International business presents a wealth of opportunities, but also comes with a number of risks. Foreign exchange rate fluctuations, cultural differences, political instability and online fraud are just some of the risks in international business. Fortunately, having the right international partners to help you assess and mitigate these risks can help your cross-border business flourish.
International Business Risks
Risks in international trade come from several sources:
- Not being physically present
- Differing government policies
- Differing compliance requirements
- Differing cultures
- Differing ethical standards
- The logistical and economic impact of world events
The impact of these risks is not insignificant: The UNCTAD reported that FDI flows in 2020 dropped 20% below the 2009 financial crisis levels due to COVID-19. As the situation improved in 2021, the value of global trade rose again by 22.4%, year-on-year.
Before entering into international markets, it’s essential to research each country thoroughly and choose countries that are politically stable, have low national debt, have a diversified economy, encourage foreign direct investment (FDI) and are not known for corruption or unethical behaviours.
After selecting countries carefully, consider risk management strategies such as advanced cyber security measures, hedging strategies and taking out various kinds of trade insurance.
There are unique economic risks in international business that aren’t present in domestic trade, as well as unique opportunities.
Foreign Exchange Risk
The value of different currencies is constantly fluctuating, creating an exchange rate risk for international businesses. Just to give a few examples:
- An Argentine business trades with China. Due to rampant inflation in the Argentine peso, buying wholesale goods from China suddenly becomes much more expensive than it was before.
- A business located in the United States has assets in Australia. As the Australian dollar becomes weaker against the United States dollar, the value of the assets drops.
Currency risk also goes the other way at times, creating opportunities. For example:
- In October 2010, the Australian dollar reached parity with the U.S. dollar. Australians took advantage of the situation and started buying more U.S. goods online (a boon for businesses in the U.S.).
- Inflation in a target country could mean that you save money on labour costs once you convert your home currency to the target country’s currency.
- Currency devaluation in a country that lent you money could allow you to pay back your debt in less time using your home country’s currency.
Hedging Strategies to Mitigate Foreign Exchange Risks
The economic risk from changing currency exchange rates can often be reduced (never eliminated completely) by:
- Buying currency ahead of time when exchange rates are favourable
- Making currency forward contracts with banks to lock in a certain exchange rate for an upcoming currency sale or purchase
- Setting sensors to trade currencies once the exchange rate reaches a predetermined value
- Investing in a range of national and international funds to even out fluctuations in individual markets
Another financial risk is related to “country risk”—a given country could change its tax laws at any time, raising foreign or corporate tax rates, adding tariffs to imports, adding taxes to exports or giving subsidies to domestic businesses.
These policies are usually created to protect domestic producers and generate more revenue for the state. However, they can have the immediate effect of raising your costs and lowering your expected income.
How to Manage Economic Risk from Tax Changes
There’s not much you can do about in-country risk factors like changes to taxation rates. However, you can keep a rolling reserve of funds to carry you through any unexpected changes, raise your prices to absorb the higher costs and work with a merchant services provider that can help you remain compliant with each country’s tax laws.
You can also focus on doing business with European countries that have low business tax rates rather than those that currently have high corporate taxes. While the situation could always change, you can benefit from these lower rates in the short term.
Dealing with a foreign country puts you at risk of theft—both theft of your customer’s property (data and money) and your company’s physical, financial and intellectual property.
International transactions come with a risk of fraud from cyber criminals and unscrupulous employees and business partners. In 2020, there was a 435% increase in ransomware. Government agencies, healthcare organisations and data-rich companies—in particular—are being targeted.
To reduce your international business risk, it’s essential to partner with a global payment processing company that uses a securely encrypted global payment gateway and offers advanced fraud protection among its merchant services.
Intellectual Property Risk
Foreign companies are at an increased risk of intellectual property theft, including patent infringement, copyright infringement, company impersonation and trade-secret leaks. Target countries may be lax on enforcement and foreign businesses have less recourse if they are not physically there.
Your best defence against intellectual property theft is to choose your partner countries well, take out all applicable patents in the target country and partner with an in-country lawyer who can fight IP battles on your behalf.
Non-Financial Country Risks
There are other country risks associated with international business aside from exchange rate risks and taxation risks. These include political risks and regulatory risks.
- Change of government. Some political parties tend to be more pro-business and pro-FDI than others. A change in government could make the economic climate more challenging (or more friendly) to foreign companies.
- Political instability. Post-election riots and other kinds of protests, blockades, strikes and wars can make it hard to transport materials and manufactured goods from one place to another. Instability also reduces customers’ expendable income.
- Regulatory changes. New policies may place restrictions on companies that weren’t previously in force. This can include things like changes to the approved pesticide list, permitted emission levels and a minimum percentage of local employees.
- Natural disasters. Floods, fires, hurricanes, earthquakes, volcanic eruptions and extreme weather can damage stock and buildings, injure employees, block transportation routes and devastate the local economy.
Managing Country Risk Factors
While you can’t control country-specific risk factors, any known risks (such as the probability of riots and natural disasters) need to be taken into account when researching countries and writing your business plan.
For example, you might decide to take out political risk insurance for countries with known political volatility and build away from disaster-prone areas in countries that tend to experience flooding and wildfires.
Cross-cultural differences are important to take into account when analysing international business risks. These cover everything from language, greetings and dress codes to negotiation styles and expectations surrounding punctuality.
Failing to take differences into account could lead to ineffective negotiations or marketing campaigns (best case scenario) or causing offence and even risking a lawsuit (worst case scenario). A fairly recent example of cross-cultural risks is the translation faux pas of internet juggernaut Meta. While the name works great in Greek, for Hebrew-speaking Israelis it sounds like the feminine word for “dead.”
To reduce cross-cultural risks, it’s important to work closely with in-country cultural advisors who can initiate you into the language and cultural norms and have all of your materials translated by professional translators for whom the target language is their native language. Sounding native (or even just making sense) will greatly increase customers’ trust in your brand.
Commercial risk refers to an international company’s failure due to poor strategies or poor execution. This could include:
- A poorly timed market entry
- A poor choice of business partners
- Misinterpreting business agreements
- Offering sub-par goods and services compared to the competition
- Ineffective business strategies
- Ineffective marketing strategies
- Inadequate pricing strategies
- Product features that don’t match customers’ preferences or expectations
The main solutions to commercial risk include:
- Gaining extensive business experience before launching in a foreign market
- Performing thorough market research in the target market
- Adapting your business to each country (consider the top business opportunities in Europe for some winning ideas)
To reduce your commercial risk, screen potential business partners carefully to avoid those who are unreliable, produce poor quality materials or are involved in unethical practices like child labour, worker exploitation, indigenous rights abuses or environmental harm. Strong partners make a strong team and a higher chance of cross-border success.
Finding the Right Partners Is the Key to Reducing Risks in International Business
As we’ve pointed out, there will always be risks to trading internationally. However, partnering with successful global companies (including payment processors, market analysts, legal advisors and tax experts) and finding strong in-country partners can help you navigate these risks, avoid common pitfalls and help your business to realise its full potential.