Risks of Expanded Businesses in Size and Globally - Coursework Example

Risks of Expanded Businesses in Size and Globally By Professor Class University City Date of submission Executive Summary With the rising levels of competition, most businesses are seeking to explore international markets. Moreover, there are factors encouraging investment in international trade. Considering the benefits associated with such investments, most businesses are deciding on investing international markets with adequately having contingency plans for the likely associated risks. These risks might compromise business operations and to some extent lead to bankruptcy. It is from such background that the report focused on various types of risks associated with increasing business operation into the global markets. These risks include country risks, exchange rate flux, liquidity risks, and cyber risks. It is important to note that these risks mainly affect the financial position of the business. Therefore, to avert the magnitude of the negative effects associated with these risks, the report tackles some of the strategies that business entities might employ to address the associated challenges. Introduction The market is becoming more challenging and competitive for most business entities making them reduce their profitability and scope of operation. Moreover, the aim of every business is to maximize its profits while the same reduce the cost of production and operation. To achieve such advantages, there is need for business entities to widen their scope of operation with an aim of reaching more customers in different areas of the market segments. It is from such background that most businesses engage in international trade. However, it is significant to note that taking part in international trade involve several risks compared to domestic trades. Such risks often relate to differences associated with laws, currency, and culture (International Monetary Fund, 2002, 254). Businesses face several types of risks, which to some extent might result in bankruptcy. Even though larger organization have contingency plans for managing such risks, smaller companies, on the other hand, do look into such issues in a systematic manner. The increment in export market is highly beneficial to economic development; however, import increment might pose several threat to economic development through affecting the local companies. Historically, the major risk that businesses ever faced is trading in the developing countries with immature and volatile political systems. The major risk feared by most international businesses is the expropriation, which relates to a possibility that a foreign country might seize foreign-owned assets (Cavusgil et al., 2015, 150). Investing in international markets has always been the advice offered to the investors willing to increase their diversification and return made on their portfolio. Besides, to achieve these benefits of diversification, it is significant that the business adds low correlational assets of the market it intends to explore for reduction of the overall risks. Country Risk Factors associated with country risk are political and economic stability and exchange control factors. Countries experiencing political turmoil and the unstable government might pose serious risks, especially to international businesses. Whenever the governments are in turmoil, there is a possibility that it might freeze all international assets and money transfer systems making it almost impossible for international business to operate. Such activities might affect the currency exchange system leading to numerous business losses. While considering expanding in international markets, it is important to consider political stability of the country as the major factor. Political stability affects all other factors that encourage international trade like regulations and economic development (Hipsher, 2006, 82). Moreover, in every country, financial institutions always have closer connection with the offshore banks to assist in backing up the crucial documents like letters of credit, which to some extent could play a significant role in mitigating financial risks. Investing in developing countries could even pose serious threats to international businesses. In these countries, changing the government powers always lead to reevaluation of the already signed agreements in which in some cases contribute to scrapping of some contracts. Exchange Rate Flux and Commercial Risks While engaging in international trade, it is important to note that transactions often involve at least two different currencies. Whenever businesses fail to consider the differences in the exchange rates, there is a possibility of experiencing losses of high magnitude. Moreover, the risks are always greater when the currency in which the business uses in calculating the cost differs from that which the business is receiving in terms of revenue. Globally, several currencies are volatile; therefore, it is important to consider their positions at the global market before the investment. In addition, when considering investing in the foreign market, business has to exchange its domestic currency into foreign currency at some stipulated currency exchange rates to purchase goods and services in a foreign stock. Payments and receipts in foreign currency occur on the daily basis for businesses involved in international trade (Sahnoun & Zarai, 2009, 115). However, international markets experience fluctuation in exchange rates caused by market speculations, economic, and political factors. These fluctuations might cause serious losses to business especially if the domestic currency is weaker compared to foreign currencies. Foreign exchange risks always occur when the value of the investment fluctuates because of the changes associated with exchange rates. Moreover, appreciation of the domestic currency against the foreign currency