Table of Content

Topic Page
1. Introduction of risks of entering an international market. 2
2. Risks of entering an international market 3-5
2.1. Financial Resources
2.2. Exchange Rate Risks
2.2.1. Natural Hedging
2.2.2. Selective Hedging
2.2.3. Systematic Hedging
2.3. Political Risks
2.4. Culture Difference
2.5. Legal Challenges
2.6. Local Competition

3. Conclusion 6
4. References 7

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Introductions:
International investing is a powerful way to diversify and grow a portfolio.
However, there is often a higher level of risk than in domestic investing. With
the globalization of the world economy, there has been a concomitant rise in
the number of companies that operate globally. Though international business
as a concept has been around since the time of East India Company and
continued into the early decades of the 20th century. Engaging in cross-border
trade and business activities has its advantages. Every nation presents
opportunities for overseas investors and companies, many emerging regions
offer an unreached customer base that is just now beginning to be able to
afford commodities that developed markets have enjoyed for years.
Additionally, the growth of global communication tools such as the Internet
has made it easier than ever before for companies to reach people outside of
their target market.

As CFO magazine recently noted, for every company that thrives abroad, four
or five are struggling to recoup their investments, decidedly not rolling in
profits. In some cases, even if there is a clear opportunity in a region, it can
often take so long to turn that opportunity into a reality that it becomes
financially unviable to achieve.

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Content:

As companies enter new markets, Risks in international business are not

restricted to one region. When companies engage in cross-border and
economic activities, they face challenges on multiple levels, from country-
specific trade restrictions to international trade laws. Here are four risk
categories that companies face when contemplating a transatlantic move.
Every founder gets excited about the thought of expanding overseas. Not only
can will it expand their brand name and attract a larger consumer base, but it
is also a good way to spread the risk. While international expansion often
comes with high returns, don’t overlook the risks that go hand in hand with
going global.

Financial resources
Entering a new market typically requires a lot of financial resources, and if that
supply of money is interrupted or halted it can cause major problems for your
operation. Internal issues like this can quickly put a stop to a market entry
attempt if not quickly dealt with. Making the leap overseas is an expensive
process. While expansion sounds fancy, you must also ask yourself whether
your company’s financials can afford it. A company in its early years should
focus on promoting its core business within the territory before thinking about
moving into foreign markets. Many companies enthusiastically set up
international branches, only to find out later that they had enough money for
initial investments, but not for sustainable growth. Entering a new market is
not a cheap endeavor. You’ll generally need considerable resources to make
this happen, and costs can be much higher than expected.
A successful market entry will allow you to make back your investment over
and over. But it’s important to understand what costs you might need to
consider when entering a new market.

Exchange Rate Risks

Foreign exchange risk usually concerns accounts receivable and payable for
contracts that are or soon will be in force. Foreign exchange rates are
constantly in flux, so businesses can be forced to convert funds generated
abroad at lower rates than they budgeted. That is why it is imperative that
businesses have a foreign exchange policy in place to:

- Stabilize profits margins on sales

- Mitigate the negative impact of exchange rate fluctuations on
procurement and sales
- Enhance cash flow control
- Simplify foreign and domestic pricing

In order to formulate an adequate foreign exchange policy, businesses must

assess their foreign exchange risks, identify the tools available to hedge these

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risks and carry out a regular comparative analysis to select the most effective
tools.

Here are the main types of foreign exchange policies:

Natural hedging:
With this type of hedging, the business generates the majority of its revenues
and expenses in the same foreign currency but does not hedge the difference
between payables and receivables. For example, an oil producer with refining
operations in the US is (partially) naturally hedged against the cost of dollar-
denominated crude oil.

Selective hedging:
This type of hedging covers some foreign exchange transactions when it is
difficult to predict needs.

Systematic hedging:
This type of hedging covers all foreign exchange transactions to eliminate the
impact of foreign exchange fluctuations on profit margin.
The variance or changes of the real domestic currency value of assets,
liabilities or operating income on account of unanticipated changes in
exchange rates are referred as Foreign Exchange Risk. This risk relates to
the uncertainty attached to the exchange rates between the two currencies.

For example, if Your company uses Euro as its currency, you are carrying out
a transaction with a company in the United States. The company buys your
service in USD, so you need to consider the value of one Euro in US dollars
(USD), expressed as a currency pair (EUR/USD). Here, the fluctuation of the
dollar represents a risk described as a transactional foreign exchange risk,
because in case of an unfavorable development of this currency in regard to
the euro, your company can be negatively affected by an exchange rate loss.
This is the most common consequence of currency risk: if left unchecked, it
can reduce a company’s margins and contribute to a decline in its profits.

