1.4 Risks of International Business

Factors such as differences in language, culture, economics, politics and laws bring about barriers and costs——risks. No company can make a strategic business decision or enter into an important business transaction without a full evaluation of the risks involved. To a great degree, the management of international business is the management of risk. In this part we will discuss just two types of international business risks: political risk and the risk of exposure to foreign laws and courts.

A particular concern of international companies is the degree of political risk in a foreign location. Political risk is generally defined as the risk to a company's business interests resulting from political instability or civil unrest, political change, war, or terrorism in a country in which the company is doing business. For example, political decisions by governmental leaders about taxes, currency valuation, trade tariffs, wage levels, labor laws, environmental regulations and development priorities, can affect the business conditions and profitability. Similarly, political disruptions such as terrorism, riots, civil wars, international wars, and even political elections that may change the ruling government, can dramatically affect the businesses. Generally, political risk is associated with instability and a country is thus seen as more risky if the government is likely to change unexpectedly, if there is social unrest, or if there are riots, revolutions, war, terrorism, and so on.

Companies naturally prefer countries that are stable and that present little political risk, but the returns need to be weighed against the risks, and firms often do business in countries where the risk is relatively high. In these situations, companies seek to manage the perceived risk through political risk insurance, ownership and management choices, supply and market control, financing arrangements, and so on. In addition, the degree of political risk is not solely a function of the country, but depends on the company and its activities as well——a risky country for one company may be relatively safe for another. Handling political risk requires planning and vigilance. First, the company must have an understanding of the domestic affairs of a country. Typical questions might include: Is the country subject to religious or ethnic strife? Is the country politically stable? Can the government of the country rule effectively? The firm must also understand regional politics. Is the region stable? Are neighboring countries in the region hostile? Finally, it is well advised that managers of the company should keep abreast of all political affairs that could affect their business interests worldwide.

Exposure to foreign law and courts is another risk for international business. Laws vary from country to country depending on social, political, cultural and historical traditions. Some acts that are perfectly legal in one country may be illegal in another. Most travelers to a foreign country could conceivably break laws but not even be aware of it. It is true not only for criminal law but also for the law of contracts, torts, employment, intellectual property and other business laws. For example, under Islamic law in many Middle Eastern countries, there is prohibition against charging interest on a loan. However, in other parts of world, it is almost taken for granted.

Settling disputes between companies can be much more difficult in international business than in domestic business. It may involve complex procedural problems: What country's court should hear the case? What countries law should apply? Should the case be submitted to arbitration? and so on. Litigation in a foreign court is both costly and time consuming. The laws of a foreign country can differ greatly from those laws one is accustomed to at home. In addition, language and logistical issues can be problems as well. A company may respectively need representation by attorneys in its own country and in the foreign country. Frequent court appearances could cost a lot of time and travel expense.

Chapter Summary

本章是关于国际商务及国际商务环境的介绍。国际商务是一种跨越国界的商业活动，是在不同国家之间进行商品、劳务、资本、技术和信息等资源的国际转移，其主体活动是进出口贸易，包括货物贸易和服务贸易。个人、企业乃至政府（在某些情况下）都可以从事国际商务活动，其中最活跃的主体当属跨国公司。

相较国内商务活动，国际商务因跨越了过境而更为复杂。他国的经济环境、政治环境、文化环境和竞争环境等情况都将对国际商务活动产生重要影响，可能会给国际商务活动带来政治、经济和法律风险。

国际商务的历史悠久。“二战”之后国际商务发展迅速，全球化加剧了国家之间的经济依赖，有力地促进了国际商务的繁荣，也对国际商务的法律规制产生了重大影响。

Exercises

Part Ⅰ. True or False Statements: Decide whether the following statements are true or false and explain why.

1. International business consists of import and export of goods.

2. In international business, exporting is more important than importing.

3. Only multinational corporations can conduct international business transactions.

4. On the basis of per capita GDP, countries are often divided into three main categories: the developed countries, the developing countries and the least developed countries.

5. China is a newly emerging country and has graduated from the group of developing countries.

6. It seems more difficult to understand the cultural environment, because the cultural environment is essentially intangible.

7. According to Hofstede's model of culture, China belongs to a country of individualism.

8. International business began to exist after the end of World War II.

9. With the increasing globalization of economy, we will experience more cross-border international business transactions.

