Sources of Risk in Global Business

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Global businesses face increased risks as compared to other businesses.
Global businesses face increased risks as compared to other businesses. (Image: risk investment image by Warren Millar from Fotolia.com)

A global business is a firm that operates both within its home country and also in one or more host countries. The expansion of an organization's business dealings across international borders causes it to encounter more risks than an organization that only conducts business within in its home country. Sources of risks faced by global businesses include political, economic and cultural climates.

Political Risk

Political risk is the threat of loss of assets, earnings potential or managerial control as a result of political actions by the host country. In general, the more stable a country’s government, the less political risk involved. There are three main types of political risk impacting global businesses: ownership risk, operating risk and transfer risk.

Ownership political risk is the inherent risk in maintaining corporate property and the lives of host country employees. Operating political risk is the threat of interference in day-to-day operational tasks. Transfer political risk addresses the danger of a corporation losing the ability to transfer profits and money from the host country back to the home country.

Economic Risk

Economic risk is the chance that a host country will impose economic regulations on international corporations to restrict or control their activities. Exchange controls, tax policies and price controls are all sources of economic risk in global business.

Exchange controls are those placed on the movement of money in and out of the country, and they are often imposed when a host country is confronted by a deficiency of foreign currency. Tax policies are a method by which host countries try to control international corporations by imposing a hefty tax on their business profits. This often results in increased revenue for the host country, while having a detrimental effect on the firm. Price controls consist of the host country’s regulation of the price of a business’ goods and services, and they may be established by setting a maximum or minimum price, or by fixing a price range.

Cultural Risk

Cultural risk is just as real a threat to global business as is political and economic risk. Cultural risk is the threat that an international corporation will commit a business blunder, engage in poor customer relations or fail at negotiations because of a lack of understanding and adaptation to the differences in culture between the home country and the host country. Cultural risk can take the form of national, business and corporate risk.

National cultural risk is the threat of not doing things appropriately within the sociocultural environment of the host country. Business cultural risk is the risk of acting inappropriately within the business cultural environment of the host country, and corporate cultural risk is the threat of making mistakes in dealing with a specific firm.

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