Risks Associated With International Business Transactions Economics Essay

International business has appeared in the history to satisfy the need of merchandises from long distance nations , it was an international trade . It begins in the 19th century BC where it has appeared in Assyrian merchant colony in Cappadocia . Camels allows Arab to move spices and silk from far east and trade it , establishing the silk road which make a connection to trade Chinese and Indian goods with the Romanian empire goods .Vasco de gamma ( Portuguese explorer ) has established a sea route between Europe and India .

As international trade extent to reach all nations , the necessity of regulations or an international business law has been raised . The main convention for international trade was the united nations convention on contracts for international sale of good (CISG) which established by UNCITRAL (United nations commission on international trade law) .

International Business Law involves two parts , private and public law , the private law related to international business transaction like international trade , finance trade , licensing and distributing agreements . the public law related to agreements that help to create a legal framework which international business takes place ( e.g. Treaties , Customs , Tariff.. )

International Business Transactions

A business transactions begins when a buyer and a seller agree the terms and conditions to purchase a specific goods with a detailed quantity and price ( contract of sale ). In this contract , from the buyer point of view what is essential is to gain the ownership of the goods , for the seller what is important is to have the legal terms that provide receiving money .

An International business transactions differ from domestic business transaction , because it’s usually include long distance which means higher risk in goods transiting , which mean higher insurance , how money will be transferred and who is responsible of the goods delivery , all that should be included and clearly in international business transaction contract .

import – Export trade

Imports are goods or services that are made or grown abroad then purchased or receipt by the importer and distributed domestically . Exports are goods or services that are made or grown inside the nation then sold or rendered by the exporter to be distributed abroad

The need of export – import trade generally is because on country has an advantage over others in specific items , some countries have comparative advantages like manufacturing (ex. Germany , japan .. ) others have comparative advantage in natural resources like oil or gas ( ex. Saudi Arabia , Russia ) .

Exporting can be direct or indirect .Direct exporting is when the manufacturer take the responsibility of most of the export processes , usually they use Foreign sales representative or foreign distributer in the exported country .Indirect exporting is when a company use intermediaries ( export trade company , export management company ) to enter the foreign market , usually happen because lack of capital or because the company do not have the needed experience to enter this foreign country .

Trades usually governed by the laws and regulations of the trade countries , they use tariffs and non-tariffs barriers , this reflect the way that companies trade with each country . In 1947 nations accept General Agreement on Tariffs and Trade , this movement occurred to liberalize trade by reducing tariffs and non-tariffs barriers . in 1995 WTO (World Trade Organization ) has been created to manage the rules and assist settling the trade disputes between WTO nations .

foreign Direct Investment

Foreign Direct Investment is when a company invest its workforces and resources to purchase or to build an operation in another country . those company called MNC (Multinational Corporation) . Countries usually welcome FDI because MNCs has many impacts over hosts country economics and political system . FDI is a major decision for any company because its full of costs and risks .

MNCs companies has many ways to enter the market of a foreign country considering of many factors like capitalization , legal considerations and market condition, MNCs decide to enter foreign market as Joint Venture , Mergers , Subsidiaries or Acquisitions .

When a firm owned 100% by a foreigner , it’s a wholly owned subsidiary . A joint venture is an organization that is created by two or more companies or with the foreign government they share risk and assets , companies use joint venture to reduce the risk of entering foreign market . ( e.g. Peugeot “France” has a joint venture with Dongfeng Motor “China”)

A strategic alliance is an agreement between competitors to achieve common goal .(e.g. Airlines Coding share )

Licensing , Franchising

Licensing is an agreement where the Licensor (Firm) grants a Licensee (Foreign Firm) the right to use its intellectual property ( patent , logo, formula , etc.) .Licensing can be completely within one country , but it’s a way that companies use to distribute its products with minimum risk taken , where there is a percentage of profit paid by the licensee to the licensor .

