Posted: March 24th, 2023

Types of Risks in International Business and their Corporate Implications

Introduction

The ability of a business to mitigate risks is an important aspect of its growth and development. Foreign organizations are susceptible to various types of risks in international business. Political and economic turbulence within a country may create different challenges, such as intolerance from the local community, currency fluctuations, and uncertainty in harnessing raw materials (Kot & Dragon, 2015, p. 103). Accordingly, financial risks affect firms through uncertainty in the fiscal market, leading to volatility in stock prices, currency instability, and interest rate variations (Dinu, 2015, p. 93). Other notable risks to overseas organizations are unfriendly regulations, such as government policies and tariffs (Dinu, 2015, p. 93). Dinu (2015) avers that legislation, intellectual property rights, and unfavorable competition affect companies by providing skewed market information meant to advantage locals. As risks are inevitable in the international business environment, the capability to identify and manage threats is significant for growth and competitive advantage.

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Financial Risks in International Business

The financial capacities of a country influence the purchasing power of its people. Citizens’ economic strength can affect foreign companies’ financial targets. Employment levels determine the consumption of goods and services in a country, consumer income, and interest rates, among other factors. For instance, nations with high levels of unemployment have reduced spending power, which affects the business environment. Foreign companies encounter financial risks such as high costs of labor. Such firms should research and forecast the economic power of a nation to cover potential losses that may emanate during operations.

Quality and regulatory frameworks influence the demand and supply of products in the international market. Therefore, it is important to understand a foreign nation’s legal expectations and quality standards. Providing proper employee training on policy expectations and market information may save overseas businesses from losses, including fines from regulators. For instance, the Iranian government fined Schlumberger Limited, an American company, for violating policies and compliance procedures (Patrucco, Scalera, & Luzzini, 2016, p. 333). Thus, a firm should develop effective approaches for managing financial risks that may occur in the market for effective operations and cost savings.

Currency is a significant determiner of success in the business environment. Variations in the value of local and international currencies affect the operations of foreign companies (Patrucco et al., 2016, p. 333). For example, when an organization receives payment in local currency and initiates an exchange with the dollar or euro, the inflation of the local market may affect the currency value, leading to significant losses. Economic risks such as changes in monetary value may affect the rate of local currencies and suppliers’ buying power and may become a source of stakeholders’ conflicts (“International Business: New Realities,” n.d.).

While some suppliers prefer strong global currencies, such inclinations may affect a company’s financial reporting systems, leading to fines or other limitations imposed by regulatory bodies. Therefore, as organizations face the risk of accepting currencies with a lower value, financial managers should develop appropriate measures to mitigate losses incurred during currency conversion.

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Political Risks in International Business

Politics plays a critical role in the operations of international business. Locations with higher political instability are risky for business (Quer, Claver, & Rienda, 2018, p. 4). For example, civil unrest can affect business activities adversely, leading to economic losses on recurrent expenditures, such as rents, employee welfare, and utility costs. Inadequate regulations on property rights are a political risk that results in massive losses for international companies through damage to property or patents (Han, Liu, Gao, & Ghauri, 2018, p. 6).

According to Quer et al. (2018), a stable political situation and effective laws provide a comfortable regulatory environment for business (p. 4). However, stringent regulations on imports and exports, such as cancellation and non-renewal of export and import licenses or the imposition of bans on either raw materials or marketer products, can lead to losses. Therefore, it is important for international companies to assess the levels of political risks and ascertain if they are avoidable or coverable by a business strategy.

Political risks in domestic markets also affect organizations. For example, firms that operate under outsourcing arrangements in other countries face political risks associated with protectionist pressures at home (Chauhan, Kumar, & Sharma, 2015, p. 37). In addition, products from the outsourced market are met with hostility in host countries, which increases risk exposures. Companies outsource operations due to relatively cheap labor or low manufacturing costs in the preferred offshore destinations (Chauhan et al., p. 37). Such decisions, however, contribute to unemployment in domestic markets. Thus, companies that outsource their operations face the risk of products boycott, strikes, and poor publicity from negative campaigns. It is significant for organizations to manage the interest of the local clientele when they venture into international markets to consolidate their customer base.

