Risks Associated With International Business Transactions Economics Essay

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 its 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 , its 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 its 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 à ¢Ã¢â€š ¬Ã‚ ¦ 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. McDonalds) 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 , its 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 deci sion 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 didnt receive ordered goods , it can happen because of workers strike , or delay in the shipment . One form of delivery risk is property risk , and its 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.