Types Of Risks
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Types of Risks
Any Business house engaged in international trade is exposed to several risks, which are also inherent in the home trade. But international business is faced with certain additional risks like political uncertainty, exchange rate fluctuations, import-export regulations, etc. Event the intensity of some of other risks is increased in case of foreign trade. For instance, risk because of credit worthiness of foreign parties and marine and air transport risks get multiplied many times. Various types of risks in international business have been described below:
1. Political Risks. Such risks occur because of the uncertainty associated with political events in the host country. An MNC is a guest of the host country and, therefore, the host country can influence the scale and dimensions of the operations of an MNC through its policies. For instance, Coca Cola was compelled to disband its operations from India in 1978. Political risks may of the following kinds:
(i) Blockage of Funds. A business entity operating in a foreign country may not be allowed to export its earnings for investment or repatriation purposes. This was common problem faced by Indians during Idi Amin’s rule in Uganda. It was almost impossible for Indians to repatriate their earnings in any form.
(ii) Domestication. It refers to transfer of control of a foreign company to national entrepreneurs to bring its activities in lien with national interests. Thus, a company whose majority shares are held by foreign interests may be compelled to offload their shareholdings to transfer control of company to the Indian interests.
(iii) Expropriation or Forced Divestment. It is the most extreme case of political risk which a foreign firm may have to face. Expropriation refers tot eh government confiscation of property of the foreign firm with or without proper of assets which may be for less than there market value. There were 144 cases of expropriations in Latin America from 1960 to 1976.
(iv) Trade Regulations. Every country imposes restrictions in the import and export of goods to protect its economic and political interests. These restrictions are created by various laws, regulations and customs formalities enforced by the governments of different centuries. Sudden changes in the rules and regulations affecting international trade pose a greater threat to the business houses.
2. Financial Risks. Such risk are inherent in international business because of the following:
(i) Fluctuations in Exchange Rates. Every country has its own currency system and the currency of another country is not allowed to circulate. The currencies of different countries are exchanged through the banking channels as provided by the Government of the concerned country. This creates a problem in the foreign trade. The traders have to fix the rate of exchange between two currencies before they enter into any foreign trade traction. It may be noted that the rate of foreign exchange keeps on fluctuating and it creates risks for the traders in foreign trade. A dealer entering into a transition at a specified exchange rate today may have to incur heavy losses if at the time of delivery of goods the exchange rate turns out to be unfavorable.
(ii) Credit-worthiness of Foreign Parties. The value of goods involved in foreign trade is fairly high. Every exporter is interested to know the credit-worthiness of the importer and every importer wants to known reliability of the exporter.It takes a ling time to verify form references given by te parties to the foreign trade transactions. If foreign party goes bankrupt before the completion of transaction, the Indian party would be put to great loss. Thus, exporters have to face great credit risks in international trade.
3 .Market Risks. International business is exposed to several marketing risks. There may be risk because of competition in international business. A firm may face unexpected competition in the Market because of which it may not be able to achieve its sale targets. Sometimes, the goods exported are sent back as they do not adhere to the quality standards and specific delivery schedules laid down by the importers. Transport of goods to foreign markets is also associated with risks of filferage, damage, deterioration of quality etc. Because of long distance between buyers and sellers, the goods have to dispatched by sea routes or airways. Sea and air transports are exposed to may kinds of additional risks as compared to road and rail transport.
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1. Political Risks. Such risks occur because of the uncertainty associated with political events in the host country. An MNC is a guest of the host country and, therefore, the host country can influence the scale and dimensions of the operations of an MNC through its policies. For instance, Coca Cola was compelled to disband its operations from India in 1978. Political risks may of the following kinds:
(i) Blockage of Funds. A business entity operating in a foreign country may not be allowed to export its earnings for investment or repatriation purposes. This was common problem faced by Indians during Idi Amin’s rule in Uganda. It was almost impossible for Indians to repatriate their earnings in any form.
(ii) Domestication. It refers to transfer of control of a foreign company to national entrepreneurs to bring its activities in lien with national interests. Thus, a company whose majority shares are held by foreign interests may be compelled to offload their shareholdings to transfer control of company to the Indian interests.
(iii) Expropriation or Forced Divestment. It is the most extreme case of political risk which a foreign firm may have to face. Expropriation refers tot eh government confiscation of property of the foreign firm with or without proper of assets which may be for less than there market value. There were 144 cases of expropriations in Latin America from 1960 to 1976.
(iv) Trade Regulations. Every country imposes restrictions in the import and export of goods to protect its economic and political interests. These restrictions are created by various laws, regulations and customs formalities enforced by the governments of different centuries. Sudden changes in the rules and regulations affecting international trade pose a greater threat to the business houses.
2. Financial Risks. Such risk are inherent in international business because of the following:
(i) Fluctuations in Exchange Rates. Every country has its own currency system and the currency of another country is not allowed to circulate. The currencies of different countries are exchanged through the banking channels as provided by the Government of the concerned country. This creates a problem in the foreign trade. The traders have to fix the rate of exchange between two currencies before they enter into any foreign trade traction. It may be noted that the rate of foreign exchange keeps on fluctuating and it creates risks for the traders in foreign trade. A dealer entering into a transition at a specified exchange rate today may have to incur heavy losses if at the time of delivery of goods the exchange rate turns out to be unfavorable.
(ii) Credit-worthiness of Foreign Parties. The value of goods involved in foreign trade is fairly high. Every exporter is interested to know the credit-worthiness of the importer and every importer wants to known reliability of the exporter.It takes a ling time to verify form references given by te parties to the foreign trade transactions. If foreign party goes bankrupt before the completion of transaction, the Indian party would be put to great loss. Thus, exporters have to face great credit risks in international trade.
3 .Market Risks. International business is exposed to several marketing risks. There may be risk because of competition in international business. A firm may face unexpected competition in the Market because of which it may not be able to achieve its sale targets. Sometimes, the goods exported are sent back as they do not adhere to the quality standards and specific delivery schedules laid down by the importers. Transport of goods to foreign markets is also associated with risks of filferage, damage, deterioration of quality etc. Because of long distance between buyers and sellers, the goods have to dispatched by sea routes or airways. Sea and air transports are exposed to may kinds of additional risks as compared to road and rail transport.
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