Introduction
The ability of a business to mitigate risks is an important aspect of its growth and development. Foreign organizations are susceptible to various types of risks in their operations. Political and economic turbulence within a country may create different challanges, such as intolerance from the local community, currency fluctuations, and uncertainty in harnessing raw materials (Kot & Dragon, 2015, p. 103). Accordingly, financial risks affect firms through uncertainty in the fiscal market, leading to volatility in stock prices, currency instability, and interest rate variations (Dinu, 2015, p. 93). Other notable risks to overseas organizations are unfriendly regulations, such as government policies and tariffs (Dinu, 2015, p. 93). Dinu (2015) avers that legislation, intellectual property rights, and unfavorable competition affect companies by providing skewed market information meant to advantage locals. As risks are inevitable in the international business environment, the capability to identify and manage threats is significant for growth and competitive advantage.
Financial Risks in International Business
Financial capacities of a country influence the purchasing power of its people. Accordingly, financial markets play an important role to manage balance on the business environment. (Busch, Bauer, & Orlitzky, 2016, p. 2). The consumption of goods and services is determined by employment levels in a country, consumer income, and interest rates, among other factors. For instance, nations with high levels of inflation have reduced spending power, which affects the business environment (“International Business: New Realities,” n.d. ). Foreign companies encounter financial risks such as currency fluctuations and variances in tax obligations among others (“International Business: New Realities,” n.d. ). Such firms should research and forecast the economic power of a nation to cover potential losses that may emanate during operations.
Quality and regulatory frameworks influence the demand and supply of products in the international market. Therefore, it is important to understand the legal expectations and the quality standards in a foreign nation. Providing proper employees’ training on policy expectation and market information may save overseas businesses from losses, including fines from regulators. For instance, the Iranian government fined Schlumberger Limited, an American company, for violating policies and compliance procedures (Weise & Hund, 2016, p. 332). Thus, a firm should develop effective approaches such as avoidance, and transfer of financial risks that may occur in the market for effective operations and cost savings.
Currency is a significant determiner of success in the business environment. Variations in the value of local and international currencies affect the operations of foreign companies (Razzaq, Thaheem, Maqsoom, & Gabriel, 2018, p. 11). For example, when an organization receives payment in local currency and initiates an exchange with dollar or euro, the inflation of the local market may affect the currency value, leading to significant losses. Economic risks such as changes in monetary value may affect the buying or selling rate of local currencies on the money market and limit the capability of suppliers when fluctuations are high leading to losses. (Razzaq et al., 2018, p. 3). While some suppliers prefer strong global currencies, such inclinations may affect a company’s financial reporting systems, especially when regulators expect them to report in local currencies leading to fines or other limitations imposed. . Therefore, as organizations face the risk of accepting currencies with a lower value, financial managers should develop appropriate measures to mitigate losses incurred during currency conversion.
Political Risks
Politics plays a critical role in the operations of international business. Locations with higher political instability are risky for business (Quer, et al, 2018, p. 4). For example, civil unrest can affect business activities adversely, leading to economic losses on recurrent expenditure, such as rents, employee welfare, and utility costs. Inadequate regulations on property rights are a political risk that results in massive losses for international companies through damage of property or patents (Han, Liu, Gao, & Ghauri, 2018, p. 6). According to Quer et al. (2018), a stable political situation and effective laws provide a comfortable regulatory environment for business (p. 4). However, stringent regulations on imports and exports, such as cancellation and non-renewal of export and import licenses or the imposition of bans on either raw materials or marketer products, can lead to losses. Therefore, it is important for international companies to assess the levels of political risks and ascertain if they are avoidable or coverable by a business strategy.
Political risks in domestic markets also affect organizations. For example, firms that operate under outsourcing arrangements in other countries face political risks associated with protectionist pressures at home (Chauhan, Kumar, & Sharma, 2015, p. 37). In addition, products from the outsourced market are met with hostility in host countries, which increases risk exposures. Companies outsource operations due to relatively cheap labor or low manufacturing costs in the preferred offshore destinations (Chauhan et al., p. 37). Such decisions, however, contribute to unemployment in domestic markets. Thus, companies that outsource their operations face the risk of products boycott, strikes, and poor publicity from negative campaigns. It is significant for organizations to manage the interest of the local clientele when they venture into international markets to consolidate their customer base.
Terrorism, cybercrimes, money laundering, and corruption are among the major political risks that affect organizations. Violence, radicalism, and other forms of delinquencies cause instability in host countries, which also negatively influences the business sector. Corruptions affects the financial market and lead to increased inflation levels and can interfere with exchange controls, hence creating a shortage in foreign currencies (Badawi & AlQudah, 2019, p. 2). All these risks can escalate to lack of goodwill, poor controls, and lawlessness and affect political sovereignty, which is adversarial for effective running of international enterprises.
Cross-Cultural Risks
International businesses operate across various sociocultural setups, whose differences can create many challenges. Patrucco et al. (2016) illustrate that cross-cultural variations are a source of conflict among employees of foreign companies and often affect other stakeholders (p. 5). For example, interactions across cultures can lead to misinterpretation and misunderstanding of people’s intentions or ideologies. Cultural variations also affect negotiation patterns, ethical practices, and decision-making systems (“International Business: New Realities,” n.d.). Businesses that share similar cultures between the home and host countries integrate workers easily and subsequently achieve consumer interests, unlike those with significant cultural distinctions (Angelova, 2016, p. 32). Considering these risks, integrating cultures is an important strategy to manage cultural differences in the workplace.
