International Business Risk Factors To Consider
Learn how to prepare against the international business risk factors waiting for you. Discover how you can start mitigating them with Zyla
The UN Conference on Trade and Development (UNCTAD) has released a report stating that global trade is expected to hit an all-time high of $32 trillion in 2022. This same report predicts that the US economy will continue to recover from the pandemic.
All this is good news for the world’s largest importer, and second-largest exporter, and these positive developments are encouraging for businesses and industries worldwide. With the support of the International Trade Administration (ITA), and the financial assistance of the Export-Import Bank (EXIM), small businesses throughout the United States are now exploring promising opportunities in international markets.
However, business isn’t always smooth sailing. If you’re thinking about expanding into new markets overseas, it pays to consider the different international business risk factors that could impact your operations.
Fortunately, you’re in the right spot to get yourself up to speed. In this article, we’ll highlight some of the factors that could affect your business’s overall risk exposure, so that you can sense what to anticipate before establishing your presence in a new region. We’ll also examine how businesses can mitigate the international risk factors listed below:
- The usual suspects — market and economic forces
- Cultural differences
- Extreme weather events and natural disasters
- Legal challenges
- Political risk factors
- Purchasing power parities
1. The usual suspects: market and economic forces
As a business owner, you’re probably familiar with the typical challenges of supply and demand in your own market. You might even have developed a resilient system and only encountered issues on rare occasions.
However, entering into a new market is a whole other story. You might have identified a complete or partial gap in the market, but you’ll be entering a new business environment, where you’ll face new competitors, and different consumer preferences. Local suppliers will likely have a stronger foothold in the area, so you’ll need to break through existing brand loyalty.
You’ll need to carefully manage this new business risk factor with comprehensive market research and advertising to build up brand awareness and trust — particularly if your goods/services are price-sensitive.
If the local economy of your new overseas market is in (or heading towards) a recession, certain customer demographics may have less disposable income to make purchases. In addition, the wider economic health of the country might not last long enough for you to set up properly. While you can’t eliminate this international business risk factor entirely, you may be able to reduce it to some extent. This will take time and planning.
2. Cultural differences
Much more obvious international business risk factors include language and cultural barriers.
Practically speaking, businesses must be able to communicate with their customers and/or suppliers — at a bare minimum. It’s important to make sure your language skills are passable if you’re expanding into a market where there’s a dialect or language barrier.
Fortunately, e-commerce businesses can use freelance translators on platforms like Upwork or Fiverr for product descriptions and translations of marketing materials. In contrast, physical stores may need a more hands-on approach, which can be costly.
Even if you are familiar with the local language, understanding the finer points of your new cultural environment is even more crucial. While your communications might be grammatically correct, an inappropriate turn of phrase can quickly harm a business relationship. The same principle applies to behavior, meaning you’ll need to maintain proper conduct to sell effectively.
Business cards and etiquette, for example, are important elements of doing business in China, while inviting contacts for meals during the daylight hours of Ramadan may be considered insensitive in Saudi Arabia. Even accepted business attire in Wall Street (our own backyard, relatively speaking) is changing.
3. Extreme weather events and natural disasters
With globally connected supply chains, you may need to relinquish total control over every logistical step. Although there are perfectly reputable and reliable manufacturing and shipping partners available, Mother Nature can always mess things up. For this reason, extreme weather events and natural disasters present a sustained business risk, as entrepreneurs expand internationally.
In the past few years, the United States has seen a rise in the frequency and severity of extreme weather events such as hurricanes, floods, droughts, and wildfires. Moreover, increasing sea levels are endangering coastal communities, and warmer temperatures are contributing to heatwaves and worsened air quality.
Sadly, the impacts of climate change are not limited to the United States alone. For instance, the damage caused to infrastructure in Japan after the 2011 tsunami was estimated to be $235 billion (USD), while more recent storms in New York and Berlin are also expected to cost substantial amounts.
From a practical standpoint, your business might need to factor in higher premiums for business insurance and operational difficulties, if your property or inventory could be affected by severe weather events.
4. Legal challenges
As if overcoming cultural and language barriers wasn’t enough, your business must also comply with foreign legal systems.
Businesses are subject to fines or further legal consequences if they don’t comply with their relevant local authorities. Because of inevitable regional legal differences, we advise you to seek advice from a qualified attorney, as well as an accountant, to ensure you’re not violating local legislation.