could lead to decline in the profits realized in the foreign country upon exchanging into the local currency. Considering the level of volatility of the exchange rates, protecting the business against such risks might be difficult which might in turn lead to decline in sales and generated revenues. Commercial risks might also affect the performance of the business. It involves both collection and early termination risks. Collection risks involve insolvency or delays in payments by the importer while early termination risks might occur when the one of the trading partners completely cancels the contract. These activities might compromise business operations of the other partners and associated losses. Differences in currencies also affect the performance of businesses. For example, McDonalds Corporation is one of the leading food chains in the United States. In a bid to explore Australian market, its sales increased in 2011. However, the yearly profits declined due to weakening Australian dollar. Most experts argue that the management needs to be cautious especially with the U.S. dollar continuing to strengthen against the Australian dollar. Interest, Taxation, and Custom Risks Most businesses operate their activities sufficiently due to loans acquired from the banks. Moreover, the market is becoming very competitive that business entities need to ensure that their operations meet the needs of the customers. As a result, business entities might decide to acquire financial assistance from financial organization in form of loans. However, changes in interest rates could greatly affect business operations irrespective of whether the business is operating at global sphere or domestic. While operating an international business, it is significant to note that reference interest rates might change drastically. These references include Libor or Euribor. Moreover, businesses aiming to invest in international market should understand that it is wrong to assume taxation laws are similar in all the countries. Instead, it is important to learn and plan for the countries that have different laws (Burrow & Kleindl, 2013, 122). There is a possibility that customs laws might lead to increment in the cost as it encourages delays and restriction on the goods. At every moment good passes across the border, they are taxed. To some extent, some countries do not allow some products across their borders amid security measures and poor trading relationship between the two countries. However, such incidences could also lead to delays and associated losses since proper documentations might be required to allow passage of goods. Liquidity Risks Liquidity risk is another type of inherent risk associated with foreign markets. However, it is common among the emerging markets. It refers to that moment when a business is not able to sell its stock quickly enough upon entering the sell order. From financial point, liquidity risk is a risk that a given asset or security might not be able to trade faster enough in the market to prevent organizational loss or generate the desired profit. Prior to international financial crisis, most financial organization took issues related to liquidity for granted. However, during the crisis, most institutions struggled to maintain adequate liquidity, which contributed failures of most banks making central banks to inject liquidity into the national financial system with an aim of keeping the economy afloat. In such countries, international businesses often suffer considering that, most people, especially in the developed countries, prefer purchasing their stock in a global market. The business entity might as well lose its liquidity if its credit rating decline in the market. Moreover, liquidity might as well result in unexpected cash outflows or losing trading partners. Such challenges often result in poor organizational performance. Cyber Risks With the rising level of technology, businesses are shifting to technical methods of operating business activities. However, it is important to note that there several illegal activities associated with increased technological level that international businesses need to understand. Globally, most businesses are losing many finances to cybercrime activities like hacking. Besides improving access to potential customers, businesses need to understand that by engaging in international trade, they increase their level of susceptibility to cyber risks. Currently, cyber risk is topping the list on international agenda as the major window in which organizations are losing finances. Moreover, these activities respect no borders and engaging in international trading activities might increase the level of susceptibility to different hackers existing globally (Smith, 2015, 155). These activities expose personal information of the potential clients and financial position of the business leading to loss of confidence among the consumers. With advancement cybercrime programmes, the criminals have the ability to conduct transaction on behalf of the organization leading to massive financial losses. Moreover, some countries are known globally for cybercrime-related activities. As a result, most businesses spent money compensating the consumers, building an effective and reliable database system, and financial transaction with no authorized transaction. Several Australian businesses suffered a number of cyber-attacks in the last few months. For example, in April 2015, the website of Hobart Airport was hacked by criminals believed to support the activities of the ISIS and posted that the organization was in support of ISIS related activities. They gained the access to the domain through the host, NetRegistry. In February 2015, Vodafone, Optus, and Telstra confirmed that they sold many SIM cards after the revelation that some U.S. and British spy agencies had access to encryption keys that secured confidential information about the