Culture and the legal work environment differ in various countries and influence business environment. For instance, whereas some cultures consider the payment of incentives as motivation towards trading, others view it as an unlawful practice that, in addition, violates religious tenets. Similarly, some countries incline towards corruption or poor ethical principles (“International Business: New Realities,” n.d.). Although the culture of giving bribes and kickbacks may be illegal, it can affect foreign corporations, especially if they are denied vital operating licenses. For instance, when an international enterprise is restricted on importation or exportation in favor of a local company due to a failure to provide bribes or fund a regulator activity, it is disadvantaged in the market. Cross-cultural variations have implications for the operations of businesses and should be managed through effective integration strategies and sound policy influence.
Employees are the bearers of cultures in the workplace. Cross-cultural disparities among workers can affect working relations and reduce productivity levels. Integrating the cultures through cross-cultural trainings of employees is critical to mitigating possible risks (Franklin, 2017, p. 9). For instance, whereas Americans are friendly and easy to interact with others, the Japanese are reserved and may not cooperate effectively with foreigners (Franklin, 2017, p. 2). In addition, language is a significant cultural factor that influences success in global businesses. Therefore, integrating employees of diverse cultural backgrounds and engaging in a shared language in the workplace is important for effective running of a business.
Cross-cultural aspects interfere with relations among company stakeholders. Cultural differences between suppliers and managers lead to an unpredictable business environment. The problem is that some cultures appreciate relationship building between partners, while some cultures are strict and rigid (Franklin, 2017, p. 4). For instance, Canadians are decisive decision makers and more risk takers compared Japanese who take considerable time to make or agree to important decisions (“International Business: New Realities,” n.d.). However, in both cases, what matters most is whether decision made will positively enhance the operation of an organization Managing such variances is, therefore, significant to the growth of business since they are remarkable areas of ideological differences and operational conflicts, since it may be difficult to implement issues that require swift decision processes.
Commitment to business processes and agreements are cultural issues with global communities. Accordingly, people’s cultures in the host country influence the legal protection for breach of contract or other forms of non-payment. Some cultures are flexible and open to social discussions, while others such as American are assertive and more business focused (“International Business: New Realities,” n.d., p. 10).Organizations that operate in foreign countries should understand the culture of their host nation to enhance integration through training and improved workplace interactions (Franklin, 2017, p. 9). Firms should research to ascertain the commitment levels in foreign markets to mitigate of possible evasions and bad debts during operations.
Masculine and feminine cultures affect productivity in the workplace. Dominant cultures vary across nations. For example, Bulgaria and turkey are feminine culture compared to Italy or Germany with masculine culture (Angelova, 2016, p. 32). Although cultural perspectives have significant effects on productivity and performance, the difference is more of a perception. When a company employs more women or balances both genders in its top management, it is regarded as inclusive and customers may want to be associated with such a firm. Although both feminine and masculine approaches can have advantages and disadvantages, it is advisable to have a proportional representation of both to enhance inclusivity.
Commercial Risks
Amid misinformed business strategies and operational procedures, companies can experience commercial loss. The aspect emanates from the general business setup under which an organization manages its operations. Business environment is affected by various factors, including players, legal expectations, and competition. For instance, a foreign company may engage a local distributor with limited capacity due to lack of information (“International Business: New Realities,” n.d.). Commercial factors have serious consequences to offshore operators and should be managed through effective research and development so as to arrive at decision that will advantage a firm in the foreign market.
Although all businesses should be prepared to accept a certain level of risk, a strategy to avoid threats is significant for growth and competitive advantage. Research, development, and capacity analysis of stakeholders, such as suppliers and financial partners, help organizations to manage commercial risks in business. Patrucco et al. (2016) illustrate that businesses should manage operational risks since they have severe effects such as escalated transactional costs on an organization (p. 4). In addition, company executives should manage offshore activities through effective planning to minimize cost and manage risks (Patrucco et al., 2016, p. 8). Therefore, mitigating commercial risks should be part of business operations.
Summary Chart: Risk in International Business
Business risks fall within four categories, including commercial, cross-cultural, currency, and country risks. International organization experience threats when managing their operations in offshore destinations. Developing strategies that identify and manage risks help to achieve growth and competitive advantage.
The Four Risks of International Business
(“International Business: The New Realities,” n.d.)
Conclusion
Foreign companies experience several types of risks in the course of their operations. Such risks are inevitable due to the nature of the international market. Therefore, companies should develop strategies to manage threats to experience growth and competitive advantage. The competitive environment requires multinationals to generate a mechanism for recalculating operational risks in foreign locations or cover them within their operational forecast. Political, commercial, financial, and cross-cultural risks should be mitigated by policy initiatives. Additionally, models such as risk estimation frameworks and industry assessment systems can be used to handle the effects of such risks. By managing risk, firms should prepare to accept possibilities that are beyond their capability. Accordingly, they should develop tools for effective risk assessment and estimation of potential losses to be covered.
References
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