Political Risks
Political risks are risks associated with changes that occur within a country's
policies, business laws, or investment regulations. Other influential factors
include international relationships and any other situation which may have an
influence on the economy of a given country. A common example of political
risk is countries that are in political upheaval. Many countries are experiencing
changes in social attitudes and perspectives as of late, causing unrest,
changes in politics, and political movements that are disrupting economies.

For example, Wal-Mart Stores Inc. mentioned specific political risks, that it
experiences, in its 10-K filing in the fiscal year 2015 with the Securities
Exchange Commission in its category of operating risk. Regarding its risks
related with suppliers, the company informed prospective instability in the
political and economic operations of countries that are operated by

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international suppliers. The other section involving Wal-Marts regulatory,
compliance, reputational and other risks involves risks concerning legislative,
regulatory, jury-based, and political or economic risks. Many risk factors
involve product safety, political changes, legal issues, environmental policies,
tax regulations, trade policies, and currency-based policies. Wal-Mart
particularly emphasized on Brazil and the complications associated with its
federal, state, and domestic laws.

Cultural differences
Much more obvious international business risk factors include language and
cultural barriers. Practically speaking, businesses must be able to
communicate with their customers and/or suppliers — at a bare minimum. If
you’re expanding into a market where there is a dialect or language barrier,
therefore, it’s important to make sure your language skills are passable. If you
do have a functional familiarity with the local language, understanding the
finer points of your new cultural environment is even more crucial. While your
communications might be grammatically correct, a taboo turn of phrase can
quickly spoil a business relationship. The same principle applies to behavioral
conduct, meaning you’ll need to keep up proper appearances to sell
effectively.

Business cards and etiquette, for example, are important elements of doing
business in China, while inviting contacts for meals during the daylight hours
of Ramadan may be considered insensitive in Saudi Arabia. Even accepted
business attire in New York and London (our own backyard, relatively
speaking) is changing.

Legal Challenge
As if overcoming cultural and language barriers wasn’t enough, your business
must also become familiar, and comply with entirely different legal systems.
Businesses are subject to fines or further legal consequences if they don’t
comply with their relevant local authorities, for instance. Because of inevitable
regional legal differences, we advise that you seek advice from a qualified
solicitor and an accountant to make sure you’re not violating local legislation.
The main legal challenges you may face into three distinct areas are tax,
operations, and contracts.

Local competition
It’s not easy to persuade a foreign customer to trust your brand when a similar
product from a local brand with long-standing is also available especially
when newly enter to a new country While big-name U.K. brands are able to
capture a considerable portion of the market shares overseas, small to
medium–sized companies may find it extremely hard to gain a foothold. Local
companies have another edge over your business because they tend to have
better access to market information and business opportunities given their
social and business ties. Not being able to get first-hand insight may mean
you are missing out on many lucrative business opportunities.

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Conclusions:
My summary recommendation is to success in international business is
achieved through a combination of various factors and efforts with the
organization. Different players come in with different inputs to drive the
organization’s agenda toward the achievement of success on a global level.
The challenges are continually evolving and are, at their root, a product of
social interaction, economic evolution, and political dynamics. It will always
take smart entrepreneurs, armed with the latest knowledge and modern
analytic tools, to minimize the risks and maximize opportunities. Tapping into
global markets, especially the large and under-developed ones, not only
promises market growth beyond our most optimistic vision, but also
empowers people the world over to share in a better economic future.

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References:

Czinkota, Michael R. (2009) International business. European ed.

Hoboken, NJ: Wiley.

Dawes, Brian (1995) International business: [a European perspective].

Cheltenham: Stanley Thornes.

Cavusgil, S. T., Rammal, H., & Freeman, S. (2014). International business:

the new realities. Pearson Higher Education AU.

Dunning, John Harry (1993) The globalization of business: the challenge

of the 1990s. London: Routledge.

Griffin, Ricky W. and Pustay, Michael W. (2010) International business. 6th

ed. Upper Saddle River, NJ: Prentice Hall.

Ball, Donald A. (2008) International business: the challenge of global

competition. 11th ed. Boston, Mass: McGraw-Hill/Irwin.

Hill, Charles W. L. (2012) International business: competing in the global

marketplace. 9th ed. London: McGraw-Hill Higher Irwin.

McDonald, Frank and Burton, Fred (2002) International business. London:

Thomson.

Rugman, Alan M. and Collinson, Simon (2009b) International business.

5th ed. Harlow: Prentice Hall Financial Times.