UNIT 4.

INTERNATIONAL BUSINESS RISKS

1. INTERNATIONAL BUSINESS RISKS AND DIFFICULTIES

Engaging in international business introduces a myriad of challenges and risks compared to

national operations. Cultural differences pose a substantial hurdle, affecting communication and

business conduct.

Logistics and transport challenges emerge as goods traverse diverse borders, encountering

varying regulations and transportation systems. Currency exchange fluctuations add an

additional layer of risk, impacting pricing, profit margins, and financial stability. Political

uncertainties on a global scale introduce unprecedented risks,

Navigating these intricate languages demands adaptability, strategic foresight, and meticulous

risk management to ensure the sustainability and success of international business endeavors.

2. LANGUAGE AND CULTURE RISK

Expanding a business internationally requires translating marketing materials accurately to avoid

negative impacts on the brand image. Poor translations can lead to lost business opportunities

and reduced revenue. To avoid marketing translation fails, businesses can follow several tips.

Firstly, businesses should hire professional translators who are fluent in both the source and

target languages and familiar with cultural nuances. These translators ensure that marketing

materials accurately convey the intended message and resonate with the target audience.

Secondly, businesses can use Translation Management Systems (TMS) to manage the

translation process efficiently. TMS software can ensure consistency and accuracy across all

marketing materials, as well as manage glossaries, translation memories, and style guides.

Thirdly, businesses must research the local market’s culture, language, and preferences to

create marketing materials that are relevant and appealing. This includes knowing what type of

humor or wordplay is acceptable and what cultural references to avoid.

Fourthly, businesses must review and approve translations before publishing. It is essential to

have all translations reviewed and approved by a native speaker or a professional proofreader to
catch any errors, inconsistences, or cultural misinterpretations that could negatively impact the

brand’s image.

Finally, businesses should avoid using machine translation tools for marketing materials.

Machine translations are not yet accurate enough for marketing translations, so it is better to

focus on professional human translation.

By investing in professional translations services, using TMS software, researching the local

market, reviewing and approving translations, and avoiding machine translation, businesses can

avoid marketing translation fails in international business.

3. TRANSPORT AND LOGISTIC RISK

International business operations involve complex logistics and transport networks that connect

suppliers, manufacturers, and customers across borders. While globalization has opened up new

opportunities, it has also exposed businesses to a myriad of risks in the logistics and transport

sector. Understanding and mitigating these risks are crucial for the success and resilience of

international businesses.

I. Customs and Regulatory Compliance. Navigating diverse customs regulations,

import/export restrictions, and compliance requirements is a significant challenge in

international logistics. Failure to comply with these regulations can result in delays,

fines, and even the confiscation of goods. Staying abreast of evolving trade policies

and maintaining accurate documentation are essential to mitigate this risk.

II. Supply Chain Disruptions. Disruptions to the supply chain, whether due to natural

disasters, geopolitical events, or global crises (such as pandemics), can severely

impact the movement of goods. Businesses must develop contingency plans,

diversify suppliers, and invest in technology to monitor and respond to disruptions

promptly.

III. Transportation Delays. Transportations delays can arise from various factors,

including congested ports, labor strikes, weather conditions, or inadequate

infrastructure. These delays can disrupt production schedules, increase holding

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 costs, and damage relationships with customers. Building flexibility into supply chain

strategies and utilizing real-time tracking technologies can help mitigate these risks.

IV. Security Concerns. Cargo theft, piracy, and terrorism pose significant security risks to

international shipments. Implementing robust security measures, utilizing secure

transport providers, and leveraging advanced tracking and monitoring technologies

can enhance the safety of goods in transit.

V. Currency Fluctuations and Financial Risks. International businesses are exposed to

currency fluctuations, which can impact the cost of transportation, raw materials, and

other expenses. Fluctuations in exchange rates can affect profit margins and overall

financial stability. Implementing risk management strategies, such as hedging, can

help mitigate the impact of currency volatility.

VI. Poor Infrastructure. Inadequate transportation infrastructure in certain regions can

lead to delays, increased costs, and operational inefficiencies. Assessing

infrastructure capabilities and collaborating with reliable partners can help businesses

navigate regions with suboptimal logistics infrastructure.

VII. Communication and Coordination Challenges. Effective communication and

coordination are vital for successful international logistics. Language barriers, cultural

differences, and varying time zones can complicate coordination efforts. Utilizing

technology, fostering cross-cultural training, and establishing clean communication

protocols are essential in overcoming these challenges.