chips, calls, and texts. These Telcos spent a lot of money trying to identify the compromised cards. Risk Management Strategies Every moment an organization implement business decisions, several risks are involved in the process. These risks vary from place to place and from one business to another. However, the success of the business in a global market would depend on its ability to manage its risks effectively. Poor managerial strategies could result in massive losses within the organization. Evaluation of politically instigated risks might be difficult. To manage successfully the risks, businesses need to have strategies that would build around taking sensible precautions. Therefore, businesses should employ market specialists before deciding to invest in a particular country. Although a country might be experiencing stable economic development and political stability, these factors do not warrant the better performance of international organization (Haggblade, Hazell, & Reardon, 2007, 173). An assessment would assist in identifying the challenges business are like to experience fluctuation in interest rates and currency exchange rates. Like risk management, financial risk management requires the business to identify various sources of the risks, measure and develop adequate plans of addressing them. The type of strategy used in managing the risk depends of the characteristic of the organization, industry of operation, and the competitive environment that it intends to operate. Although most of these factors are idiosyncratic in nature, the existing relationship between the strategies used in managing the existing risk within the country and organizational size are likely to be systematic. Globally, there are four steps used in managing business risks. These steps include identification of the potential risks, evaluation of these risks, selection of the risk management method, and effective implementation of the management programme. While implementing, the programmes business entities need to understand that it is important to employ the most effective method. The commonly used methods are risk avoidance, reduction, assumptions, and sharing. Under risk avoidance, businesses need to understand that some risks are avoidable. The only method of avoiding the risk associated with international trade is to sell organizational products in the native country. However, businesses should note that such methods are never practical in most cases since at every point of sale there are always associated risks. Selling in the domestic country might limit an opportunity of the business to grow (Avadhani, 2010, 230). Risk reduction involves investing in internal markets but taking into consideration precautionary measures to reduce the level of exposure. In risk assumptions, businesses take the responsibility for the incurred losses while trading. For example, it might involve setting aside some funds for contingency purposes should any damage occur. Risk assumption might as well be self-insurance and it involves setting aside mover to cover potential financial losses that could lead to organizational failure. Within international markets, most businesses face almost similar financial problems. In such situations, most businesses often consider sharing the risks among them to reduce the cost of management. In addition, some organizations often purchase international insurances for financial protection from property losses. Managing Cybercrime Risks While businesses face risks associated with data breach, most of them do not understand the treats and the level of severity related to cybercrime. The recently conducted study in the United States reveal cyber-related crime currently ranks as one the major economic crimes affecting most business in the country. However, these businesses might use cyber risk insurance with an ability protecting organization concerns like network security, privacy issues, technological associated errors, crisis management, and improvement in the intellectual property issues. Moreover, it is quite affordable compared to the damages and losses that might result from cyber breach (Franklin & National Underwriter Company, 2009, 101). To protect the business database from any form of infringement by the hackers, the business needs to identify key people whose responsibilities are to manage the risks, various components of information technology, legal notifications, and communication with the partners (Chambers-Jones & Hillman, 2014, 183). Furthermore, the business needs to regularly test its plans and walk through any possible scenario to help identify possible areas of weaknesses in the security systems that require improvement. Managing foreign exchange risks As noted earlier, countries differ in terms of exchange rates for the foreign currencies. Although it might be difficult or almost impossible for businesses to change the exchange rates, they have the ability of deciding the country they market their products. It is important that businesses make proper connection with rules managing the exchange rates in the countries they intend to invest in to prevent inconveniencies that might occur the future. To manage these risks, the business should begin by identifying and measuring exposures associated with foreign exchange that it requires to manage. Most companies focus on managing transaction risks (Fung & Tse, 2013, 192). Upon calculation of the level of exposure, businesses need to develop organizational foreign exchange policy. The policy should be able to explain the appropriate time of hedging foreign exchange, tools, and instruments required undertaking such responsibilities. The organization could also have foreign currency bank accounts as well as acquiring foreign loans to prevent involvement in currency exchange processes. Managing Liquidity Risks Generally, there is no ways for an average investor to protect themselves from liquidity