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Risks and

Uncertainties in
International
Business

Risk

Definition:

The level of exposure to uncertainties that the


enterprise must understand and effectively
manage as it executes its strategies to achieve
its business objectives and create value
(Deloach, 2000)

Quantifying Risk

Risk = Probability (of the event) X Business


impact (severity of the event)
Difference between risks and uncertainties:
risks can be calculated, uncertainties are
genuinely unknown.

Risk Factors

The risks of doing business in a (different)


country are determined by a number of
political, economic, and legal factors.
Therefore, generally, there are 3 types of
risks in international business: political
risks, economic risks, and legal risks

Political risks

The likelihood that political forces will cause


drastic changes in a countrys business
environment that adversely affect the profit
and other goals of a particular business
enterprise

Political risks

Therefore, political risks tend to be greater


in countries experiencing social unrest and
disorder, or
In countries where the underlying nature of
society increases the likelihood of social
unrest

Economic Risks

The likelihood that economic


mismanagement will cause drastic changes
in a countrys business environment that
adversely effect the profit and other goals
of a particular business enterprise

Economic risks

Economic risks arise from economic


mismanagement by the government of a
country
Usually interrelated to political risks
A visible indicator economic
mismanagement tends to be a countrys
inflation rate, and/or level of business and
government debt.

Legal Risks

The likelihood that a trading partner will


opportunistically break a contract or
expropriate property rights.

Natural (Disaster) Risks

The likelihood that natural disaster will


cause severe damage to the companys
assets/ cause major business interruptions

Natural Risks

2 types:

Nature:

Nature
Man-made
Avalanche, blizzards, droughts/extreme heat,
earthquake/tsunami, floods, fires (forest fires), hurricanes,
tornadoes etc.

Man-made:

Dams or locks, severe environmental pollution, severe


building collapse, explosions, transportation incidents etc.

SOURCES OF RISKS

Physical environment
Social environment
Political environment
Operational environment
Economic environment
Legal environment
Cognitive environment

RESOURCES EXPOSED TO
RISKS

Physical resource exposures


Human resource exposures
Financial resource exposures

Risk Management

The process whereby decisions are made


to accept a known or assessed risk and/or
the implementation of actions to reduce the
consequences or probability of occurrence.

Risk management major


components

4 major components:

Risk identification
Risk analysis
Risk reducing measures
Risk monitoring

End.
Thank you.