Question

In 525 words the challenges and risks you may face in starting a business in a foreign country including the following:
cultural, business, and political risks
How you plan to avoid operational, transaction, and translation exposure.

Answer 1

When starting a business in a foreign country an enterprise and its management have to deal with several risks and the key among those risks are cultural risks, political risks and business risks.

Let us first talk about cultural risks. It is a known fact that a culture of a country or a region significantly affects the buying and consumption behavior of people. As such a business cannot expect the consumers in a foreign country to behave in the same manner like consumers in their home country. There is a risk that consumers may dislike their products and hence businesses have to ensure that they account for this and incorporate necessary adjustments in their business model as well as in their offerings. For instance consumers in Western countries like consuming fast foods and hence QSR (quick service restaurants) is a popular and a thriving concept there. When many popular QSRs like KFC and McDonalds entered Asian countries they met with initial failure as people in these countries have different consumption habits.

Business risk is another important risk that may affect new enterprises when they enter a foreign country. Business risk may arise due to several different reasons like unknown trading partners, slow rate of economic growth in the foreign country, financial instability in the foreign country, etc. First of all there is a risk of unknown trading partners. In case of unknown trading partners one can face the risk of unprofessionalism, slow response time to the changes that are occurring in the market, bad debts, negative impact on cash flow etc. When there is financial instability in a foreign country in which a company is doing business then there will be tariffs and exchange rate fluctuations and this can have a significant negative impact on a company’s business, its profitability and its ability to continue as a going concern.

Political risks arise due to political instability. It is the politicians who develop trade policies and tariff policies of a country. If there is political stability in the country then its trade policies, economic policies and financial regulations will also be stable. On the other hand if a country’s political climate is unstable and there is regular change of its President/Prime Minister then the trade and economic policies will also change. The level of risk will increase for a company when there is political instability and when economic policies changes frequently.

Operational, transaction and translation exposure can be avoided. Operational exposure arises due to currency fluctuations when combined with price level changes can change the amount and riskiness of a company’s revenue and costs. Transaction exposure stems from the possibility of exchange losses (or gains) accruing on transactions that have already been entered into in a foreign currency. Translation exposure arises from the need of reporting and consolidation and when converting the financial results from local currency to the home currency. To avoid these risks I will design a hedging strategy to better manage foreign exchange exposure. I will make use of balance sheet hedge, funds adjustment, and forward market hedge, make use of price adjustment clauses and swaps. Exposure setting is also another useful tool.

(525 words)