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Evaluating International Risk

By: Matt Gossett

 

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A big reason why most small businesses don’t approach foreign markets is because of the myriad risks associated with global operations. While international risk is certainly not something to take lightly, a careful assessment of the primary dangers that your business faces will ensure that you’re ready for whatever challenges you might face. The following are three primary risks to consider and how they could affect your business.

Political Risk
The first risk factor to consider relates to the political environment in a country. Political instability can have a devastating impact on a business, particularly when the government is a threat to impose new laws and restrictions on your business. Choosing to operate in a country where the government actually wants you to be there will diminish any feeling of having to earn political favor when issues arise. In extreme cases, a business’s assets be jeopardized by a government that has decided to seize control over your sector of the economy. When evaluating the political climate of a particular country, it would be useful to know whether other international businesses have had issues in dealing with the government.
Credit Risk 
Another way to evaluate risk in a foreign economy is to review the credit market. Credit can impact your business in several ways. In a country where credit is tight, your business may not have to worry about the frequency of consumer defaults on financing. However, your business might have difficulty obtaining a loan to expand its operations in that country. On the other hand, a loose credit market could be a sign of national financial issues that could lead to mass defaulted loans when people are unable to pay their debts (as occurred during the 2007-2008 financial crisis). Credit risk can be determined by performing internal research or paying a third-party rating agency for an assessment.
Currency Risk
The strength and stability of a foreign currency is another risk you’ll have to consider when operating internationally. A weaker currency is favorable for a business that’s looking to set up manufacturing facilities where production cost is low. A stronger currency is preferable to businesses in retail as it diminishes the problem of holding onto currency after executing a sale. A stable currency will minimize the need for a business to adjust price based on currency fluctuations. An unstable currency that is susceptible to future inflation or deflation might cause a business to hedge its risk in the currency exchange market where both current and projected future exchange rates can be locked in.
What other risks has or will your business face from a global perspective?
Published: September 16, 2013
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Matt Gossett

Matt Gossett is a writer and editor for Tarkenton Companies. A graduate of Washington and Lee, Matt is currently studying International Business at the HEC School of Management in Paris. He specializes in leadership issues, combining insight from business, athletics, and education. Connect with him on

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