International Business - The Concept of Risk within Business - Term Paper Example

 «International Business» The concept of risk within business is one that not only is created through domestic opportunities with building and sustaining a business. There are also changes that come with international business and the management that is needed to sustain a corporation at an international level. According to Schaffer et al (2009), the management of risk is incorporated when working at an international level. Defining the aspects of risk, as well as how they can be changed through the management of risk with international companies can then provide a different approach toward working at a global level. Understanding what types of risk are incorporated and questioning whether it is risk or a change in business can further help corporations to evaluate their company and what is needed for risk management. The first concept that should be approached when determining the concept of international business and management is to define what the term of risk means. Often businesses, will state that there is a large risk in moving to international levels because of the economics or business structure. However, this is most often attributed to uncertainties that are a part of the business. According to Frank Knight (2002), there are several distinctions that need to be made between risk and uncertainty. When one moves into an unknown situation, different variables begin to become incorporated in the business. Elements that are common in one environment may not be as common in another. Other situations may seem to lead in one direction or perspective which are valued or which are not accounted for. The variables that are in each situation lead to a level of uncertainty (Knight, 2002). When working at an international level, this uncertainty continues as cultural distinctions, changes in the environment and alterations in the economy are unknowns. The concept of risk, from this perspective, is not one that is based on the management of a company that incorporates risk, but is instead unknowns about foreign countries that one may be working in. The concept of risk, instead incorporates moving into decisions that are innovative but necessary to make within the work environment. Redefining risk and management from an international level then includes different concepts then most businesses perceive. To define whether the international management of a company is risky, one also needs to incorporate the six categories of risk – bearing. The first part to this is the completion of a project. For instance, when looking at domestic resource development, there are specific measures that are taken, all which lead to reaching the end goal or completions. If this is performed, then the project moves into low risk. However, the innovations, processes and the difficulties that are maintained may move into the ideal of risk. If this is performed with the correct management, then the achievement will lower the amount of risk and only becomes an unknown. To stop risk, there is the need to have resources and operations that support what is occurring. The resources should support the innovations and overall project and the operations should be managed in a manner that is conducive to the different needs of the work environment (McLennan, 1990). The risk bearing that comes is not from the management of a project, but instead comes through the external environment. For instance, when moving into the market, there is a level of risk toward the responses that occur. To create barriers with this is the need to develop projects that are able to respond to the culture and current trends. With domestic products, this is done by researching different needs and responding with specific resources and completion of projects. The currency and political risk may also respond to this with different regulations or expectations. Businesses can also change the outlook of this specific problem, specifically by understanding the legalities and regulations and planning through management in a conducive manner. By responding in an efficient manner, there is the ability to overcome the risk that is involved and to create a stronger presence with a company (McLennan, 1990). When considering risk at an international level among a corporation, most have created a belief that the global presence also involves responding to risk. However, a business can work effectively not only at a national level, but also nationally by understanding potential risks and preparing accordingly. With this perspective, the concept of risk is not related directly to responses, but instead is the understanding the uncertainties that are a part of businesses and how they create different scenarios. By preparing for these through risk – bearing first and working into an unknown situation with preparations, one can easily overcome the risks and instead stabilize a company at a global level, as opposed to overcoming risks and management issues that may occur in different regions of the globe. Question 2 The ability to assist with mortgages and real estate is a priority for several who are interested in specific business ventures. However, to consider this, one also has to be aware of the different laws and regulations that come from diverse backgrounds, either nationally or internationally. A mortgage concept that needs to be considered is one that is based on the Islamic mortgages and laws and regulations that pertain to buying a home under this law. There are Islamic finance regulations that are required, including contract forms, legal arbitrations, corporate governance