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Risk ininternational business

Matev Rakovi, PhDUniversity of Ljubljana, Faculty of Economics;

2012-2013 Visiting scholar SIFT, China;2010-2011 Visiting fellow at Harvard University, USA

Shanghai, November 30th 2012

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What is risk and how would we define risk?

What is risk in international business?

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Defining risk?

Business dictionary: probability or threat of a damage,injury, liability, loss orother negative consequences, caused

byexternal and/or internal factors, which may beneutralizedor lessenedthrough pre-meditatedactions

Quantifiable likelihood of negative consequences or less-than-expected returns

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Understanding risk in IB and IBE

Risk connected with UNCERTAINTY, regarding FUTUREevents, which can DECREASE the PROBABILITY of

reaching EXPECTED / SET / PLANNED goals and have an

IMPACT on the company (Tayeb, 2000)!

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Example: What are the odds?

Odds of fatally slipping in bath or shower: 2,232 to 1

Odds of being struck by lightning: 576,000 to 1

Odds of being murdered: 18,000 to 1

Odds that a first marriage will survive without separation or divorce

for 15 years: 1.3 to 1

Odds of dating a supermodel: 88,000 to 1

Odds of winning the California lottery: 13,000,000 to 1

Chance of dying in a terrorist attack while visiting a foreign country:

1 in 650,000

http://www.funny2.com/odds.htm

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Factors when considering risks

Companies and managers differ in their perceptions of risks and

risky behavior .

One companys risk may be another companys business

opportunity.

You cannot always avoid risk, but you can usually at least minimize

it.

There are usually trade-offs among risks.

Status quo can also be risky.

Is there such a thing as calculated risk-taking?

Daniels, Radebaugh & Sullivan, 2011: International Business: environments and operations.

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India example: risk or opportunity?

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Two sides of the same coin

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Risk and profit in IB

Czinkota, Ronkainen & Moffett, 2000: International Business.

International experience

Costs &benefits

profit

risk

MARKET GAP

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Why is IB more risky?

International business is more prone to risk, because (Buckley,2004):

1. Companies are operating and doing business in a less knownsocio-economic environment they harder understand thecause-and-effect mechanisms in such environment (i.e.change of government)

2. Differencesin language, culture and religion

3. Harder collection of importantdata and information about theenvironment and potential partners

4. Additional political and economic factors, i.e. changingcurrency rates

5. Longerphysical distances(different transportation modes)

6. Highertransportation costs7. Longertimewindowfor something to go wrong

8. Usuallybigger transactions(in terms of size and value)

9. More complex logistics andmanagement issues

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Basic types of IB risks

COUNTRY

RISK

FINANCIAL

RISK

BUSINESS

RISK

RISK ASSOCIATED

WITH ALL BUSINESS

PROCESS AND

ACTIVITIES:

- Innovations- Product design

- Marketing

- HRM

- Administration

- Documentation

-Transport

POLITICAL RISK

ECONOMIC &

LEGAL

RISK SOURCES

PAYMENT RISK

MARKET RISK:

- Currency risk

- Interest risk

- Price risk

Source: Tayeb, 2000.

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What about environmental risks?

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Type 1: Country risk

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What is country risk?

Country risk: all economic, political, legal, financial and socialaspects, which impact doing business in an internationalenvironment

Key questions?

How to determine thekey risk factorsof country risk?

How topredict key country risk factorsfor the future?

Which country risk factors are more and which lessimportant?

How tocomparethe country riskiness of two environments?

All isrelative!!!

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How did we usually analyze 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

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

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I. Political risk

Political Riskcaused by political instability Promotes fear that operating position will deteriorate

Tends to behigher in totalitarian regimes

Sources of political risks:

Unstable Political System

Political involvement of religious or militaryleader

Frequent changes in government

Corrupt or poor leadership Civil disorder due to:

Economic conditions Human rights violations Conflict among races, religions & ethnicities

Group animosity

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Types of property seizures

Confiscation

The forced transfer ofassets from a company

to the government without

compensation

Expropriation

The forced transfer ofassets from a company tothe government with

compensation

Nationalization

When expropriationinvolves one or a smallnumber of companies in

an industry, thegovernment may take over

an entireindustry

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Types of political risk

PoliticalRisks

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Example: Belgium

Belgium holds a world record in

government formation with 541 days toform government over80 rounds of

negotiations

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Government changes in EU

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Food security & political risk

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Example: Food security index

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Economic equality: GINI coefficient

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Quality of life index

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II. Macroeconomic risk

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Example: Country economic risk &

ratings

http://www.coface.com/CofacePortal/COM_en_EN/pages/home/risks_home/country_risks

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Example: sovereign debt

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Example: sovereign debt

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Example: EU-27 country economic health

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Example: Past vs. future growth in EU

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Example: The Economist

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Example: Moodys Sovereign RatingsData for 2008

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Payable country risk reports

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Coface

http://www.coface-usa.com/CofacePortal/US_en_EN/pages/home/risks_home

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New ways of thinking and looking at risk

New cause-and-effect risk mechanisms

Increasing global poverty, higher sensitivity to prices of basic goods

Control over strategic resources (i.e. oil)

Social media fueled revolutions

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How to protect against country risks?

InfluencingLocal

Politics

InformationGathering

Adaptation

Avoidance

Risks

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12 pillars of competitiveness

World Economic Forum, 2010/20101

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