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How can international business risks be overcome?

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28 May 2024. With the globalization of trade, businesses are increasingly looking beyond their national borders to explore new markets, tap into diverse consumer bases, and seek growth opportunities. However, these opportunities come with inherent risks. International business risk refers to the uncertainties and potential adverse consequences that organizations face when operating across borders. These risks may arise from a variety of sources, including economic, political, cultural and operational factors. Below we will look at the main factors and classifications of risks associated with conducting business activities on the world stage.

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International business risks

One of the common international business challenges that many companies face is political and economic instability in various regions of the world. Political and economic instability may affect the business environment, market demand, foreign exchange rate, legal and regulatory frameworks, employee and asset security, and the overall profitability and sustainability of business operations. It is therefore important for international businesses to have a clear understanding of the political and economic risks and opportunities in each country in which they operate, and to develop effective strategies to mitigate negative impacts and exploit positive ones.

Entering a foreign market initially implies competition with local companies. Understanding the competitive environment is very important for finding potential partners or collaborators, as well as for developing effective marketing strategies. To be successful, foreign companies must also have a sufficient understanding of customer preferences. Conducting market research can help companies identify potential opportunities and develop effective marketing strategies.

Also important and carrying a special meaning is the risk of changes in exchange rates. Entering the international market means working with different currencies. Any change in exchange rates can affect a company’s profits and lead to losses. A risk management strategy must be developed to minimize potential losses.

Insufficient staff training is also a risk. International business requires employees to have specialized knowledge and skills. Staff need to be trained to ensure they are ready to work internationally.

And another important risk aspect is political and economic instability. There may be political and economic crises in different countries that can affect business. It is necessary to monitor the political and economic situation in the countries where the company operates and develop action plans in the event of a crisis.

Hedging strategies to mitigate foreign exchange risks and how to manage economic risk from tax changes

Managing and mitigating risks in these categories may involve implementing the following strategies and approaches.

  1. Diversification of business portfolio and income streams across different regions and markets. This can help reduce dependency and exposure to one or more markets that may be affected by political and economic instability, and increase business resilience and agility to adapt to changing conditions and opportunities. Diversification can also help balance the risks and rewards of different markets and sectors, and optimize the allocation of resources and capital.
  2. Setting clear budget boundaries. Always make a budget, regardless of your personal ambitions and desires. This applies to absolutely all aspects, from renting an office and finding specialists to join your team, to selling your own services or products. Don’t take it all on yourself; delegate some of the tasks to your sales manager. Of course, this approach will reduce the amount of expected profit, but on the other hand, it will reduce the level of responsibility; in any case, profit will be received daily. Before making global plans, look at how things are going in your company; if a product does not work in a specific foreign market, you will understand this long before the company’s large-scale withdrawal. A SWOT analysis will not be superfluous; it will provide clear strategic planning and show the weaknesses of business development.
  3. Development of a business model for the market. Create a business model that suits the country and its demographics. Large countries with different market segments and geographies may require a multi-part model that includes specific strategies for each region. Assign a new product introduction team to determine the right business models, operating models, and profit expectations before entering the target market. The NPI team must tailor the product or service to meet the needs of the market and target customers.
  4. Emergency plan. When you decide to develop a business in a foreign market, make sure once again that you really need it. It is important to study the possible risks and benefits of the business at the initial stage. It’s good to be an optimist, but in business development and investment it is important to be realistic; believe me, even large companies have failures.

Finding a right partner and other ways of reducing risks in international business

Let us highlight several strategies that relate to issues not only of the financial side, but also of the partnership and legal side.

  1. Conducting a thorough assessment of political and economic risks before entering a new market or expanding an existing one. This can help identify potential threats and opportunities such as political stability, corruption, human rights, trade barriers, taxation, inflation, currency fluctuations, etc., and assess their likelihood and impact on business goals and operations.
  2. Developing a contingency plan for various scenarios and events that could disrupt business operations, such as civil unrest, violence, terrorism, natural disasters, sanctions, embargoes, etc. This can help prepare for worst-case scenarios and minimize losses and damages. The contingency plan should include alternative suppliers, distributors, customers, locations, modes of transportation, communication channels, etc.
  3. Building and maintaining strong relationships with local stakeholders such as government officials, regulators, business partners, customers, suppliers, employees, communities, media, etc. This can help build trust, authority, legitimacy and support business operations and facilitate access to information, resources and opportunities.
  4. It is necessary to develop a mechanism for positive interaction with employees, clients, suppliers and create standardized communication documents. It is important to stabilize the supply chain, as well as optimize the customer service management system in order to avoid the formation of a negative public opinion about the company.
  5. The physical and mental health of employees should be maintained. It is necessary to create a flexible work schedule and provide staff with all the technical means so that they can work remotely, if necessary.
  6. It is important to emphasize plans to respond to risks in supply chains. Multinational companies usually make provisions in advance for the use of redundant office space, production facilities and supply chains in different countries or regions.
  7. Before entering a new market, it is important to conduct thorough market research and analysis to identify potential opportunities, risks, and barriers that may impact the business. This includes understanding the local culture, consumer preferences, demand, competition, legal environment and trade policies.

Thus, risks must be assessed and mechanisms and plans for emergency response and work sharing must be determined. Many multinational companies have already developed a contingency plan or business sustainability plan and are prepared to implement it if necessary. If there is no such plan, then the company needs to immediately assess all risks, including problems related to personnel, outsourcing, relations with government agencies, public relations, and supply chain.

Risk assessment tools and systems

  1. SWOT analysis. One frequently used tool is a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. It helps a business assess internal strengths and weaknesses as well as external opportunities and threats in the international market and develop strategies to mitigate risks.
  2. PESTEL analysis. Another valuable framework is PESTEL (political, economic, social, technological, environmental and legal) analysis. This tool examines external factors that can affect international business operations. It provides a comprehensive understanding of macro-environmental factors.
  3. Assessing the country risk associated with specific countries is important for international business. Factors taken into account include political stability, economic performance and cultural considerations.

Thus, we have identified potential risks for international business and possible ways to reduce them. The development and implementation of any strategies depends on the individual parameters of each business. Our experts will help you assess your project for potential risks and develop the best mitigation strategies for you. Contact us now.

Article’s author is Denys Chernyshov – founder and CEO of the globally-famous organization Eternity Law International.

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