and financial obligations that fall under this specific way of life. To comply with this, are specific laws that need to be followed for the completion of Islamic mortgages (El – Gamal, 2006). The concept that is used for Islamic financing and mortgage opportunities first fall under the Shariah Law. Lending a specific amount of money to those in Islam should include specific security agreements and contract compliances for paying off a mortgage. These are strictly based on moral obligations and prohibitions that fall under the religious beliefs of Islam. There are four main concepts used for the use of finances under Islamic law. This includes the prohibition of interest earnings, also known as usury or riba. There is also prohibition of money lending that will lead to specific earnings under a financial jurisdiction. The second prohibition is known as haram, or sinful activity, which includes the sales of different items which are not accepted in Islam, including guns, tobacco, pork and adult entertainment. The third aspect is the exchange of money for speculations, known as maisir. If one uses the money without an asset transfer, then it is considered illegal. For instance, if the money is taken and used for betting, then it becomes illegal. The fourth rule is known as bay’al inah and gharar. This is the trading of the same object from buyer to seller after the transfer is completed. This also includes prohibition of forwarding contracts, creating future agreements and using derivative instruments. These each come from the main Shariah Law, known as halal, which means there are specific activities which should be taken, as well as maslaha, which is the monitoring of public goods (Jobst, 2007). When creating a mortgage for those under Islam, it is important to consider the financial obligations under this law, specifically to the prohibition of riba. Since one can’t have a set of interest earnings or money lending, a different method for the loan needs to be created that doesn’t have interest to the bank attached, but instead includes an investment in which the property can be bought under. Under the same Shariah Law, it is stated that individuals can partake in an investment that includes specific assets, such as a business or property. The contractual agreement and the lending would have to be developed by creating the mortgage with only an investment in asset based developments. The mortgage would have to further the expected interest rates by developing a secured interest form that is included as compensation for the asset or investment that those in Islam will be using for the mortgage (Jobst, 2007). The mortgage contract and agreement that can be designed for Islamic law should be based on three possible arrangements. The first is the asset based contract, which would be a lease to purchase agreement. The second is through a synthetic loan, which would be based onb buying an asset and paying back the debt. The third is equity based, which includes profit sharing contracts, which would substitute for the interest of the loan. The main contract that would be provided under these three potential options would be the murabaha, which is the cost of the home plus the cost of the sale. The interest payment would be added as a one time sale agreement and would be included in the installment of the home for the down payment, as well as a promised payment for the future agreement. This can be furthered according to the financial conditions of the home, which would include a contract based on a negative short sale, meaning the loan would be paid back with the complete purchase made with the initial signing. It could also be paid back with a back to back sale, which would mean that a third party would take the mortgage on behalf of the borrower, in which they will pay the price of the home plus the closing sale price, or interest, back. This option becomes a loss generating contract because of the repayment plans needed (Jobst, 2007). To finalize a mortgage payment plan under Islamic law, one would have to reconsider the contractual basis while understanding the prohibition of interest rate payments with the final contract made. Question 3 The ability to resolve disputes through international business is essential to understand, not only through the basic laws, but also through specific associations with territories. If a company is based out of the United States and working with the People’s Republic of China, for instance, are certain compliances that need to be used. The ability to understand and employ commercial courts or arbitration bodies while understanding the laws of China as well as international agreements, can help to change the role that most are playing through the dispute. Creating preventative measures first, then moving forward with necessary means, will provide each individual with the correct alternatives to resolving different problems that may arise in business at an international level. When a dispute arises, specifically with the PRC and an international company, international agreements should be presented and met. Problems can easily be dissolved by creating private contracts between two companies and creating different agreements. This should include a specific bilateral agreement that facilitates business co-operation. Intellectual property conventions, convention of contracts provided by the UN and foreign arbitral corporations should be included as components that will help to resolve the dispute. By creating this foundation first, one is able to easily move into specific negotiations that will resolve the dispute. Many of the cases that occur at an international