2. Risk Management in Export-import
Business
Risk is a fact of business life, more so of international
business.
The Management of International business is the
management of risk.
No manager can make a strategic business decision or enter
into important business transaction without a full evaluation
of the risks involved.
Many of the best business plans have been ruined by a
miscalculation or a mistake, or an error in judgment that
could have been avoided with proper planning.
3. Risk Management in Export-import
Business
If the risk cannot be reduced through advance planning
and careful execution, perhaps it can be shifted to some
other party to the transaction.
If the risk cannot be shifted to another party to the
transaction, it might be shifted to an insurance company.
Many types of risks can be insured against, including the
risk of damage to the goods at sea, the risk of loosing an
investment in a developing country and many others.
4. Risk Management in Export-import
Business
(1) Risk Assessment and the Firm’s Foreign Market
Entry Strategy:
When a firm is considering its entry or expansion in a
foreign market, it must consider all options and decide
on a course of action commensurate with its objectives,
capabilities and its willingness to assume risk.
Selling to a customer in another country results in less
risk to the firm than licensing trademarks, patents and
copyrights there.
5. Risk Management in Export-import
Business
(2) Managing Distance and Communications:
The risks of doing business in a foreign country are
different from those encountered at home.
A firm doing business in a foreign country would
encounter greater distances; problems in
communications; language and cultural barriers;
differences in ethical, moral and religious codes;
exposure to strange foreign laws and government
regulations; and different currencies. All these factors
affect the risks of doing business abroad.
6. Risk Management in Export-import
Business
(3) Managing Currency and Exchange Rate Risks:
Currency risk is risk a firm is exposed to as a result of buying,
selling, or holding a foreign currency. Currency risk includes:
(i) Exchange Rate Risk
(ii) Currency Control Risk
(i) Exchange Rate Risk: Exchange rate risk results
from the fluctuations in the relative values of the foreign
currencies against each other when they are bought and sold
on international financial markets.
7. Risk Management in Export-import
Business
(ii) Currency Control Risk:
Some countries, particularly developing countries where
access to ready foreign reserve is limited, put restrictions on
currency transactions.
In order to preserve the little foreign exchange that is
available for international transactions, such as importing
merchandise, these countries restrict the amount of foreign
currency that they will sell to private companies.
This limitation can cause problems for a U.S or any other
country exporter waiting for payment from its foreign
customer who cannot obtain the dollars needed to pay for
the goods.
8. Risk Management in Export-import
Business
(4) Special Transactions Risks in Contracts for the Sale
of Goods:
Special risks are inherent in international transactions for the
purchase and sale of goods.
These transactions present special risks to both the parties
because the process of shipping goods and receiving
payment between distant countries is riskier than within a
country. Such risks are:
(i) Payment or Credit Risk
(ii) Property or Marine Risk
(iii) Delivery Risk
(iv) Pilferage and Theft Risk
9. Risk Management in Export-import
Business
(5) Managing Political Risk:
Political Risk is generally defined as the risk to a firm’s
business interests arising form political instability or
political change in a country in which the firm is doing
business.
Political Risk includes risk derived from potentially adverse
actions of Governments of the foreign countries in which
one is doing business or whose laws and regulations one is
subject to.
It also includes laws and Government policies instituted by
the firm’s home country which adversely affect the firms
that do business in a foreign country.
10. Risk Management in Export-import
Business
(6) Risks of Foreign Laws and Courts:
Many Acts that are perfectly legal in one country can be
illegal in another. Indeed, most travelers to a foreign country
could conceivably break a host of laws and not even be
aware of it.
The same is true for the law of contracts, employment,
competition, torts and other business laws.
It is virtually impossible to catalog all of the differences
between these laws from country to country
11. Risk Management in Export-import
Business
(7) Commercial Risks: The risks arising from suitability
of the product for the market or otherwise change in
supply and demand conditions and changes in price.
Commercial risks arise due to:
(i) Lack of Knowledge
(ii) Inability to adapt to the environment
(iii) Different kinds of situations to be dealt with
(iv) Greater transit time involved
12. Risk Management in Export-import
Business
(8) Cargo Risk:
Transit disasters are an ever present hazard for those
engaged in Export-Import business.
Every shipment runs the risk of a long list of hazards such as
storm, collision, theft, leakage, explosion, spoilage etc. It is
possible to transfer the financial losses resulting from perils
of and in transit to professional risk bearers known as
underwriters.
As most goods are transported by marine transport, every
exporter should have an elementary knowledge of marine
insurance to get the protection at the minimum cost.