For conclusion, navigating the complexities of international logistics and transport in the business

landscape requires a comprehensive understanding of the associated risks. Proactive risk

management strategies, including regulatory compliance, supply chain diversification, and

investment in technology, are critical to building resilient and successful international business

operations.

3.1. MITIGATING TRANSPORT AND LOGISTICS RISK

Mitigating transport and logistics risks in international business requires a proactive and strategic

approach. Here are several measures that companies can adopt to protect themselves against

potential problems:

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 I. Risk Assessment and Planning. Conduct a thorough risk assessment to identify

potential vulnerabilities in the supply chain. Develop a comprehensive risk

management plan that addresses various scenarios, including regulatory changes,

natural disasters and geopolitical instability.

II. Diversification of Suppliers and Partners. Reduce dependency on a single supplier or

transportation partner. Diversifying suppliers and logistics providers can help mitigate

the impact of disruptions in one area and provide alternative routes in times of crisis.

III. Stay Informed on Regulatory Changes. Stay abreast of changes in customs

regulations, trade policies, and compliance requirements. Regularly update internal

processes to align with evolving regulatory landscapes. Establishing a dedicated

compliance team or working with experts in international trade law can be beneficial.

IV. Utilize Technology for Real-Time Tracking. Implement advanced tracking and

monitoring technologies to gain real-time visibility into the movement of goods. This

allows companies to proactively address potential issues, track shipments, and

communicative effectively with relevant stakeholders.

V. Invest in Supply Chain Resilience. Enhance supply chain resilience by building

redundancy and flexibility into the network. This may include having multiple

transportation routes, alternative suppliers, and robust contingency plans for various

disruptions.

VI. Security Measures. Implement stringent security messages to protect goods in

transit. Utilize secure transportation providers, invest in advanced tracking and

monitoring systems, and collaborate with relevant authorities to enhance security

protocols.

VII. Financial Risk Management. Employ financial risk management strategies to mitigate

the impact of currency fluctuations. This may involve hedging, setting currency

exchange rate contracts, or working closely with financial experts to develop

strategies tailored to the company’s risk tolerance.

VIII. Infrastructure Evaluation. Before expanding into new markets, thoroughly assess the

transportation infrastructure in those regions. Choose logistics routes that have

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 reliable and well-maintained infrastructure and collaborate with local partners who

understand the intricacies of the transportation network.

IX. Cross-Cultural Training and Communication Protocols. Foster a culture of effective

communication and coordination within the organization. Provide cross-cultural

training to staff involved in international operations to improve understanding and

collaboration. Establish clear communication protocols to mitigate language barriers

and time zone differences.

X. Use INCOTERMS to your advantage. INCOTERMS provide a clear roadmap for

international trade, mitigating transport risks by defining roles, responsibilities, and

liabilities between buyers and sellers at every stage of the journey.

By adopting a comprehensive risk management strategy that encompasses these measures,

companies can enhance their ability to navigate the challenges associated with international

logistics and transport, ultimately safeguarding their operations and ensuring sustained success

in the global marketplace.

3.2. INCOTERMS

INCOTERMS are set of standardized trade terms published by the International Chamber of

Commerce (ICC). These terms are widely used in international commercial transactions to define

the responsibilities and obligations of buyers and sellers regarding the delivery of goods.

INCOTERMS help prevent misunderstandings, disputes, and ensure clarity in the international

trade process.

The main role of INCOTERMS is to establish a common language for international trade and

specify the respective obligations and risks of the buyer and seller at various stages of the

transportation process. These terms address key aspects such as the point of delivery,

transportation costs, risk transfer, and the division of responsibilities between the parties

involved. Properly understanding and using INCOTERMS is crucial for businesses to manage

risks, negotiate contracts, and facilitate smoother international transactions.

4. CURRENCY EXCHANGE RISK

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Currency risk, also known as exchange rate risk, is a significant challenge that companies face

when conducting international business. Here are some strategies that can help companies

avoid or mitigate currency risk:

I. Currency hedging. Companies can use various financial instruments, such as forward

contracts, options, and futures contracts, to hedge against currency risk. By locking in

exchange rates for future transactions, companies can protect themselves from

adverse movements in currency values.

II. Diversification. Companies can reduce currency risk by diversifying their operations

across multiple countries and currencies. This can help to balance the impact of

currency fluctuations on the company’s overall performance.

III. Pricing strategy. Companies can adjust their pricing strategy to account for currency

risk.