risks. Therefore, it is important the while investing in international trade to pay more attention to foreign investment that could become or are likely to be illiquid by the moment the business intends to close its position. There are common ways of evaluating the liquidity of the assets before engaging in contract of purchase. One method business entities could use is by observing the bid-ask spreads of the required asset over time. The bid-ask spread is the amount by which the asked price exceeds the bid. Essentially, it the difference in the prices between the highest cost that a buyer is willing to spend and the lowest that the seller is willing to sell the asset (Institute on Privacy and Data Security Law, Gilbert, & Practising Law Institute, 2010, 163). Consequently, illiquid assets often have wider bid-ask spreads compared to the other types of assets. The risks majorly affect financial institutions. Most businesses depend on these institutions for their survival and effective management, therefore, when the banks have strict measures managing liquidity risks, most businesses are likely to be affected as well. Management of the liquidity depends on the measures in place to manage both the assets and liabilities. Managing Country Risks Political instability greatly affects the performance of any business entity irrespective of whether it is domestic or international. For example, the turmoil in the Middle East demonstrated that upon confiscatory and discriminatory actions, civil war breaks outs, eruption of crises and damages showed that limited options were available for the businesses to manage their activities. To some extent, country risks involve risk of investing in a foreign country, which have the ability to induce investment impairment and decline in investment returns (ROI). The main aim of managing these risks is to protect the investment of a company and its returns (Bouchentouf, 2013, 221). To prevent losses from confiscation of organizational assets, the company should consider repatriating cash and managing down investment. With the countries that exchange control factors and conditions allow repatriation of cash, the organization should repatriate as much as possible upon considering the requirements of ensuring sustainability of the local operations of the business. In relation to managing down investment, the organization needs to treat their operations as if they are “cash cow” until the prevailing conditions stabilize (Jarrow & Chatterjea, 2013, 185). Moreover, it is important to avoid any additional capital investment and stop replenishing inventory from other countries. Managing Risks of Fluctuating Interest Rates and Commercial Risks The main methods commonly used in managing risks associated with fluctuating interest rates are the swapping method and the hedging strategies. Any standard interest rate swap would ensure that the contract between the two parties exchanging the stream of cash flows conduct their activities according to the pre-set terms. Borrowers always have specific objectives while choosing to participate in an interest rate swap. Although regulation of the interest rates is the responsibility of the mandated state organ, businesses might employ some strategies to prevent borrowing at higher interest rates (Sen, 2008, 161). In addition, businesses interested in international trade might also consider the advice from financial advisors with adequate knowledge of international business and with the major specialty in the market currencies and areas that the organization wishes to invest. Mitigation of commercial risks like those associated with early termination and collection risks is also important. Business entities need to plan by focusing on the down payment or insurance policies. Furthermore, it is important to check the plans and ensure they are valid in all countries where the business wishes to conduct its activities due to difference caused by varying financial and business laws. Conclusion Traditionally, most business entities considered international trade to have low risk. Political environment plays an important role in large international businesses. With the rising populations globally, business entities are seeking international markets without considering the different types of risks associated with such investments. When entering into any international trade, it is important to note risk is an inevitable part of such investment. The major risks include country risks, commercial risk, related financial risks, country risks, and liquidity risks. All these risks depend on the existing political stability of a country that the business intends to invest in. Country risks relate to interventions of the government, protectionism, economic malfunction, and social disturbances. These factors in most cases might pose the business to serious financial problems, which could lead to failure and collapse. Before investing in the international markets, businesses should ensure that they have the ability to counter these problems. Besides, risks associated with cybercrimes continue to siphon money from most business entities. Therefore, organizations must have contingency plans of ensuring that these risks do not affect the normal operations of the business. References Avadhani, V. A. 2010. International financial management. Mumbai [India: Himalaya Pub. House. Bouchentouf, A., G, M., Pechter, K., Duarte, J., Dolan, B., Rockefeller, B., & Logue, A. C. 2013. High-powered investing all-in-one for dummies. Hoboken, NJ: John Wiley & Sons. Burrow, J. L., & Kleindl, B. 2013. Business Management. Mason, US: Cengage Learning. Cavusgil, S. T., Knight, G. A., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. 2015. International business: The new realities. Chambers-Jones, C., & Hillman, H. 2014. Financial Crime and Gambling in a Virtual World: A New Frontier in Cybercrime. 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