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Raskovic SIFT 2012

Apr 04, 2018

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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

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