Raskovic SIFT 2012

7/30/2019 Raskovic SIFT 2012

1/67

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


2/67

What is risk and how would we define risk?

What is risk in international business?


3/67

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


4/67

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)!


5/67

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


6/67

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.


7/67

India example: risk or opportunity?


8/67

Two sides of the same coin


9/67

Risk and profit in IB

Czinkota, Ronkainen & Moffett, 2000: International Business.

International experience

Costs &benefits

profit

risk

MARKET GAP


10/67

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


11/67

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.


12/67

What about environmental risks?


13/67

Type 1: Country risk


14/67

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!!!


15/67

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


16/67

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


17/67

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


18/67

Types of political risk

PoliticalRisks


19/67

Example: Belgium

Belgium holds a world record in

government formation with 541 days toform government over80 rounds of

negotiations


20/67

Government changes in EU


21/67

Food security & political risk


22/67

Example: Food security index


23/67

Economic equality: GINI coefficient


24/67

Quality of life index


25/67

II. Macroeconomic risk


26/67

Example: Country economic risk &

ratings

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


27/67


28/67

Example: sovereign debt


29/67

Example: sovereign debt


30/67

Example: EU-27 country economic health


31/67

Example: Past vs. future growth in EU


32/67

Example: The Economist


33/67

Example: Moodys Sovereign RatingsData for 2008


34/67

Payable country risk reports
http://www.coface-usa.com/CofacePortal/redirection.jsp?pageId=pages/home&site=US_en_EN


35/67

Coface

http://www.coface-usa.com/CofacePortal/US_en_EN/pages/home/risks_home
http://www.coface-usa.com/CofacePortal/US_en_EN/pages/home/risks_homehttp://www.coface-usa.com/CofacePortal/US_en_EN/pages/home/risks_homehttp://www.coface-usa.com/CofacePortal/US_en_EN/pages/home/risks_homehttp://www.coface-usa.com/CofacePortal/US_en_EN/pages/home/risks_homehttp://www.coface-usa.com/CofacePortal/redirection.jsp?pageId=pages/home&site=US_en_EN


36/67

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


37/67

How to protect against country risks?

InfluencingLocal

Politics

InformationGathering

Adaptation

Avoidance

Risks


38/67


39/67


40/67


41/67

12 pillars of competitiveness

World Economic Forum, 2010/20101


42/67

EXAMPLE: WEF (Competitiveness)

2 views:

1) Absolute progress and 2) relative progressWorld Economic Forum, 2010/20101World Economic Forum, 2010/20101


43/67

WEF: Slovenia

World Economic Forum, 2010/2011


44/67

Global balance of trade?


45/67

Some important info sources


46/67

III. Legal risk

http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results
http://www.transparency.org/policy_research/surveys_indices/cpi/2010/resultshttp://www.transparency.org/policy_research/surveys_indices/cpi/2010/results


47/67

Intellectual property rights

Figure 2.2: Regional Piracy Rates for Software

0 20 40 60 80

North America

Western Europe

Middle East and Africa

Latin America

Asia Pacific

Eastern Europe

Percentage of Software that is Pirated


48/67

Areas of legal risk

Intellectual property

Product safety and liability

Worker relations:

Health and safety standards

Workweek

Employment practices

Antitrust prohibitions

Environmental practices

Taxes and reporting requirements


49/67

Type 2: Financial risk


50/67

How we usually looked at financial risk

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 doesnt pay Market change

Non-commercial

reasons

(conversion restr.)

Change in

currency

rate

Change in

interest

rate

Change in

prices

Commercial

reasons

(liquidity)


51/67

Protecting against payment risk

Running a check on a customers 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 thecustomers customers or suppliers

Reading their annual report

Asking for proof of sound financial health


52/67

Examples of market risks

Example: currency rate changes A Chinese computer manufacturer sells 1.000 PCs to a German

retailer, for 500 EUR per PC. The arranged payment currency is EUROand the amount has to be paid in 90 days.

What happens if the EURO falls (depreciates) against the RMB in 30 days?

How does this change impact the German buyer?

How does this change impact the Chinese seller?

Similar also holds for interest risk and price risk!


53/67

Different types of exposure

Accounting exposure is the exchange rate exposure thatresults when consolidated financial statements are prepared in

a single currency

Two types of accounting exposure:

Transaction exposure

Translation exposure


54/67

Exposure types (contd)

Transaction exposure results from transactions involving thepurchase or sale of goods or services with the price stated inforeign currency

Exists until the payable or receivable is liquidated

E.g., a U.S. importer must pay a European supplier in

Swiss francs

Translation exposure results from translating foreign assetsand liabilities into U.S. dollars on the consolidated balancesheet

Economic exposure measures the risk that the value of asecurity or a firm will decline due to an unexpected change inrelative foreign exchange rates

Would reduce the value of the security or firm

The most important type of exposure for security investors


55/67

Protection against market risk

Use of special financial instruments: futuresand 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


56/67

Type 3: Business risk


57/67

Business risks

May arise in all business processes, which take place in thefunctioning of the company, and can span from technologicalinnovation mistakes, to product design mistakes, to marketingmistakes, 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

Marketingfauxpas


58/67

Example: wrong marketing strategy


59/67

Culture is context based

The common grasshopper (Acrididae)

USA: Pest!

CHINA: House pet!

Thailand: A snack!

Culture is animportant part

ofinternational

business andmarketing!!!


60/67

Culture ingredients / elements

Institutions

Norms

Values

Believes

Religion

Language

Education system

Art and aesthetics

Material culture and life-style


61/67

Layers of culture

Core believes

& expectations

Values & norms

Habits, routines &procedures

Physical objects, heroes,

symbols & artifacts

implicit

explicit

a man shouldhave only 1

wife

Slovene values:

work, family,security

walking otherladders


62/67

Sometimes culture can be weird

MATEV

a Slovene

male name

a Slovene

national dish


63/67

China & Slovenia, China & USA


64/67


65/67

Example: transportation risk


66/67

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, paymentdeadliness

Transportation and manipulation:

Transport insurance

Lloyd's insurance policy

Packaging

Penalties

Marketing:

Information is key to every marketer!!!

Analysis, analysis and analysis


67/67

Developing a risk management system

Raskovic SIFT 2012

Documents