IV. Invoice currency. Companies can negotiate with their customers and suppliers to use

a stable currency, such as the U.S. dollar, for invoicing and payment. This can help to

reduce the impact of currency fluctuations on the company’s revenue and expenses.

V. Risk-sharing agreements. Companies can enter into risk-sharing agreements with

their suppliers or customers to share the risks and costs associated with currency

fluctuations. This can help to reduce the impact of currency risk on both parties.

Overall, the best strategies to avoid currency risk in international business with depend on the

specific circumstances and goals of each company. Companies should assess their exposure to

currency risk and develop a comprehensive risk management strategy that takes into account

their business objectives, financial resources and risk tolerance.

4.1. DIFFERENCES BETWEEN CURRENCY HEDGING CONTRACTS

A forward contract, futures contract and options contract are three common types of financial

instruments that companies use to hedge against currency risk. Here are the main differences

between them:

 Forward contract. Is an agreement between two parties to buy or sell and underlying

asset, such as a currency, at a specified price and date in the future. The price is

determined at the time the contract is entered into and is not affected by subsequent

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 market movements. The main advantage of a forward contract is that it provides certainty

of future exchange rates, allowing companies to budget and plan with more accuracy.

 Futures contract. Is similar to a forward contract, except that it is traded on an exchange

and is standardized in terms of contract size, delivery date, and settlement procedures.

Futures contracts are highly liquid and can be easily bought or sold, making them a

popular hedging tool for companies. The main disadvantage of future contracts is that

they require margin deposits, which can be costly and may limit the flexibility of the

hedging strategy.

 Options contract. Gives the holder the right, but not the obligation, to buy or sell an

underlying asset at a specified price and date in the future. Unlike forward and futures

contracts, options contracts provide the holder with flexibility, as they can choose to

exercise the option or let it expire. The main disadvantage of options contracts is that

they come with a premium cost, which can be significant and may limit the potential

savings from hedging.

Overall, the choice of hedging instrument will depend on the specific needs and objectives of the

company. Each type of contract has its own advantages and disadvantages, and companies

should carefully consider their risk management strategy before choosing a particular instrument.

5. PAYMENT RISK

International payment insurance, often referred to as trade credit insurance or export credit

insurance, is a risk management tool designed to protect businesses engaged in international

trade from the financial consequences of non-payment by foreign buyers. This type of insurance

provides coverage for commercial and political risks associated with cross-border transactions.

 Coverage for Non-Payment. The primary purpose of international payment insurance is

to safeguard businesses against the risk of non-payment by their foreign buyers. This

coverage can include insolvency of the buyer, protracted default (delayed payment), or

political events that prevent payment.

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  Risk Diversification. By obtaining international payment insurance, businesses can

diversify and spread the risk associated with selling goods or services abroad. This

allows companies to explore new markets and customers with greater confidence.

 Credit Risk Assessment. Trade credit insurers typically conduct through credit risk

assessments on potential foreign buyers. This assessment helps businesses make

informed decisions about extending credit terms to buyers, reducing the risk of dealing

with financially unstable partners.

 Flexible Coverage Options. International payment insurance policies offer flexibility in

terms of coverage options. Businesses can choose the level of coverage they need

based on factors such as the countries involved, the nature of the goods or services, and

the creditworthiness of buyers.

 Improved Financing Terms. Having international payments insurance in place can

enhance a company’s ability to secure financing. Lenders may view insured receivables

as less risky, allowing businesses to negotiate better financing terms.

 Political Risk Coverage. Many international payment insurance policies also include

coverages for political risks, such as changes in government policies, war, or civil unrest,

which could impact a buyer’s ability to fulfill payment obligations.

 Claims Processing. In the event of non-payment, businesses can file a claim with the

insurance provider. The insurer will then assess the validity of the claim and, if approved,

compensate the insured for the covered losses.

 Market Expansion Support. With the protection offered by international payment

insurance, businesses may feel more confident in exploring new and emerging markets,

as the financial risks associated with non-payment are mitigated.

It’s important to note that while international payment insurance provides valuable protection,

businesses should not solely rely on it. A comprehensive risk management strategy may include

additional measures such as due diligence, secure payment terms, and effective contract

management. Each policy may have specific terms, conditions, and exclusions, so businesses

should carefully review and understand the coverage provided by their chosen insurer.

