Question

There are many risks for companies to do business in other countries. What are some of those risks? Can those risks be hedged? If it is so risky to do business in other countries, why do companies do it?  

Answer 1

Ans:

Risk faced by companies in other countries:

1. Exchange rate risk : Different  exchage rates are always fluctuating because of different diplomatic issues and other reasons. For company it is a huge risk to do business in another country in tension like situations.

2. Political instability: Business investments are affected by political instability of the country. Because political instability and economic performance are closely related. This type of problem creates barrier for international companies. Example - China- USA trade war.

3. Tax and accounts compliances: Different country have different tax system. So for an international company has to comply with every countries tax system and has to maintain different accounting principles that creates complexity in management process for decision making.

4. Cultural Challenge: Different group of people work in different international companies in different departments and their languages, behaviour and culture is very different from the original culture of the company. This creates a barrier in communication.

5. Local demand: local people of another country has different demand than company's origin country people. This creates a barrier between local customer and company at another country. As new coming company has no experiance in local people demand.

6. Tough competition: A company from other country face very tough competition from local competitors of that country. And this is a big risk for a company, want to set business in another country.

Risk hedging:

1. Currency risk can be hedged by proper financial management through derivative market instruments.

2. Tough competion and local demand can be solved by serveying or researching about target customers before setting up business.

Others are not possible.

Company do set up business in abroad because

1. Through this company can diversify their portfolio in different geographic regions.

2. It increases business profit enoromusly.

3. Company want to globalize it products.

4. Explore the unexplored area of a business.