Risks in International Business

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Imagine that you are considering starting your own firm. You’ve been contacted by a college acquaintance – a brilliant biology student-who tells you that while in graduate school she developed a procedure in the lab that she believes has considerable commercial potential. This classmate makes it clear that she has little interest in or expertise at managing people, and she wants you to join her in founding a company in which you will handle the management chores and she will be responsible for developing the technology and product applications. You’ve always wanted to get in on the ground floor of such an entrepreneurial venture, and you are convinced this acquaintance has the sort of brilliance that could lead to tremendous success. So you decide to think hard about her offer.

Needless to say, there are lots of things you’d better start thinking about concerning product development, financing the venture and managing cash flow problems, and (perhaps somewhere down the road) production and marketing.

If you have no interest in ever building your own company or working in a start-up, there are some very good reasons, both pedagogical and practical, for looking at human resource management in young emerging organizations. First, one can be led considerably astray when the theory, research, business press articles, and managerial testimonials available to guide you are all based exclusively or primarily on the experiences of relatively large, long-lived organizations, as is true in the domain of human resources management. There is simply much more information available about the human resources practices and performance of established enterprises than there is about new ventures, and many popular and influential management books have sought to derive broader insights and principles by examining the characteristics of companies that have remained successful over long periods of time. Those studies can be illuminating, but they have some drawbacks from both a scholarly and a managerial vantage point.

From a scholar’s perspective, the danger in drawing inferences from long-lived or seemingly successful organizations is that one typically lacks information on the enterprises that have failed over the same period. One suspects, for instance, that the vast majority of successful firms have had chief executives, and a large number no doubt have had mini-blinds on their office windows. But one would be reluctant to conclude that these characteristics contribute to organizational success, particularly because it is quite likely that most firms that failed over the same period also were led by CEOs and had mini-blinds on their windows.

From a managerial and policy perspective, studies of leading-edge human resources practices in well-established corporations are also of limited value. Even if such studies can cast light on effective human resources management in other large corporations, they are of less help to the entrepreneur wishing to draft a human resources blueprint for a new organization or for the manager striving to achieve excellence in a smaller, emerging enterprise. Moreover, the vital role that small, young, rapidly growing organizations play in generating new jobs within the economy has been widely noted, which underscores the importance of understanding human resource management in emerging companies for those concerned with employment policy and economic development.

There is another important reason for looking in some detail at the evolution of human resources management within young emerging organizations: It provides a powerful lens for examining the organization. It is stressed the importance of crafting personnel policies that are closely aligned with the organizational context and that display strong internal consistency. It is noted how organizations can benefit by structuring employment relations that leverage the cognitive and cultural “baggage” or expectations that employees bring with them from other social roles and experiences. Examining the birth and early evolution of employment practices in new organizations can provide important insights into all of these processes.

Just as there are reasons to get into global markets, and benefits from global markets, there are also risks involved in locating companies in certain countries. Each country may have its potentials; it also has its woes that are associated with doing business with major companies. Some of the rogue countries may have all the natural minerals but the risks involved in doing business in those countries exceed the benefits. Some of the risks in international business are:

(1) Strategic Risk
(2) Operational Risk
(3) Political Risk
(4) Country Risk
(5) Technological Risk
(6) Environmental Risk
(7) Economic Risk
(8) Financial Risk
(9) Terrorism Risk

Strategic Risk: The ability of a firm to make a strategic decision in order to respond to the forces that are a source of risk. These forces also impact the competiveness of a firm. Porter defines them as: threat of new entrants in the industry, threat of substitute goods and services, intensity of competition within the industry, bargaining power of suppliers, and bargaining power of consumers.

Operational Risk: This is caused by the assets and financial capital that aid in the day-to-day business operations. The breakdown of machineries, supply and demand of the resources and products, shortfall of the goods and services, lack of perfect logistic and inventory will lead to inefficiency of production. By controlling costs, unnecessary waste will be reduced, and the process improvement may enhance the lead-time, reduce variance and contribute to efficiency in globalization.

Political Risk: The political actions and instability may make it difficult for companies to operate efficiently in these countries due to negative publicity and impact created by individuals in the top government. A firm cannot effectively operate to its full capacity in order to maximize profit in such an unstable country’s political turbulence. A new and hostile government may replace the friendly one, and hence expropriate foreign assets.

Country Risk: The culture or the instability of a country may create risks that may make it difficult for multinational companies to operate safely, effectively, and efficiently. Some of the country risks come from the governments’ policies, economic conditions, security factors, and political conditions. Solving one of these problems without all of the problems (aggregate) together will not be enough in mitigating the country risk.

Technological Risk: Lack of security in electronic transactions, the cost of developing new technology, and the fact that these new technology may fail, and when all of these are coupled with the outdated existing technology, the result may create a dangerous effect in doing business in the international arena.

Environmental Risk: Air, water, and environmental pollution may affect the health of the citizens, and lead to public outcry of the citizens. These problems may also lead to damaging the reputation of the companies that do business in that area.

Economic Risk: This comes from the inability of a country to meet its financial obligations. The changing of foreign-investment or/and domestic fiscal or monetary policies. The effect of exchange-rate and interest rate make it difficult to conduct international business.

Financial Risk: This area is affected by the currency exchange rate, government flexibility in allowing the firms to repatriate profits or funds outside the country. The devaluation and inflation will also impact the firm’s ability to operate at an efficient capacity and still be stable. Most countries make it difficult for foreign firms to repatriate funds thus forcing these firms to invest its funds at a less optimal level. Sometimes, firms’ assets are confiscated and that contributes to financial losses.

Terrorism Risk: These are attacks that may stem from lack of hope; confidence; differences in culture and religious philosophy, and/or merely hate of companies by citizens of host countries. It leads to potential hostile attitudes, sabotage of foreign companies and/or kidnapping of the employers and employees. Such frustrating situations make it difficult to operate in these countries.

Although the benefits in international business exceed the risks, firms should take a risk assessment of each country and to also include intellectual property, red tape and corruption, human resource restrictions, and ownership restrictions in the analysis, in order to consider all risks involved before venturing into any of the countries.