Franchising is a form of licensing which the Franchisor (parent firm) offers equipment , material , trademarks , technology … to the Franchisee (investor) , in the other hand the franchisee should pay a fee or a percentage of the profit to the franchisor .(e.g. McDonald’s)

Franchising is a good way to inter the foreign market because the franchisee will provide the capital for investment and the management and franchisee will deal with customer and labor problems , franchising usually associated with many legal requirements , it depends on the country , un US the federal trade commission is regulating the franchising . in other hand in china they eliminated most of the restriction on franchising .

rISK aSSOCIATED WITH INTERNTIONAL BUSINESS TRANSACTIONS

sTRATEGIC rISK

Strategic risk means the risk of weak or bad strategic decision concerning the competitiveness the firm in the foreign country , it’s the risk of misanalysing of the porters five forces which are the threat of new entrants , threat of substitute products or services , Bargaining power of customer , Bargaining power of suppliers and the intensity of competitive rivalry .

Usually MNCs companies is more concerned about this risk , where a well done study of the market is required before entering the foreign country . An example of a company which failed In the strategic risk consideration .

Political risk

International managers should understand the substantial effects of political decision making in country before beginning its business , and understand how political decision making can influence its business . Political movements and instability can make it difficult to the company to operate well . International manager should be aware of the ideology of the host country , the economic system ( communism , socialism ,capitalism ) and the political system ( democratic , totalitarianism ) and the structure of the host government , a risk of embargos and sanction of trades which usually used for political pressure rather that economic issues .Understanding the stability of host country political system can avoid many risks , a new and hostile government may replace the friendly relationships and hence expropriate foreign assets .The firm most understand the regional stability and international affairs of the host country . The firm can do political risk analysis to assist in firm decision making .

operational risk

Operational Risk is the risk concerning operational activities , machineries breakdown , supply of resources, logistics and inventory problems .By establishing a good operational risk analysis and evaluation , companies will be able to reduce operational loss, pre-detecting of illegal activities , reducing auditing costs and reduce exposures to future risks , and that well lead to reduce waste and improve processes , it will develop lead-time and add to efficiency in international business .

In export – Import international transaction , a delivery risk is an operational risk , where a buyer didn’t receive ordered goods , it can happen because of workers strike , or delay in the shipment . One form of delivery risk is property risk , and it’s a loss or damage to the goods before they arrive.

The risk of Pilferage can affect all types of trade transaction , specially import – export one, this has been a problem for many years , a new way of boxing (cargo) and new technologies entered this sector to minimize the risk of pilferage .

country risk

When the firm decided to do business broad , it should consider the basic infrastructure needed for the firm operation , that what country risk means . Roads , Bridges and telecommunication, crime rate and corruption , internal conflicts or civil unrest and the economic condition ( unemployment rate , unskilled labor force etc. ) , terrorism , in the host country all that can make it difficult to enter or do business safely ,effectively , efficiently in that country .

Country risk can be the Language and Cultural differences and the risk of exposure to foreign law and courts , a Lack of language differences awareness can cause many problems that will end in courts , an example of that , what happened in1975 , United states district court , between Gaskin (US citizen) and Stumm Handel GMBH (German company ) , an employment contract written in German has been signed by Gaskin ,who has no knowledge about German language .

technological risk

Lack of security in electronic transaction , absence of information technology infrastructure and the cost of rapidly developed technology , all that will result creating problems that will affect doing business in the host country .

environmental risk

Environmental risk may lead to damage the reputation of the Firm if firms function resulted pollution ( Air , water , environment .etc.) and that will cause risk to the firm .And vice versa if the host country has pollution , that may cause health problem to firms employees .

economic & Financial risk

Changing in domestic fiscal or monetary policies , devaluation or inflation rate , GDP , unemployment rate and the ability of the host country to meet financial obligations , all that make an Economic risk that should be careful understood before conducting international business .

In this area, Currency exchange rate can have big effect over international trade and investment decisions taken by the firm . Fluctuations in foreign country currency can diminish profits when the firm convert them back to home currency , some countries may create rules that will minimize the flexibility of the firm to send money outside the country , hedging strategies could mitigate some of the currency exchange rate.

In export-Import international transaction a financial risk can be a payment risk , where the buyer will fail to pay for the ordered goods , it will costs a lot specially if the cost of shipment is so high (Because of sensitive or heavy shipments ).

Summary

The International Business environment has changes a lot in the last decades , with the high competitiveness of international market , International mangers now a days should be aware of economic , political , culture and other differences in the world to be affective in his position .

The three main international business types , export-imports , FDI , and Licensing and franchising. In each type of them there are risks that should be considered and pre-determined to be able to build and plan a good strategy that will minimize any risk that may face firm international business.