level can then be resolved through the use of arbitration, mediation and negotiations between two companies. When this is done, private agreements are made and resolved. These are recorded through both the PRC and the company, and end the agreements while creating a different understanding between the two businesses so there can be more opportunities for everyone involved (Ya – Wei, 2006). If the specific agreements and arbitration are decided upon, then a company that offers assistance with bilateral agreements should first be contacted. International lawmakers are the most common individuals who can provide arbitration with the bilateral agreements that are created. The UN Convention of Contracts for the International Sale of Goods and the New York Convention are the two areas that provide the most guidelines for trade arbitrations and the inability to meet specific agreements. Establishments such as the China International Economic and Trade Arbitration Commission and the China Maritime Arbitration Commission are also known for taking different international issues and resolving them through negotiations (Applebaum et al, 2001). Legal institutions can also be contacted; however, these will fall under the jurisdiction of PRC as opposed to international agreements. The Supreme People’s Court and the Ministry of Justice are the two most common courts used. Corruption, local protectionism and lack of professionalism can all be taken to court with international trading. The legal process moves under the influences of the Communist Party, which then takes judicial decision making through individual judges in the court. One should keep in mind that a lawyer will first need to be contacted, which will need to be followed by a legislative process through the People’s Court, first at a local level then through the State Council. The legal departments will then make a decision based on the legalities of the country and the international standards that have been set (Applebaum et al, 2001). The legislation that takes place, both at arbitration and legal levels begins with a due process of law. This is divided by the complaint issued or the contract that has been breached and is divided by civil, arbitral, administrative and criminal procedures. The beginning stages will include arbitration and negotiations for settlement. If this doesn’t occur, then the trials move into a civil procedure under an adversary system. During this time, a compulsory consultation clause may be issued, which gives the multinational corporation the right to consult with others until a resolution is reached. If this doesn’t occur, than a dispute resolution process begins. Mediation over the international contracts then begins and investigations over the problem continue. A third party may be assigned to assist with the investigation, specifically which is issued through the Beijing Conciliation Center. On the other side, the China Conciliation Committee of the American Arbitration Association can be contacted for further assistance. Rules and laws are investigated, specifically which includes the contract that has been broken, Chinese law and the four areas of breaking the agreements, such as the civil and criminal offences. Typically, this will lead to a final conclusion through the mediators and the committees involved (Applebaum et al, 2001). If the contract and the final decision are not reached, then the corporation has the ability to move into a public court. There is also the ability to report the offence to the International Chamber of Commerce or the United Nations Commission on International Trade Law. If the foreign system shows that there is a break in the contract and it is not being withheld, then a new process for the court hearing can begin. Arbitration and mediation will then begin through the ICC or the UN to ensure that the contract is fulfilled and that the multinational corporation has the contract fulfilled. Using the different organizations and moving through the local, national and international levels to resolve a dispute can then help to fulfill the contract. The importance of using a mediator or arbitration process through this can then help to create a better set of alternatives for the contract that has been broken (Appelbaum et al, 2001). Question 4 a. The case of Voth vs. Manildra Flour Mills Pty Ltd of 1990 was based on negligent accounting that was provided by Voth. The Manlidra Flour Mills stated that the accounting had led the company into debt because of unfair accounting practices. The company had outsourced the accounting to Voth to fill through 1986. When the accounting was finished, it caused a loss in the amount of money that Manildra Flour Mills had. The final jurisdiction from this case stated that the Manildra Flour Mills was in compliance with the law and that the loss of money was directly a cause of the outsourcing to Voth, making them liable under Australian law, to pay for the loss of the company. Manildra Flour Mills initially sued the accountant company for damages that were due to professional negligence, which falls under Pt 10 1 (1), e of New South Wales Supreme Court Rules. A state of claim was given by Voth, which dismissed the costs to the Court of Appeal with countersue for damages that occurred because of negligence. The first negligent act that was based on the Internal Revenue Code of the United States, which questions who is liable for the payments made and the negligence performed, specifically through interest income. With the accounting that was provided, it stated that MFL didn’t make the necessary payments from the interest income, specifically between the