Risks and Uncertainties in International Business Risk n

Risks and Uncertainties in International Business

Risk n Definition: n The level of exposure to uncertainties that the enterprise must understand effectively manage as it executes its strategies to achieve its business objectives and create value (Deloach, 2000)

Quantifying Risk = Probability (of the event) X Business impact (severity of the event) n Difference between risks and uncertainties: risks can be calculated, uncertainties are genuinely unknown. n

Risk Factors The risks of doing business in a (different) country are determined by a number of political, economic, and legal factors. n Therefore, generally, there are 3 types of risks in international business: political risks, economic risks, and legal risks n

Political risks n The likelihood that political forces will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a particular business enterprise

Political risks Therefore, political risks tend to be greater in countries experiencing social unrest and disorder, or n In countries where the underlying nature of society increases the likelihood of social unrest n

Economic Risks n The likelihood that economic mismanagement will cause drastic changes in a country’s business environment that adversely effect the profit and other goals of a particular business enterprise

Economic risks arise from economic mismanagement by the government of a country n Usually interrelated to political risks n A visible indicator economic mismanagement tends to be a country’s inflation rate, and/or level of business and government debt. n

Legal Risks n The likelihood that a trading partner will opportunistically break a contract or expropriate property rights.

Natural (Disaster) Risks n The likelihood that natural disaster will cause severe damage to the company’s assets/ cause major business interruptions

Natural Risks n 2 types: n n n Nature: n n Nature Man-made Avalanche, blizzards, droughts/extreme heat, earthquake/tsunami, floods, fires (forest fires), hurricanes, tornadoes etc. Man-made: n Dams or locks, severe environmental pollution, severe building collapse, explosions, transportation incidents etc.

SOURCES OF RISKS Physical environment n Social environment n Political environment n Operational environment n Economic environment n Legal environment n Cognitive environment n

RESOURCES EXPOSED TO RISKS Physical resource exposures n Human resource exposures n Financial resource exposures n

Risk Management n The process whereby decisions are made to accept a known or assessed risk and/or the implementation of actions to reduce the consequences or probability of occurrence.

Risk management major components n 4 major components: n n Risk identification Risk analysis Risk reducing measures Risk monitoring

End. Thank you. n