International Business Risks

When manufacturing overseas, purchasing from overseas, or wanting to expand your sales overseas there are several “international factors” that one needs to be aware of.  These are not new and have been well documented in academia and on the internet for years now, however, for the sake of being thorough, I will go over the International Business Risks that companies may face when doing business in other countries.  Also, while these may be well known to international company management, I like to believe that these articles can be useful training documents to young professionals who do not have a lot of experience, yet may be the next generation of leaders in the business world.  

There are several different classifications of International Business Risks but most can be put into four to six categories such as the following:

• Political Risks
• Foreign Exchange (Currency) Risks
• Infrastructure Risks
• Intellectual Property Risks
• Corruption Risks
• Credit and Shipping Risks

I’ll give a brief description of each of these types of risks to lay the foundation for the next couple of articles in this series.  Also, you may be wondering why I am discussing these topics when this blog series is devoted to Pricing and Revenue Management.  Well, if you recall in my article Marketing and Pricing, the Pricing and Revenue Management aspects go hand-in-hand with Marketing to deliver products to the right customers for the right price at the right time in the right place.  Therefore, with so many companies expanding production overseas and/or also wanting to sell their products in new markets overseas, these business risks become very important to understand when bringing products or services to market.

Political Risks:  

These are generally governmental or regulatory risks that come into play.  Some countries may impose trade or monetary sanctions on products made in other countries, or some countries may impose tariffs and regulations to protect their local businesses from foreign competition.  Often these political factors may be disguised as technological or environmental issues.  Countries sign free trade agreements to allow their products to be sold in other countries, but these countries also sign such agreements as the Paris Climate Agreement that requires the reduction of greenhouse gases.  The next thing you know you cannot sell your products in a particular country or cannot manufacture to sell in that country without meeting all types of environmental or regulatory hurdles (even though the local companies often don’t need to meet those standards). The political risks that can come into play can completely eliminate any cost advantage that foreign manufacturing or foreign selling of products may provide.  Therefore, it is imperative to thoroughly study these issues before making any decisions to manufacture, purchase from or sell your products overseas.

Foreign Exchange (Currency) Risks:  

I will discuss this topic in much more detail in the coming articles, but briefly, exchange rates change every day on the open market and this affects the company’s revenue streams as well as costs.  The big question is the amount of exposure a company has between local revenue and local costs versus local revenue and offshore costs.  This can result in foreign exchange gains/losses on a company’s income statement as well as affecting the balance sheet and cash flows.

Infrastructure Risks:  

Setting up a new factory in a low-cost country sounds appealing, but you need to make sure the infrastructure is in place.  What does this mean?  Stable electric power, roads and bridges, ocean ports and airports, a skilled labor force, warehousing, and security to prevent theft to name a few issues.  

Producing items at lower costs can be good, but if the road to the port gets washed out every time it rains, or electric power is unstable, or theft is rampant, then your products are useless if those products cannot get to market.

Intellectual Property:  

Once you start producing in another country the risk of your intellectual property being copied or stolen increases greatly.  Some of your employees or vendors may leave and take their knowledge with them to the next company they work for.  And defending your intellectual property may be nearly impossible with the local courts in some countries.  This issue should not be underestimated when expanding to other countries.  Seeking local legal advice and registering your patents and trademarks in that country are the first steps a company must take.

Corruption and Ethics:  

In some countries this is the only way to do business, but it is also illegal.  US companies are bound by the Foreign Corrupt Practices Act (FCPA of 1977 and amended in 1988) which basically makes it illegal to bribe or make any payments to get favors in a foreign country.  The UK Bribery Act 2010 (UKBA) prohibits bribes paid to “any person” to induce them to act “improperly”.  France passed a similar law on December 9, 2016 known as the “Law on transparency, corruption and modernization of the economy” (the “Sapin II” law).”

But not all countries have such laws governing their own companies, and some companies “pay” their way through the regulatory barriers as a cost of doing business.  There is a mentality that “if you don’t play the game then you don’t get your way” in many countries.  However, since this is often illegal then corruption must be a factor that management must consider when deciding to do business in a particular country.

Credit and Shipping Risks:  

There is a word known as “incoterms” and it stands for International Commercial Terms.  In short, incoterms is a trademark owned by the International Chamber of Commerce and sets guidelines for the international import and export of goods around the world (for more details click on Incoterms).  There are many different legally defined terms of international trade as part of incoterms such as FOB (“Free on Board”), DAP (“Delivered at Place”) CIP (“Carriage and Insurance Paid To”) and many, many more.  These terms are all well defined by incoterms to ensure exporters and importers around the world have the same understanding and no disputes.

Another way to reduce risk is by using Letters of Credit issued by third-party financial institutions that guarantee payment for goods once delivered in satisfactory condition to the buyer.  Letters of credit eliminate the risk to both the origin country manufacturers and the destination country buyers for a reasonable fee to guarantee the value and payment of shipments.  Now, the payor of the fees for the Letters of Credit are also part of the incoterms that can be negotiated between the buyers and sellers.  The point being, there are many options within incoterms to minimize credit and shipping risks as part of international trade.

In my next article, I will discuss Foreign Exchange Exposure that all companies face when conducting business in foreign markets.  Foreign exchange exposure can directly impact the company’s financial statements and health of the company, but some types of foreign exchange exposure can be less serious than other types.  This will all be explained in my next article.