To illustrate this point more effectively, we’ve broken down the main legal challenges you may face into three distinct areas: tax, operations, and contracts.
Almost every nation has some form of tax requirement (although some have a lower threshold than others). Regardless of the amount paid to the relevant governing bodies, the local governments you deal with will require your business to file some form of tax return paperwork — even to report a loss, or no net profit. Each of these obligations comes with deadlines and workloads that must be managed on top of your business’s existing operations.
Different tax rates can also affect your growth strategy in each new location. It can be challenging to implement a unified strategy across your enterprise if you have fewer resources in one location than another.
A qualified accountant in your chosen market can help you to clearly understand your tax obligations.
Operational requirements are a much more diverse and less standardized aspect of international business than our tax example above. Different countries regulate their business macro-environment more rigorously, and certain industries within each country may be more heavily regulated than others. Depending on how “free” the market is in your new country, you may need to obtain permits for certain business activities before you can legally operate.
Farms and fisheries, for example, have to comply with environmental legislation. Manufacturers have to follow stringent safety product standards when producing children’s products. Certain business activities, such as playing copyrighted music or handling food, may also require a license.
If you manufacture or import goods as an e-commerce business, specific regulatory requirements will vary depending on the product category. Alcohol vendors, for instance, may need to obtain a license or permit and pledge not to sell to minors, while tech businesses may have to ensure that their products meet electrical safety standards.
Whether you’re hiring staff to fulfill orders, or liaising with local businesses for support or supplies, it’s essential to create ironclad contracts.
Certain agreements between businesses and their employees or suppliers may be considered unreasonable and unenforceable, leaving you open to lawsuits or unfulfilled obligations. Specific legal principles, like time-based clauses or what might constitute a ‘good faith’ agreement, can vary widely between two nations’ legal systems. Adding a language barrier on top of this can make securing reliable contracts difficult.
Consult a locally qualified attorney to ensure you’re not exposed to this risk factor.
5. Political risk factors
First and foremost are changes to existing laws (for example, in tax rates, employment wage minimums, or mandatory licenses). Being compliant with the law means staying compliant, even as new governments tweak or overhaul entire pieces of legislation. Simply put, changes to the law can upend existing compliance efforts and move business strategy back to square one.
International businesses, importers and exporters also have to stay abreast of trade deals. The introduction (or removal) of lucrative international trade arrangements affects small businesses heavily, and can almost entirely determine their viability outside their original domestic market. With already thin margins in some product categories, small businesses can benefit from free trade agreements or lax tariffs on goods between nations.
When these arrangements are changed, removed or expanded to a third-party nation, the business landscape can alter very quickly. As you’re reviewing your expansion efforts, take note of developments in regulation and legislation to ensure your business is viable.
6. Purchasing power parities
It won’t surprise you that financial factors affect your business’s risk exposure. But understanding exactly how is important. As you’re expanding internationally, you may find that your budget stretches less far than it does stateside.
This is known as purchasing power parity, where international buyers (you, in this instance), need to pay more for the same amount of goods as someone who lives there domestically. If this is the case, your initial investment and growth strategy will need to account for this additional business expense.
Fortunately, this isn’t always the case. If your budget forecast shows that your money goes much further, it’s essential that you maximize this advantage as much as you can. This will help you fund a more aggressive growth strategy than your domestic competition.
Importing goods to your new operational location and/or buying domestically within the United States can also help you take a blended approach and maximize your access to price differences. It’s important to note that parities in purchasing power are not consistent across the board; no single nation is always able to access goods cheaper than another.
Purchasing power doesn’t typically remain static over time. The fluctuating nature of economies and currency markets (caused by the combined effects of changes in market forces, perceived stability in policymakers and business leaders, political direction and more), causes the purchasing power of nations to change. China, for example, has enjoyed some of the most enduring economic development in human history, and the luxury goods market is now poised to center on China as consumers buy high-quality brands with their increased disposable income.
How to limit international business risk factors with Zyla
Currency transfer providers, such as Zyla, offer businesses innovative solutions to mitigate international business risk factors faced by those conducting cross-border transactions, by limiting their foreign exchange exposure. With a fast and flexible approach to currency transfers, you too can improve your access to consumers and suppliers.
The free-to-open Zyla Account enables businesses to make collections and payouts internationally – giving you the freedom to do business anywhere, all with the security of our online platform. Open an account today and you could be approved, set up and trading internationally in 24 hours. Get started or find out more by calling (855) 797-3366 today.