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INTERNATIONAL BUSINESS ENVIRONMENT

INTERNATIONAL BUSINESS ENVIRONMENT. RISK IN IBE: COMPANY PERSPECTIVE Matevž Rašković Faculty of Economics University of Ljubljana March 2010. INTERNATIONAL BUSINESS AND RISK. Why is International business more risky?. International business is more prone to risk, because (Buckley, 2004):

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INTERNATIONAL BUSINESS ENVIRONMENT

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  1. INTERNATIONAL BUSINESS ENVIRONMENT RISK IN IBE: COMPANY PERSPECTIVE Matevž Rašković Faculty of Economics University of Ljubljana March 2010

  2. INTERNATIONAL BUSINESS AND RISK

  3. Why is International business more risky? • International business is more prone to risk, because (Buckley, 2004): • Companies are operating and doing business in a less known socio-economic environment  they harder understand the cause-and-effect mechanisms in such environment (i.e. change of government) • Differences in language, culture and religion • Harder collection of important data and information about the environment and potential partners • Additional political and economic factors, i.e. changing currency rates • Longer physical distances (different transportation modes) • Higher transportation costs • Longer ‘time window’ for something to go wrong • Usually bigger transactions (in terms of size and value) • More complex logistics and management issues • Thus, companies must be aware of different • sources and types of risk and take measures • to minimize them!

  4. But what is risk? • Risk connected with UNCERTAINTY, regarding FUTURE events, which can DECREASE the PROBABILITY of reaching SET / PLANNED goals and have an IMPACT on the company (Tayeb, 2000)! • POSITIVE vs. NEGATIVE RISK? www.youtube.com/watch?v=vNSLnIxvhnk&feature=related

  5. Types of risk in Int. business COUNTRY RISK FINANCIAL RISK BUSINESS RISK • RISK ASSOCIATED • WITH ALL BUSINESS • PROCESS AND • ACTIVITIES: • Innovations • Product design • Marketing • HRM • Administration • Documentation • Transport… POLITICAL RISK ‘PAYMENT’ RISK ECONOMIC & LEGAL RISK SOURCES • MARKET RISK: • Currency risk • Interest risk • Price risk Source: Tayeb, 2000.

  6. Risk type 1: COUNTRY RISK www.youtube.com/watch?v=kXpB5JwpJFk

  7. Country risk • Country risk: all economic, political, legal, financial and social aspects, which impact doing business in an international environment • Key questions? • How to determine the key risk factors of country risk? • How to predict key country risk factors for the future? • Which country risk factors are more and which less important? • How to compare the country riskiness of two environments? • All is relative!!!

  8. Analysis of country risk • Analysis of political risk: • Wars and political conflicts • Terrorism and kidnappings • Confiscation, expropriation and • nationalization • Corruption • Government policies • Monetary policies and so called • transfer risks • FOCUS: corruption • www.youtube.com/watch?v=oxlPyvRzMJM&feature=related • Macroeconomic risk: • Monetary policy • Fiscal policy • Currency exchange policy • Foreign trade policy • GDP growth • Inflation • Unemployment • FDIs… • Legal environment risk: • Intellectual rights • Ecology • Tariffs and regulation on trade • Taxes • Regulation of products and services • Accountability

  9. Transparency int.: corruption perception index

  10. Analysis of country risk 2 approaches in practice • In advanced prepared • country reports: • BERI index • Control Risk Group (CRG) • Euromoney • Economist Intelligence Unit (EIU) • Moody’s Investor Service and Risk & • Payment Review • Coface • Export Credit Agencies (ECAs) • Euromoney Country Assessment: • Political risk: 25% • Economic performance: 25% • Indebtedness: 10% • Servicing loans: 10% • Credit ratings: 10% • Access to various finance… • Own analysis: • PEST analysis • PESTL analysis • SWOT analysis • Porter’s 5 forces analysis (industry) • C-analysis • Other analysis important to firm and • industry specific

  11. Example: Coface • http://www.coface-usa.com/CofacePortal/US_en_EN/pages/home/risks_home

  12. This is happening right now http://www.youtube.com/watch?v=3clrwC5HL64&feature=related

  13. Protection / minimization of country risk • Insurance (ECAs, insurance agencies, etc) • Integration with the host environment • Building political support at home and abroad • Moving profits through transfer pricing • Alternative business transactions: • Barter • Compensation • Counterpurchase • Offset transactions • Switch trading • Swap deals….

  14. Risk type 2: FINANCIAL RISK

  15. Financial risks • All unexpected changes in value of assets and liabilities of an internationally active company! • Types of financial risks: FINANCIAL RISKS PAYMENT RISKS MARKET RISKS Buyer doesn’t pay Market change Commercial reasons (liquidity) Non-commercial reasons (conversion restr.) Change in currency rate Change in interest rate Change in prices

  16. Protection against payment risk • Running a check on a customer’s financial health • Appropriate financial instrument • Insurance of liabilities (insurance company, ECAs, etc) • Following up and monitoring liabilities • Offering discounts for early payment • Maximum overdraft for different customer types • Compensation • Advanced forms of financing (factoring, forfeiting) • Also some simple procedures, like: • Calling one of the customer’s customers or suppliers • Reading their annual report • Asking for proof of sound financial health…

  17. Examples of market risks • Example: currency rate changes • A Japanese computer manufacturer sells 1.000 PCs to a German retailer, for 500 EUR per PC. The arranged payment currency is EURO and the amount has to be paid in 30 days. • What happens if the EURO falls (depreciates) against the Yen in 30 days? • How does this change impact the German buyer? • How does this change impact the Japanese buyer? • Similar also holds for interest risk and price risk!

  18. Protection against market risk • Use of special financial instruments: futures and forwards • Options • Insurance of currency rate change (but it costs money!) • Legal instruments: contractual clauses of foreign currency • Agreements of sharing the market risks • Swap transactions

  19. Risk type 3: BUSINESS RISK Examples of two big business mistakes!

  20. Business risks • May arise in all business processes, which take place in the functioning of the company, and can span from technological innovation mistakes, to product design mistakes, to marketing mistakes, to production mistakes, to HRM mistakes…. • Most common business risk in Int. business: • Risk associated with various types of documentation • Risks associated with pricing and calculations • Transportation risks • Manipulation risks • Marketing ‘faux pas’

  21. Protection against business risks • Documentation: • Experienced staff • Systematic tracking and IT systems • Outside help • Pricing and calculations: • Knowing your cost structure • Knowing your Incoterms clauses • Negotiate not only on the price, but also currency, payment deadliness… • Transportation and manipulation: • Transport insurance • Lloyd's insurance policy • Packaging • Penalties… • Marketing: • Information is key to every marketer!!! • Analysis, analysis and analysis…

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