Management of Risks in International markets

Risk is a fact of business life, more so of international business. What is more due to increasing complexities of business, the number and variety of risks are increasing. What is needed for the success of business, as also of international business is the ability to evaluate carefully the risks involved and then try to cover them if possible.

Experienced businessmen are aware of the risks involved in business and, instinct, they try to minimize their risks. For example, Indian exporters usually begin with exporting to nearby countries or to countries having a substantial number of Indian settlers there. So also they prefer to go to English-speaking countries. Every businessman prefers to export to safer countries rather than to unsafe ones. In this respect developed countries are considered to be less risky than the developing countries. Two points may be noted in this connection: (1) Competition is the keenest in markets consider safe and is virtually non-existent in so called unsafe markets, (2) Nobody can foresee which countries are to be risky. Countries once considered safe may become absolutely unsafe.

In international marketing assumption of risks is often, though not always, voluntary. In the initial stages a policy of risks avoidance is followed but it is not always possible to do so and a firm must be prepared to accept progressively greater risks.

The various types of risks that an international marketer may face can be divided into the following categories:

1. Commercial risks
2. Political arising out of foreign laws
3. Cargo risk
4. Credit risk
5. Exchange fluctuations risk

We shall discuss each of these risks separately.

Commercial Risks

Among commercial risks be included the risks arising from suitability of the product for the market or otherwise, change general, it may be said that the export trade is more risky than the domestic trade.

Commercial risks due to (1) lack of knowledge, (2) inability to adapt to the environment, (3) different kinds off situations to be dealt with, and (4) greater transit time involved. The exporter is unlikely to know as much about the foreign market as he does about his own. He does not have adequate about the foreign market as he does about his own. He does not have adequate information about the market or does he have the same feel about the foreign market as the domestic market. Distances involved are usually greater and hence the transit time is longer. In case goods are not sold, he might have to bring the goods back (involving additional freight costs) or be prepared to sell them at lower prices.

Changes in exchange rates, either of the country’s currency or for foreign currencies might seriously affect the country’s competitive capacity.

For most of the commercial risks there is no possibility of shifting the risk to professional risks bearers and the exporting firms would have to bear these risks themselves. However, these risks can be reduced by the application of forecasting techniques as also by keeping a watch on the changing business conditions in the countries concerned as also of the international economy as a whole. What is needed is to be prepared for any adverse changes and take corrective action as soon as possible when the situation so warrants.

Political Risk:

Political risk may arise as a result of changes in party to power in the countries concerned coups, civil wars, rebellions, wars between two countries or among many countries capture of cargo by enemy etc. Political risks could be avoided /reduced to some extent by judicious selection of countries. Insurance companies may agree to provide cover for some of these risks on payment of additional premium. Some of the risks are also covered by the Export Credit Guarantee Corporation.

Legal Risks:

Commercial laws may be different in the two countries. Moreover, conducting legal proceedings in a foreign country is complicated and expensive. The major risks can be taken care of by stipulating in the contract itself which law will apply and who will be the arbitrator in case of disputes. But even then the risks remain and have to be assessed as part of the total risks situation.