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6. POLITICAL RISK

Political risk is international business refers to the potential impact of political factors on the

operations, investments and profitability of businesses operating across national borders. These

risks arise from uncertainties and instabilities in a country’s political environment, and they can

significantly affect the success and sustainability of international ventures.

6.1. TYPES OF POLITICAL RISK

 Policy and Regulatory Changes. Unpredictable shifts in government policies, regulations,

or laws that can impact businesses, such as changes in trade policies, taxation, or labor

laws.

 Political Instability. Unrest, civil disturbances, or political upheavals that disrupt normal

business operations. This includes events like protests, revolutions, or coups.

 Expropriation and Nationalization. The risk of a host country taking over or nationalizing

foreign-owned assets, leading to loss of control and potential financial setbacks for

businesses.

 Corruption and Bribery. The prevalence of corruption or bribery within a country’s political

system, which can complicate business operations, lead to unfair advantages for

competitors, and result in legal consequences.

 Sovereign Risk. The risk that a host country may default on its financial obligations,

impacting businesses through currency devaluation, inflation, or changes in interest

rates.

6.2. IMPORTANCE OF POLITICAL RISK IN INTERNATIONAL BUSINESS

 Impact on Operations. Political risk can disrupt day-to-day operations, affecting

production, distribution, and supply changes. This can lead to increased costs, delays,

and potential loss of market share.

 Financial Consequences. Sudden policy changes, expropriation, or nationalization can

have severe financial implications, causing businesses to incur losses, write-offs, and

even bankruptcy.

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  Reputation and Brand Damage. Political instability or involvement in controversial

situations may harm a company’s reputation and brand image, making it difficult to attract

customers and business partners.

 Investment Decisions. Businesses may be hesitant to invest in countries with high

political risk, limiting their opportunities for growth and expansion into potentially lucrative

markets.

 Legal and Compliance Challenges. Changes in regulations or legal frameworks can pose

compliance challenges, requiring businesses to adapt quickly or face legal

consequences.

In summary, political risk is a critical consideration for international businesses. Understanding

and effectively managing these risks are essential for strategic decision-making, ensuring

business continuity, and safeguarding financial interests in an ever-changing global political

landscape.

6.3. AVOIDING POLITICAL RISKS

Mitigating political risks in international business requires a strategic and proactive approach.

Here are key measures companies can take to avoid and protect themselves against political

risks:

 Conduct Comprehensive Risk Assessments. Regularly assess political risks in potential

markets by analyzing political stability, legal frameworks, and regulatory environments.

Identify potential challenges and assess their impact on business operations.

 Diversify Market Presence. Avoid overreliance on a single market or country. Diversify

your international presence to spread risks across multiple regions, reducing vulnerability

to political instability in any one location.

 Stay Informed and Monitor Political Developments. Keep abreast of political

developments and changes in target markets. Establish monitors systems to track

political events, regulatory shift, and emerging trends that may impact business

operations.

 Engage in Local Partnerships. Build strong relationships with local partners who have a

deep understanding of the political landscape. Local partners can provide valuable

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 insights, navigate regulatory complexities, and enhance the company’s ability to adapt to

political changes.

 Political Risk Insurance. Consider obtaining political risk insurance to protect against

losses resulting from political events such as expropriation, political violence, or contract

frustration. These policies can provide financial compensation and risk mitigation.

 Adapt Legal and Contractual Strategies. Develop contracts that include flexibility clauses

to accommodate unforeseen political changes. Ensure contracts address potential risks,

specify dispute resolution mechanisms, and outline provisions for compensation in case

of political disruptions.

 Maintain a Strong Compliance Program. Implement a robust compliance program to

ensure adherence to local laws and regulations. Stay vigilant about changes in

compliance requirements and adjust business practices accordingly.

 Engage with Government Authorities. Establish open lines of communication with local

government authorities and relevant stakeholders. Engaging with governmental bodies

can facilitate a better understanding of regulatory changes and provide an opportunity to

influence favorable outcomes.

 Create Contingency Plans. Develop comprehensive contingency plans that outline

responses to various political scenarios. These plans should include risk mitigation

strategies, communication plans, and potential relocation or divestment strategies if

necessary.

 Crisis Management and Response Teams. Establish crisis management and response

teams equipped to handle political disruptions. These teams should be well-trained, with

clear protocols for managing and mitigating the impact of political risks on business

operations.

By implementing these measures, companies can enhance their resilience to political risks in

international business. A proactive and adaptative approach, combined with a throughout

understanding of local political dynamics, is crucial for navigating the complexities of the global

business environment.

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