International business course at ESEC BCN. Bachelor 3. Lesson 2: Int'l business risks

1. International Business
Int'l business risks
Professor: Marc Arza
marza@rjce.net

2. 1. Int'l business risks
There are specific difficulties around
international business that differentiate
global operations from regular national
market activities.
This difficulties can be summed up in six
different risks:
- Cultural risk
- Political risk
- Information risk
- Transport risk
- Foreign exchange risk
- Payment risk

3. 2. Cultural risk
Cultural risk: Cultural differences around
the world create difficulties in many different
areas of business practice.
Different languages, values, religions and
attitudes make it difficult to manage areas
as different as marketing, human resources
and finances.
There are many approaches towards the
analisys of global cultural differences but
Hoftede's cultural dimensions is one of the
most accepted and applied to business
practice.

4. 3. Political risk
Political risk: The risk of loss when
investing or doing business in a country
caused by changes in a country political
structures or policies.
Political STABILITY (the lack of abrupt
changes in policies and political
structures) is a very interesting quality
when analysing international markets.
Many international insurance companies
cover up political risks for companies
operating in unstable and risky markets.

5. 3. Political risk
Emerging markets yearn to be boring, at
least politically. The Global Political Risk
Index, which is produced by Eurasia Group,
a global political risk advisory and consulting
firm, rates Hungary just in front of South
Korea as the most stable country in a 24-
strong field. The index uses a range of
qualitative and quantitative indicators to
measure both the capacity of countries to
withstand shocks and their susceptibility to
internal crises. Pakistan comes bottom of
the list, because of mounting political and
security tensions, and Eurasia Group is not
expecting things to improve. Nigeria and
Iran also jostle at the foot of the table. But
stability should not be confused with
pluralism: China outranks South Africa, India
and some other democracies.
Source: Economist, Sep 13th 2007

6. 3. Political risk (protectionism)
Protectionism is also a strong political risk for
international business. Protectionism is the economic
policy directed to restrain international trade and
investment.
Protectionist tools include:
- Tariffs: Taxes charged on imported goods.
- Quotas: Limits to the amount of imported
goods allowed to cross the border.
- Non-tariff barriers: Any meausure other
than tariffs directed to restrain the
entrance of foreign goods into the
market.

7. 3. Political risk (protectionism)
Most common non-tariff barriers:
a) Sanitary barriers: Sanitation and health requirements
b) Domestic content specifications: Requirements to use/buy national goods.
c) Import licenses: Specific license requirements
d) Import state trading enterprises: Controling and auhorizing any import
e) Exchange rate controls: Undervalued/overvalued exchange rate
f) Subsidies: Subsidizing national products (unfair competition)

8. 4. Information risk
Sourcing reliable quality information about international
markets may be more complicated and difficult than
acquiring information at a national level. Companies
know about their home market naturally, out of their
experience and contacts but sources of international
information are not as obvious.
Failing to get reliable information is a risk as it forces
businesses to take blind decisions.

9. 5. Transport risk
Transport plays a key role in international
business. International trade is always defined
by longer and more complicated transport that
trade at a national level. Lost goods, damaged
goods, delayed shipments and other specific
risks are high when talking about international
transport and international trade involves a set
of practices and documents directed to
reducing these risks.

10. 6. Foreign exchange risk
Those international exchanges in between
companies from a different currency area are
subject to foreign exchange risk.
The risk that currency exchange rates of the
involved currencies may change in between price
negotiation and payment execution,

11. 7.
7. Payment risk
Payment risk, the risk of not being paid, may not
be specific of international business bi but it is
certainly higher.
Information about costumers may be less reliable
and legal tools to recover unpaid invoices are more
expensive and les reliable than at a national level.