Every country presents its own investment opportunities. Before expanding your company overseas, however, be aware of the additional risks of the foreign trade market. In general, the risks of conducting international business can be segmented into four main categories: country, political, regulatory and currency risk.
Country Risk
Weigh the benefits of your company doing business abroad against the potential pitfalls. Poor infrastructure such as roads, bridges and telecommunications networks can make it expensive to operate a business in another country. Economic conditions such as high unemployment or a largely unskilled labor force can be barriers to entry. Rogue nations may have untapped potential, but may also pose risks such as terrorism, internal conflict and civil unrest. Anti-foreign sentiment among citizens, workers and government officials may also make doing business abroad especially challenging. Other country risks include crime and corruption.
Political Risk
Determine the political climate of the country you hope to enter. An unstable or ineffective government will be unable to protect your business interests. Lack of a strong foreign trade policy means that your business will have to navigate through the nuances of allying with government officials who may fall from power. An incoming government may not be business-friendly, and may decide to increase tariffs or impose quotas.
Regulatory Risk
A sudden change in trade laws or a poor legal system exposes your business to regulatory risk. For example, a country without clearly defined intellectual property laws make it difficult for foreign software companies to protect their investments. Changes in banking laws may limit your company's ability to repatriate money to your home country or may limit access to funding.
Currency Risk
Fluctuations of a foreign country's currency can diminish profits when converting back to the home currency. Analyze the risk and rewards of making an investment in another country. The currencies of stable governments are less volatile than those of less-developed countries. Hedging strategies could mitigate some of the currency risk; however, your business is still at the mercy of the vagaries of the local currency market. Sudden changes in monetary policy will also affect currency rates.
Credit: WSJ.com
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