years of 1976 to 1983. However, this claim was irrelevant as it fell under US jurisdictions, instead of Australian law. More importantly, the recollection from the accountant created overpayment in income tax, which would have been exempt under the Tax Assessment Act of 1936 in section 80 (2). The overpayment of income taxes led to incurred interests on funds not being paid causing a loss of $110,097. Losses were furthered as there was a claim on $185,955, all which was considered exempt from taxes. The overpayments of the company fell under section 80 of the Income Tax Assessment Act, which would have provided MFM to not pay the amount of money required by the accounting that was completed. b. The law that was established in Oceanic Sun and Spilada created a different approach to the way in which the High Court dealt with the Voth vs. MFM. The first concept states that there must be a legitimate and legal reason behind the accounting act and the performance that occurred. There would also have to be a relevant transaction that would show that the business required the actions to take place, which would substantiate that it was not because of negligence. This would change the trial of action and would dismiss the negligence. The Oceanic Sun reversed this by stating that there was a refusal of stay because of unprofessional acts and negligence. The debate made, specifically from Oceanic Sun, was based on the fact that the accountant was not a local resident of Australia and was not required to go to Australia for further dealings with the company. The damage could then have been based on the refusal to stay, which created assumptions by the accountant. This would have dismissed the accountant of the negligence and the injustice as there was no forced action for the accountant to be in Australia from the United States. For Spilada, there was relevance to dismissing this; however, there was also a question of time, considering the case was 82 years old. The change in time led the court to believing that responsibilities changed for the accountant and the knowledge that should be obtained. The Oceanic Sun was dealt with according to the definition of whether the obligation was oppressive or vexatious. It was determined, according to 1 KB 382 of 1936, that the defendant had no forced action and that the demands of the High Court couldn’t be refused, specifically because it wouldn’t cause injustice to the plantiff. c. The majority judgment formulated the non conveins as inconvenient and inappropriate by adopting the Spiliada test first by stating it was natural and made a real connection to the current situation. The tests were determined first by what would comply not only with local laws, but also would stand at an international level. The inappropriate forum test was then determined by what would balance both local and international law. Since a foreign business was involved, the local law was disregarded and the judgment was made according to impartial legal systems that would withstand internationally. Policies relating to judicial restraint and absentation were applied, specifically because the Spiliada case had also applied these not only in Australia, but also in the UK and other countries, making it a more international policy. The court also disregarded other factors, such as the US versus Spiliada from 1981, stating that this lacked judicial resources and court principles. By moving the test back to appropriate forums according to principles and policies, it was able to create international relevance to the case (High Court of Australia, 1990). d. The orders that were given by the court were not unfair. It was clearly seen that the accountant caused a lack of professional duties. Even though the accounting business was in the United States, it is liable for the rules and regulations that apply to Australian taxes and income, specifically as it applies to different forms of wealth. If there was an understanding of the particular laws, then the problems would have not occurred, which shows negligence toward what occurred. At the same time, there was not anything creative or novel about the main judgment and orders of the court. Several other jurisdictions with unfair acts and professional negligence were applied to the case, all which had led to similar principles and statements by the parties involved. The injustice of negligence, applied at an international level, remains the same when looking at different localities. Question 5 a. The material facts of the case included the contract between Downs Investments and Perwaja. It included initial agreements that were made for the manufacturing and sales of the steel. It also included correspondence between the two parties for delivery of the steel. The payment, invoices, certification of origin and certificates of quality of steel were all made available. Shipment of the steel and recommended times was also included. Correspondence for reshipment and negotiations also added into the court ruling, as it could be seen that there was no intent of delivering the goods. The key parties involved in these were Perwaja, Mr Anderson and the manager of Wanless, which were responsible for carrying out the contract. Rohani Basir and Wan Ghani were responsible for carrying out the duties of Perwaja as managing directors. However, they had been removed from their positions and Mr Yunus and Datuk Abu had taken over the position. Letters of correspondence were provided with this. The lack of consideration to the contracts by Perwaja’s management, specifically with the inability to track and present the contract, led to the court proceedings for negligence