Types of Risk in International Business

INTRODUCTION International business means more opportunities, but also entails greater risks. Although the environment for international trade has changed substantially over the years, the risks that exporters exporters face when selling selling their products products and services in other countries countries remain essentially the same. The initial step in managing export risks is an obvious one – but one which sometimes needs to be spelled out: first to identify the source of any risks, and then to manage and lower those risks to a minimum. hoosing the right partners and the right professio professional nal advisers is a ma!or step in mitigating mitigating risk. "ankers, "ankers, lawyers, lawyers, insurers insurers and accountants should also be able to give knowledgeable advice about the risks that may face in overseas markets. This section also includes information about potential risks associated with travelling and doing business in overseas markets. #anaging risk is one of the primary ob!ectives of firms operating internationally $evertheless, current treatments of risk and uncertainty in the international management literature vary in their use of these terms and tend tend to loo look k at partic particula ularr catego categorie ries s of risks risks to the exclus exclusion ion of the risks risks mentio mentioned ned elsewhere elsewhere in managemen managementt literatur literature. e. The strategic strategic management management field lacks lacks a generall generally y accepted definition of risk.% The ma!or uses of the term are in reference to unanticipated variation or negative variation &i.e., 'downside risk'( in business outcome variables such as revenues, costs, profit, market share, and so forth. #anagers generally associate risk with negative outcomes. The concept of risk as performance variance is widely used in finance, economics, and strategic management. )ith either the variance variance or negative variation under* standings, 'risk' refers to variation in corporate outcomes or performance that cannot be foreca forecast st ex ante. ante. The The label label 'risk 'risk'' has has also also common commonly ly been been ass assign igned ed to factor factors s either either external or internal to the firm that impact on the risk experienced by the firm. In this sense, 'risk' actually refers to a source of risk. +ome common examples of risk referring to risk risk sourc sources es are are terms terms such such as 'polit 'politica icall risk' risk' and 'comp 'competi etitiv tive e risk.' risk.' +uch +uch terms terms link link unpredictability in firm performance to specific uncertain environmental components.

TYPES OF RISK IN INTERNATIONAL BUSINESS IN REFERENCE TO BANGLADESH oing

business internationally

can

involve

different

risks

from those

encountered

domestically and will be influenced by the country you intend to export to. -ere are some of the ma!or risks firms doing business internationally can face. Political risk #a!or political instability at your export destination can either disrupt or in some cases prevent completion of export contracts. This type of sovereign risk might include defaults on payments, exchange transfer blockages, nationalisation of foreign assets, confiscation of  property, changes in government policies or, in extreme instances, revolution and civil war. +ome factors to consider are: •

Trade embargos enforced by governments and the international community affect the flow of goods and services and could affect your delivery of goods and getting paid.

•

ivil disorder may affect personal security of company staff and contractors.

•

olitical upheaval may occur due to economic factors, natural disasters, civil disorder or revolution

•

)hether the local country complies with international law re/uirements, for example, human rights, trade sanctions, recognition of personal property rights etc.

•

+ome types of exports may be prohibited under local laws or due to trade embargoes or other international resolutions

•

There may be no legal recourse for default in the local country or it becomes uneconomic to pursue your legal rights

Legal risk There can be ma!or differences in Australian law and the law of the country you are exporting to. 0ou need to understand what these differences are and how they could affect your ability to successfully export your products or services. It is important not to assume that legal processes will be the same as in Australia, particularly when entering into contractual arrangements.

+ome examples of situations where legal issues can create problems for exporters include: •

The differences between legal systems – for example, common law systems as compared to civil law systems.

•

ifferences in contract law between countries means tailored advice on contract terms is important to ensure they are binding and enforceable. As discussed further below, the use of internationally recogni1ed contracts may alleviate some of these problems.

•

The /uestion of which laws will apply in disputes.

•

atent registration and other Intellectual roperty issues.

•

roduct liability laws and any implied consumer warranties.

•

2or exporters of services, occupational health and safety and employment laws may apply

•

Access to courts and dispute resolution mechanisms. +ome countries may not permit local litigation or place restrictions on the types of claims which can be made.

•

Taxation and revenue laws

•

$egligence and misrepresentation laws

Brier!" gra#t a$% corr&'tio$ risk "ribery, graft and corruption are illegal in most countries around the world. It is a criminal offence to offer a benefit which is not legitimately due with the intention of influencing a foreign public official. A benefit is not restricted solely to monetary payments and can take other forms. 2urther, it is not necessary to prove any direct benefit to the foreign official * use of an intermediary is sufficient to make out the offence. #any other countries also have extraterritorial laws outlawing bribery, including the 3+A, 34 and other 53 nations. Therefore, the risk for anyone engaging in bribery or corruption arises not only under law, but also the law of the host country and potentially laws of other nations. It also places an exporter at risk of litigation by those who are affected by illegal conduct, as demonstrated by recent successful class actions.

(&ara$ti$e co)'lia$ce risk #ost countries have strict /uarantine re/uirements. "efore exporting, you need to be aware of what is and what is not allowed under the relevant /uarantine laws of your export destination. There may also be import restrictions on certain goods and services and you need to ensure that any proposed exports are permitted under the laws of the local country. 2ailure to do so can result in forfeiture or destruction of goods, fines and restrictions on the exporter.

E*c+a$ge rate risk 5xchange rate risk can occur because of fluctuations in the value of a currency. 3nfortunately, many exporters have had their profit margins eroded or have even lost money due to exchange rate fluctuations. There are a number of ways in which you can protect yourself against this risk, including /uoting your prices in dollars &but many customers do not like this and you may adversely affect the number of new customers you attract( or hedging against currency fluctuations.