Terrorism, cybercrimes, money laundering, and human rights violations are major political risks affecting organizations. Violence, radicalism, and other forms of delinquency cause instability in host countries. Han et al. (2018) explain that such political issues lead to the proliferation of weapons, which can adversely affect the operations of foreign firms.  On the other hand, inadequate human rights policies.  Cybercrimes and money laundering have economic implications for inflation levels and can interfere with exchange controls, hence creating a shortage in foreign currencies. All these risks can escalate to a lack of goodwill, poor controls, and lawlessness and affect political sovereignty, which is adversarial to the effective running of international enterprises.

Cross-Cultural Risks International Business

International businesses operate across various sociocultural setups, whose differences can create many challenges. Patrucco et al. (2016) illustrate that cross-cultural variations are a source of conflict among employees of foreign companies and often affect other stakeholders (p. 5). For example, cultural interactions can lead to misinterpretation and misunderstanding of people’s intentions or ideologies. Cultural variations also affect negotiation patterns, ethical practices, and decision-making systems. Businesses that share similar cultures between the home and host countries integrate workers easily and subsequently achieve consumer interests, unlike those with significant cultural distinctions. Considering these risks, integrating cultures is an important strategy for managing cultural differences in the workplace.

Culture and the legal work environment differ in various countries and influence the business environment. For instance, whereas some cultures consider the payment of incentives as motivation towards trading, others view it as an unlawful practice that, in addition, violates religious tenets. Similarly, some countries incline towards corruption or poor ethical principles (“International Business: New Realities,” n.d.). Although the culture of giving bribes and kickbacks may be illegal, it can affect foreign corporations, especially if they are denied vital operating licenses. For instance, when an international enterprise is restricted on importation or exportation in favor of a local company, it is disadvantaged in the market. Cross-cultural variations have implications for the operations of businesses and should be managed through effective integration strategies and sound policy influence.

Employees are the bearers of cultures in the workplace. Cross-cultural disparities among workers can affect working relations and reduce productivity levels. Integrating employees’ cultures is critical to mitigating possible risks (Stahl, & Tung, 2015, p. 392). For instance, whereas Americans are friendly and easy to interact with others, the Japanese are reserved and may not cooperate effectively with foreigners (Franklin, 2017, p. 2). In addition, language is a significant cultural factor that influences success in global businesses. Language barrier results in poor communication and thus affects companies. Notably, some languages are difficult to master and may render a firm’s operations redundant. Employees who cannot communicate effectively with their supervisors may fail to attain set goals. Therefore, integrating employees of diverse cultural backgrounds in the workplace is important for effectively running a business.

Cross-cultural aspects interfere with relations among company stakeholders. Cultural differences between suppliers and managers lead to an unpredictable business environment. The problem is that some cultures appreciate relationship-building between partners, while some cultures are strict and rigid (Franklin, 2017, p. 4). For instance, Americans and the French tend to organize business meetings over lunch or tea breaks, while the Japanese prefer formal boardroom discussions (“International Business: New Realities,” n.d.). Managing such variances is, therefore, significant to the growth of the business since they are remarkable areas of ideological differences and operational conflicts.

Commitment to business processes and agreements is a cultural issue in global communities. Accordingly, people’s cultures in the host country influence the legal protection for breach of contract or other forms of non-payment. Some cultures are flexible and open to discussions, while others are strict and may cancel contracts when systematic delays occur, either in deliveries or acquisitions. Organizations that operate in foreign countries should understand the culture of their host nation to enhance integration through training and improved workplace interactions (Franklin, 2017, p. 9).

