Risk Management in Export

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Transcript Risk Management in Export

Dr. Bhupinder P S Chahal
Risk is a fact of business life, more so of
international business.
 The Management of International business is the
management of risk.
 No manager can make a strategic business
decision or enter into important business
transaction without a full evaluation of the risks
 Many of the best business plans have been ruined
by a miscalculation or a mistake, or an error in
judgment that could have been avoided with
proper planning.
If the risk cannot be reduced through advance
planning and careful execution, perhaps it can
be shifted to some other party to the
 If the risk cannot be shifted to another party to
the transaction, it might be shifted to an
insurance company.
 Many types of risks can be insured against,
including the risk of damage to the goods at
sea, the risk of loosing an investment in a
developing country and many others.
(1) Risk Assessment and the Firm’s Foreign
Market Entry Strategy:
 When a firm is considering its entry or
expansion in a foreign market, it must consider
all options and decide on a course of action
commensurate with its objectives, capabilities
and its willingness to assume risk.
 Selling to a customer in another country results
in less risk to the firm than licensing
trademarks, patents and copyrights there.
 The risks of doing business in a foreign country
are different from those encountered at home.
 A firm doing business in a foreign country would
encounter greater distances; problems in
communications; language and cultural barriers;
differences in ethical, moral and religious codes;
exposure to strange foreign laws and
currencies. All these factors affect the risks of
doing business abroad.
(3) Managing Currency and Exchange Rate
 Currency risk is risk a firm is exposed to as a result
of buying, selling, or holding a foreign currency.
Currency risk includes:
(i) Exchange Rate Risk
(ii) Currency Control Risk
(i) Exchange Rate Risk: Exchange rate risk results
from the fluctuations in the relative values of the
foreign currencies against each other when they are
bought and sold on international financial markets.
(ii) Currency Control Risk:
 Some countries, particularly developing countries
where access to ready foreign reserve is limited,
put restrictions on currency transactions.
 In order to preserve the little foreign exchange
that is available for international transactions, such
as importing merchandise, these countries restrict
the amount of foreign currency that they will sell to
private companies.
 This limitation can cause problems for a U.S or any
other country exporter waiting for payment from
its foreign customer who cannot obtain the dollars
needed to pay for the goods.
(4) Special Transactions Risks in Contracts for
the Sale of Goods:
 Special
risks are inherent in international
transactions for the purchase and sale of goods.
 These transactions present special risks to both the
parties because the process of shipping goods and
receiving payment between distant countries is
riskier than within a country. Such risks are:
(i) Payment or Credit Risk
(ii) Property or Marine Risk
(iii) Delivery Risk
(iv) Pilferage and Theft Risk
(5) Managing Political Risk:
Political Risk is generally defined as the risk to a
firm’s business interests arising form political
instability or political change in a country in which
the firm is doing business.
 Political Risk includes risk derived from potentially
adverse actions of Governments of the foreign
countries in which one is doing business or whose
laws and regulations one is subject to.
 It also includes laws and Government policies
instituted by the firm’s home country which adversely
affect the firms that do business in a foreign country.
(6) Risks of Foreign Laws and Courts:
 Many Acts that are perfectly legal in one country
can be illegal in another. Indeed, most travelers to
a foreign country could conceivably break a host of
laws and not even be aware of it.
 The same is true for the law of contracts,
employment, competition, torts and other business
 It is virtually impossible to catalog all of the
differences between these laws from country to
(7) Commercial Risks: The risks arising from
suitability of the product for the market or
otherwise change in supply and demand
conditions and changes in price. Commercial risks
arise due to:
 (i) Lack of Knowledge
 (ii) Inability to adapt to the environment
 (iii) Different kinds of situations to be dealt with
 (iv) Greater transit time involved
(8) Cargo Risk:
 Transit disasters are an ever present hazard for
those engaged in Export-Import business.
 Every shipment runs the risk of a long list of
hazards such as storm, collision, theft, leakage,
explosion, spoilage etc. It is possible to transfer the
financial losses resulting from perils of and in
transit to professional risk bearers known as
 As most goods are transported by marine transport,
every exporter should have an elementary
knowledge of marine insurance to
get the
protection at the minimum cost.
perspective by R.L Varshney and B.Bhattacharya, Sixth
Edition, 2006 published by Sultan Chand and Sons, New
(2) International Business Law and its Environment by Richard
Schaffer, Beverley and Filiberto Augsti, Sixth Edition, 2005
published by Thomson South-Western United States.
(3) Manual on Export Documentation published by
Commercial Law Publishers (India) Private Limited, NREW
Delhi, 2006.
(4) International Business Law, Text, Cases and Readings,
Fourth Edition, 2004. Published by Prentice Hall, U.S.A
(5) International Marketing by Philips R.Cateora and John L.
Graham published by Tata McGraw Hill
(6) International Business by Charles W.L Hill and Arun K.Jain
published by Tata McGraw-Hill Publishing Company Limited,
New Delhi.
(7) Export and import Management by Aseem Kumar
published by Excel Books, 2007