No$,'a!)e$t risk The risk of not being paid for your goods or services is a very serious one for exporters, regardless of the country you are trading with. In order to mitigate this risk, the payment option you choose should match the level of the risk. To protect yourself against payment default it is prudent, at least initially, to use payment methods which provide you with some security such as pre*payment or an Irrevocable 6etter of redit – even for customers in wealthy markets. &bank will be able to provide advice on various payment options.( There are a number of relatively simple things that can be done to lower the risk of not being paid. 2or example, be careful about offering credit terms to customers, and look into getting credit insurance.

-ANAGING RISKS IN INTERNATIONAL BUSINESS #anaging export risks is a process of thinking systematically about all possible undesirable outcomes before they happen and then setting up procedures that will either avoid or minimise these risks, or help you to cope with t heir impact. There are six basic elements in the risk management process: • • • • • •

5stablish the context of the risks Identify the risks Assess probability and possible conse/uences of the risks evelop strategies to mitigate these risks #onitor and review the outcomes ommunicate and consult with all parties involved.

4eep your risk management analysis clear and simple, and ensure it is understood by everyone in the company who is involved in exporting. De.elo'i$g a Risk -a$age)e$t -atri* A 7isk #anagement #atrix will not only clarify your thinking on the risks you may face, but also give you a guideline to work from in managing or mitigating risks. This document should be an appendix to 5xport lan, here8s some examples of what could be included in your risk matrix:

Risk t!'e

Ra$ki$g /Lo01-e%i&)1Hig+2

5xchange rate risk &"T93+ rate changes(

-igh

6egal risk: product liability laws

-igh

$on payment

#edium

Co$se3&e$ces

Ste's to )a$age or )itigate t+is risk

ayments in 3+ will ompany policy to hedge not cover invoiced all export orders taken in amount resulting in 3+ currency at time of  losses or eroded profit order receipt margin 6egal action could be 5nsure up to date legal taken against us with advice on liability laws in subse/uent financial 3+A and take out claims by customers insurance redit checks on any customers we provide ebtors difficult to credit terms to, check chase overseas, debtors list before shipping financial losses any orders. 2irst order to be prepayment or 69

7isk #anagement #atrix by creating a simple list of potential risks. A 7isk #anagement #atrix is not only a good way to identify the probability of risks occurring and the

conse/uences if they do, it will also help you to order the priority of issues that cannot be ignored. rading risks helps you to focus on critical areas and to mitigate them before they become a crisis. 2or example, if all of export business is with a single client in, and that company becomes insolvent, the outcome could be catastrophic. "ut if the likelihood of insolvency is low, your risk ranking for that event is more moderate, although it may still re/uire monitoring. It is a good idea to review your 7isk #anagement #atrix regularly to ensure you cover any emerging market changes.

OTHER RISK -ANAGE-ENT -EASURES B&il%i$g a Foreig$ E*c+a$ge Polic! This guide will help you develop a basic foreign exchange policy that protects your business from volatile exchange rates that can put your cash flow, profitability and competitiveness at risk. Cre%it -a$age)e$t Processes t+at Pa! O##  +trong credit management is essential to mitigating risk. This white paper offers information and tools that can help you establish or enhance your company8s credit management practices. C&rre$c! Risk -a$age)e$t Practices o# Ca$a%ia$ Fir)s #ost companies would accept lower profit margins to minimi1e risk. That8s !ust one of the findings of our 5 7esearch anel survey on risk management;available to you in this informative report. Fi$a$cial Cri)e i$ I$ter$atio$al Tra%e rotecting business from getting involved in financial crime;even as an unwitting accomplice;is a must when doing business abroad. This guide can help your company identify and manage the risks of financial crime in international trade.

I$tro%&ctio$ to E*'orti$g4 Ho0 to Sell to I$ter$atio$al -arkets

$ot sure where to begin when it comes to exporting< This report can help you determine if your company is ready for international trade and learn how to overcome barriers and risks. -a$agi$g Foreig$ E*c+a$ge Risk The value of the anadian dollar can change /uickly and dramatically. This paper offers an introduction to the sub!ect of foreign exchange risk and how to minimi1e the impact of a changing currency on your international business. Researc+ a$% De.elo')e$t4 A Ke! I$'&t #or E$+a$ci$g Ca$a%ia$ E*'ort Ca'acit! 7esearch and development can help you make better export decisions and expand your presence in international markets. This paper explains how. Risk a$% Cas+ Flo0 -a$age)e$t This guide offers practical advice on addressing the challenges associated with international trade, including complex operational risks, capital re/uirements and the need to manage cash flow more vigilantly

CONCLUSION AND RECO--ENDATIONS

"angladeshi

financial

institutions should use

modern technologies and

strategy in

international trade and International exchange to minimi1e risk. The International trade related rules and regulations must be updated with consistent of  international rules. 5xport and import procedure to be simplified and easier. ash incentive and other incentives to be extended. -uman 7esources must be well educated and trained with modern technologies and international trade. "angladesh overnment has to take initiative manage risk in international trade to boost up export.

In conclusion, we can say that there are a lot of opportunities for increasing export in "angladesh if stay political stability. The -uman 7esources are cheapest here which play an important role in any business. "angladesh government has to take proper steps to maintain congenial atmosphere for sustainable foreign trade and International exchange business in the country.

REFERANCES

A Text Book on International Exchange, L. R. Chowdhury (3rd Edition)  inancial In!titution! " Trade Ri!k #anage$ent, A #odern %er!&ecti'e  Banglade!h Bank uideline! or International Trade " International exchange htt&*++www.econo$ywatch.co$+internationaltrade+ri!k!.ht$l    htt&*++www.worldcu!to$!-ournal.org 