of duties and delivery of the metal (Supreme Court of Queensland, 2000). b. The Convention for the International Sale of Goods of 1980 applied to the contract between the parties through Article 64. This states that the seller must state that the contract is avoided and that the failure to deliver through a contract is a breach of the agreement. The article also states that there is a fixed period for the contract to be fulfilled, otherwise there is a breach of agreement. Parwaja didn’t deliver the metals within 60 days after the contract and failed to deliver after being asked for the goods leaving them responsible for a breach of contract. Article 72 was also included in this, which states that if there is a breach of contract, it signifies that the contract has been avoided or neglected. If there is not reasonable notice of the performance, then it also shows that the other party did not intend on fulfilling specific duties. To stop the assumption of the breach of contract, the party has to provide reasonable evidence through a letter that shows they can’t be liable, which Perwaja did not do. Article 54 from CISG of 1980 also is relevant. This states that the alternative party, Wanless, would have to breach the contract as well to stop the contract from proceeding. Wanless didn’t breach the contract, which left Perwaja responsible for delivery (Supreme Court of Queensland, 2000). c. The Downs Investments damages claim that employed CISG 1980 against Perwaja showed the likely problems of not delivering the metal. Downs claimed that the vessel of Dooyang Winner was waiting for scrap metal to finish its initial launch. Since the metal was not delivered, the boat was incomplete and couldn’t be sub-chartered, leading to over 8 months of financial losses to the company. The vessel then had to use other scrap metal from Australia which didn’t meet to the same standards and which couldn’t provide recovery of the vessel. To recover, the Dooyang Winner had to be sold for the left scrap metal. This required making another vessel, the MV Handy Light, for delivery of the vessel. This was to minimize the damage of having an incomplete vessel because of the missing scrap metal. The result was a loss of $343,163.47 because of the chartering and rechartering of the Dooyang Winner. Perwaja’s response was based on the misunderstanding and lack of communication by Downs. The change in management led to the new personnel not being informed about the contract. The actions that Downs took after this didn’t involve working out a new contract with the company, but instead was taken as a personal initiative in the company. For Perwaja, this doesn’t leave them liable for the loss of expenses that were accrued. d. To change the amount of damage when Perwaja wasn’t proceeding, was to change the strategy and plan for the development of the boats. Stopping production of the initial vessel that required scrap metal from Perwaja, making the vessel from another set of metal and selling the initial vessel helped to stop damage and to change the amount of damage to the vessel. Downs also proceeded by continuing to contact Perwaja about the agreement and the breach of contract to change the outcome and loss from damages (Supreme Court of Queensland, 2001). e. If Perwaja didn’t appeal, then Downs Investments would have to enforce damages and costs against Perwaja in Malaysia by moving into the court of Malaysia. There would need to be evidence over the amount owed and the damages of Downs Investment. This would need to move forward with a local jurisdiction that would ensure the payment was implemented. If this could not be done, then moving into arbitration at an international level could ensure payment was made. Because of international law and other alternatives, they would likely succeed. Since Perwaja is still functioning and owns and works with the company, it would enforce the law for payment. Since Perwaja is a state owner enterprise, it would make the process easier, specifically because they fall under the jurisdiction and law of Malaysia and are required to proceed with all of the laws that are enforced through the state. References Applebaum, Richard, William Felstiner, Volkmar Gessner. (2001). Rules and Networks: The Legal Culture of Global Business Transactions. Oregon: Hart Publishing. El – Gamal, Mahmoud. (2006). Islamic Finance: Law, Economics, and Practice. New York: Cambridge University Press. High Court of Australia. (1990). “Voth vs Manildra Flour Mills Pty Ltd. High Court of Australia. Retrieved from: http://www.austlii.edu.au/au/cases/cth/HCA/1990/55.html. Jobst, Andreas. (2007). The Economics of Islamic Finance and Securitization, Issues 2007-2017. International Monetary Fund. Knight, Frank. (2002). Risk, Uncertainty and Profit. New York: Beard Books. Mclennan, John. (1990). Six Steps to Risk – Barriers. London: Buttersowrth – Henning Publishers. Schaffer Robert. (2009). Risk Management. New York: Oxford University Press. Supreme Court of Queensland. (2000). “Downs Investments Pty Ltd vs Perwaja Steel SDN BHD QSC 421.” Retrieved from http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/qld/QSC/2000/421.html?stem=0&synonyms=0&query=title(Downs Investments Pty Ltd and Perwaja Steel. Supreme Court of Queensland. (2001). “Downs Investments Pty Ltd vs Perwaja Steel SDN BHD QSC 433.” Retrieved from http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/qld/QSC/2000/421.html?stem=0&synonyms=0&query=title(Downs Investments Pty Ltd and Perwaja Steel. Ya – Wei, Li. (2006). “Dispute Resolution Clauses in International Contracts: An Empircal Study.” Cornell International Journal of Law (789). Read More