Religious beliefs and practices can affect the work environment. Strong religious cultures often interfere with work relationships. Organizations from a predominantly religious background have days of worship which may be a source of conflict. For instance, firms working in Islamic countries reschedule their weekends between Friday and Saturday, whereas organizations in Christian nations have weekends between Saturday and Sunday. Cultural aspects regarding clothing for women and men are also an area that foreign companies should observe. The format of worship and approaches to religion are significant to companies seeking to operate in foreign jurisdictions.

Commercial Risks International Business

Amid misinformed business strategies and operational procedures, companies can experience commercial loss. The aspect emanates from the general business environment under which an organization manages its operations. Various factors affect the commercial environment, including players, legal expectations, and competition. Patrucco et al. (2016) elaborate that limited information about the capacity and capability of stakeholders or the overall operating environment enhances business risks (p. 4). For instance, a foreign company may engage a local distributor with limited capacity due to a lack of information.

Besides, local distributors are protected by regulations and domestic policies that hinder contract cancellation. Foreign companies are occasionally affected when low-quality products manufactured under poor occupational standards are sourced from local suppliers. Such inferior products damage the reputation of an organization. Therefore, offshore operators should plan to mitigate the impact of such laws that advantage local suppliers and competitors.  

Although all businesses should be prepared to accept a certain level of risk, a strategy to avoid threats is significant for growth and competitive advantage. Research, development and capacity analysis of stakeholders, such as suppliers and financial partners, help organizations manage business commercial risks. Patrucco et al. (2016) illustrate that businesses should process operational risks since they severely affect an organization (p. 4). In addition, company executives should manage offshore activities through effective planning to minimize costs and manage risks (Patrucco et al., 2016, p. 8). Therefore, mitigating commercial risks should be part of business operations.

Conclusion

Foreign companies experience several types of risks in the course of their operations. Such risks are inevitable due to the nature of the international market. Therefore, companies should develop strategies to manage threats to experience growth and competitive advantage. The competitive environment requires multinationals to generate a mechanism for recalculating operational risks in foreign locations or cover them within their operational forecast. Policy initiatives should mitigate political, commercial, financial, and cross-cultural risks. Additionally, they should be achieved through risk estimation frameworks and industry assessment systems. By managing risk, firms should prepare to accept possibilities that are beyond their capability. Accordingly, they should develop tools for effective risk assessment and estimating potential losses to be covered.  

 

References

Chauhan, P., Kumar, S., & Sharma, R. K. (2015). Modeling drivers of political risk in offshore outsourcing. European Journal of Business and Management, 7(9), 34-44.

Dinu, A.-M. (2015). Risk types in international trade. Knowledge Horizons. Economics, 7(1), 92-94.

Franklin, S. (2017). Japanese business culture: A study on foreigner integration and social inclusion (Honors thesis). Eastern Kentucky University, Richmond, KY. Retrieved from https://encompass.eku.edu/cgi/viewcontent.cgi?article=1492&context=honors_theses

Han, X., Liu, X., Gao, L., & Ghauri, P. (2018). Chinese multinational enterprises in Europe and Africa: How do they perceive political risk? Management International Review, 58(1), 121-146.

Kot, S., & Dragon, P. (2015). Business risk management in international corporations. Procedia Economics and Finance, 27, 102-108.

International business: The new realities. (n.d.).

Patrucco, A. S., Scalera, V. G., & Luzzini, D. (2016). Risks and governance modes in offshoring decisions: linking supply chain management and international business perspectives. Supply Chain Forum: An International Journal, 17(3), 1-13.

Quer, D., Claver, E., & Rienda, L. (2018). The influence of political risk, inertia and imitative behavior on the location choice of Chinese multinational enterprises: Does state ownership matter? International Journal of Emerging Markets, 13(3), 1-34.

Stahl, G. K., & Tung, R. L. (2015). Towards a more balanced treatment of culture in international business studies: The need for positive cross-cultural scholarship. Journal of International Business Studies, 46(4), 391-414.

Weise, R. A., & Hund, G. E. (2016). Financial incentives for reducing proliferation risks. Bulletin of the Atomic Scientists, 72(5), 332-338.

 

 

 

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