of governance for maintaining the contractual relationship that have been chosen, (Williamson, O. 1985). These costs may go up because of the bounded rationality of decision makers, asymmetric distribution of information between parties to an exchange as well as uncertainty and complexity of the environment. Since such costs tend to be nontrivial during their transaction across borders, many of the activities of international business are believed to be able to minimize property transaction cost and export channels and this makes them to be chosen to minimize the costs incurred in achieving export sale.

While exporting, there are two export channels that manufacturer has:direct export, or indirect export via export intermediaries. For an intermediary to make sure that the second option is chosen by the exporter, he has to lower his client's export related costs of transactions relative to the one of the first choice. This shows that their performance depends on how successful they are in reducing their costs.

Agency Theory

As much as firm-market conflict is being emphasized in transaction cost theory, agency theory as well focuses on the principle-agent conflict. An exporter may look at a way that he can maximize his export performance by use of agents, intermediaries who are the agents, may be interested too in extracting a maximum fee for its services using minimum efforts. Moreover, an agent might misrepresent his knowledge and skills to principals. Such problems do come up due to inability of principals in verifying the agent's skills and behaviors.

For this problem to be prevented by the principals (exporters), they can lower the information asymmetry through investigating within monitoring systems such as hierarchy, in order to structure agents' incentives or constrain agents' opportunism in such a manner that the interest of all the parties are aligned. These activities include agency costs, that are always the "ex ante" costs that are used to monitor the bonding expenditures by the agent, expenditures of the principal as well as the residue costs, (Jensen, M. & W. Meckling. 1976). Therefore, intermediaries who are performing best tend to be the ones that maximize the agency costs for their clients, as compared to the ones who are not able to do this.

Resource-Based Theory

The suggestion of this theory is that competitive advantage of the firms is a function of its valuable, rare as well inimitable resources. These resources are always embedded, intangible and knowledge-based, (Barney, J. 1991).

On the part of export intermediaries, these skills like knowledge and negotiating ability tend to play an essential role of maximizing negotiation and search costs that are associated to export transactions. In other cases, some of the firms could be having unique financial resources which give them opportunities of being more successful in bonding clients through taking title to goods making the risk of the client be reduced.

Therefore, the performance export intermediaries do depends on their ability to acquire and deploy resources in a way can never be imitated easily. On the other hand, manufacturers may try to develop export capabilities in-house, (Leonidou & C. Katsikeas. 1996). This has been done by most of the manufacturers making the intermediaries to opt to smaller firms that cannot acquire these capabilities, or on marginal markets of larger firms who have not yet commanded their in-house channels' attention.

Conclusion

Firms have faced several challenges in their attempt to smoothly run their trade. The challenges have ranged from markets' environment to the challenges caused by the intermediaries themselves who are supposed to make smooth their activities. Exporters have the duty of finding the right environment for their business whether it is through their own initiative and capabilities or through the intermediaries. When right procedure and having enough knowledge of the market's environment is there, there will be minimal risks that are going to be involved in the firms' exportation. Governments as well have the duty of making sure that their exporters and importers are well protected from some of the risks which the government is able to prevent from happening. Export intermediaries have as well played an entrepreneurial role behind the internationalization process of trade across borders for most of the exporters. Such entrepreneurial firms may become more valuable if various companies turn to venture abroad. The challenges being faced by these intermediaries is reduced information asymmetries across countries through internet and e-commerce. Nevertheless, intermediaries as an organization have risen to the occasion through transforming themselves as well as retaining their edge in global trade.