International business refers to companies doing business outside the domestic country that they are registered in.
It also includes firms established by families and individual private citizens. While the international market becomes more readily accessible and interconnected, the inherent risks of doing business are often overlooked.
If you are thinking of doing business overseas or in another country, here are some things to consider:
- Political risk is the risk that doing business in a foreign country will alienate local citizens who may have a significant stake in your company’s success.
- The existence and size of a local economy depend on the local population, which can become quite volatile.
- Political risk can also be exacerbated by a country’s lack of political stability. The prevalence of organized crime and terrorist groups can also reduce a country’s attractiveness to investors and consumers.
- These risks are especially relevant when dealing with third-party countries.
Policy changes.
International business is inherently linked to governments and their rules and regulations. Changes in government policy can wreak havoc on your company’s operations and may make doing business there tricky or even impossible.
Additionally, there are instances where direct action by a government against international trade is not necessarily desirable. Some of these issues include discrimination against specific religions (such as Jewish and Christian faiths) and restrictions on political rights.
Currency risk.
International trade involves the movement of currencies. An economically unstable country can affect the value of its domestic currency and thus indirectly affect the value of its national currency.
Consequently, if the value of the domestic currency drops, so too can the value of one’s other currency, making for a dangerous domino effect in international business.
The fluctuations of this type of risk are most pronounced during times of significant political unrest.
Political risk.
International business is most directly tied to the policies of national governments. Foreign companies will tend to do business internationally only with those countries that have stable, pro-business governments. Moreover, political chaos in any country can have a ripple effect in other countries because it can lead to capital flight, reducing foreign investors and jobs. Furthermore, currency exchange rates between countries can have significant impacts on the value of local companies.
For instance, a sudden drop in the pound’s value can significantly reduce the value of British currency and so impede business imports and exports from the UK.
They are emerging market risks.
The emergence of alternative currencies, like the Chinese Yuan, in Asia has threatened to open up numerous opportunities for international players.
If a country’s economy takes a turn for the worst, foreign investors will lose confidence in that country’s stock or bond market. Likewise, if political problems arise in a country with access to the foreign market, then that country’s consumers and businesses would suffer.
Policy risk.
The emergence of political risk also complicates international business, especially regarding currency policy changes. Because of the prevalence of trade barriers, a country’s central bank can effectively intervene in the process of its national currency to control the supply of or raise the value of a particular currency against another.
When this occurs, policy changes can significantly affect the value of a nation’s currency, which could hurt its export sector and consequently the amount of money flowing into and leaving the country.
The risks in doing business entail much more than just the dangers of investing in a particular country.
It considers the impact of political or economic risk and other factors that could potentially limit your profits.
By educating yourself regarding the various threats to doing business internationally, you will choose the best option for your particular investment.
One of the most significant decisions you will make as an entrepreneur is the risks involved in international business are?
Global expansion means either reaching new potential clients or customers worldwide and thus increasing profits.
- Despite the ongoing uncertainties and challenges that have yet to show themselves, there are some general guidelines for doing business internationally that you ought to always bear in mind before jumping into international operations.
- It helps to be aware of the factors that make you unique and different from your counterparts in the local market and know what you intend to sell and how.
- If you plan to sell goods online, then these are also important considerations, but you certainly would not want to ignore them in the slightest.
- You must be aware of the risks inherent in commercial ventures abroad, especially when dealing with currencies. Commercial activities involving currencies involve risks such as currency risks and foreign exchange risks.
- You may wish to consider the dangers of different commercial ventures abroad before starting up your own business.
- If you want to deal with the risks of international companies, you need to do a bit of research.
Modern slavery
Though this practice has been illegal in some parts of the world for decades, it still exists in other regions.
- Modern slavery involves the exploitation of another person’s labour, with the primary aim being to provide a cheap source of work.
- Due to poor working conditions, long working hours and lack of benefits, modern slavery can cause grave consequences for the victims.
- As well, forced labour and slave trade are unfortunately widespread in third-world countries, and these activities are well-known risks of doing business in developing countries.
- Interest rate risk is probably the most critical risk of doing business in any country because the fluctuations of interest rates significantly affect your finances.
The factors that determine interest rates are mainly inflation and economic growth. However, other factors can profoundly impact the foreign exchange rates, including political risks and political stability in a country. These factors can harm the value of your assets.
Another risk is that of forex settlement risk.
Forex settlement risk refers to the chance that the currency’s price will be lower than the balance owed.
- It happens when a country’s central bank cannot support the money, making it necessary to introduce a currency. Usually, this happens when there has been a failure in a country’s economic policies.
- Aside from that, financial institutions tend to get into this kind of risk when they fail to exercise caution and regulation when lending money.
Liquidity risk is another major factor that can have a significant impact on your business.
It can be defined as the risk of not having enough cash available in the market to conduct business.
- Major US and European markets face liquidity risk because most of their economies rely on finance, which banks mainly generate.
The three types of risks discussed above are by no means the only risks you need to consider when doing business in foreign markets. A lot depends on how good your management is, your contacts, and the exchange rates you are dealing with.
If you can note the risks mentioned above and the know-how to prevent them, you’ll do just fine. Always remember that knowing these risks will never guarantee your success in the foreign exchange markets, but it can significantly increase your chances.