10. Terrorism, riots, wars occurred in one country are political risks which may affect the international business.

Part Ⅱ. Chapter Questions: Discuss and answer the following questions according to what you have learned in this chapter. You are encouraged to use your own words.

1. Describe a real-life example of international business.

2. What are the factors that contribute to the globalization?

3. What is the influence of globalization on international business?

4. How do you understand the cultural environment of international business? Can you give an example illustrating the impact of culture on international business?

5. What methods a company may rely on to reduce or avoid the political risks in international business?

6. How do you understand the statement in the text that “Even the small local companies are affected by global competition and world events”?

7. Give an example of political risk in international business.

8. What are the possible methods to avoid or reduce the business losses resulting from political risk?

9. Can you give a real-life example for the statement in the text “Most travelers to a foreign country could conceivably break laws but not even be aware of it”?

10. What are the problems that may arise from litigation in a foreign court?

Part Ⅲ. Case Problem

Frigaliment (Plaintiff), a Swiss corporation, entered into contracts to purchase chicken from BNS International Sales Corporation (Defendant), a New York corporation. The English language contracts between them stated “US Fresh Frozen Chicken, Grade A, Government Inspected, 75,000 lbs. 2 1/2-3 lbs at $33.00; 25,000 lbs. 1 1/2-2 lbs at $36.50.” When the chickens were shipped to Switzerland, Plaintiff found 2-lb sizes were mature stewing chicken or fowls, but not young broiling chickens as they had expected. Plaintiff protested and claimed that in German the term “chicken” referred to young broiling chickens. Defendant pointed out the reference to “US fresh frozen chicken, grade A.” The USDA defined the term “chicken” as subsuming different grades of chicken, including broilers and fowls, as well as other types such as capons, stags, and roosters.

1. What's the focus issue in this case?

2. If you were the judge, what kind of chicken did Plaintiff order? Was it “broiling chicken” as the plaintiff agued, or any chickens weighing 2 lbs as the defendant insisted on?

3. What would the parties have done to avoid this ambiguity?

4. What can you infer from this case?

Part Ⅳ. Further Reading

Now more businesses are striving to go international and crack foreign markets. When dealing with businesses outside of your region, knowing the economic and technical differences in your target area is surely sufficient? So why is it that many individuals are experiencing pushback when it comes to their lack of cultural sensitivity and awareness? It's just as important to prepare for and familiarize yourself with your target country's cultural differences.

Did you know that Mexican businessmen prefer to avoid explicit disagreements and that their way of saying “no” is often disguised as a “maybe” or “I'll get back to you”. Are you still waiting to hear back from a potential business partner in Mexico? Perhaps you've had their answer all along. Other cultural differences to note when doing business in Mexico include the 10 minute rule for punctuality, working hours, avoiding the use of aggressive paper or hand movements and ensuring that you do not stare for too long. Take note of these differences, for although your technical knowledge of Mexico's economic and tax rules may be exemplary, being unaware of their working culture may ultimately be your pitfall. Be sure to cry “Salud!” when toasting your business success in Mexico.

On the culture side of things, British are an interesting bunch with a number of peculiarities that those looking to do business with us should be aware of. For some cultures making your own introductions is standard, however most British feel far more comfortable being introduced by a mutual party – be sure to take this into account if you find British lingering on the edge of the group uncomfortably. Furthermore, although enquiring about another's salary is standard for other nationalities, never ask a British - talking about how much they make is heresy. From my experience working with clients, those who appreciate basic cultural differences find it much easier to forge longer and more prosperous business relationships. An important feat considering the competitive world we live in.

China is currently undergoing major economic developments across a number of different sectors. The economic restructuring process is likely to have a temporary negative impact on China's economic growth, and certainly the wider economic market. The most recent outlook for the country's economy will be driven by innovation, the service sectors and private capital – make sure you take these into consideration when pursuing business opportunities in China.

Considering the on-going changes in China, the business potential is widespread. It is important to not only ensure that your plans fall in line with the country's economic outlook, but also to maximize on them by understanding how they are integrated with China's culture. China's “shame culture” is one of the biggest driving forces behind success. The act of “saving face” is a resilient motivating force in China——a concept that is undeniably the hardest to understand for those who haven't experienced it. So what is this “shame culture”? Shame is the feeling of inadequacy in the eyes of your peers, failing to live up to their expectations. Airing dirty laundry is avoided out of fear of “losing face”. This is very much ingrained in China's culture, so if you are doing business in the country it is important that you are aware of this and do not compromise your image or someone else's. Being logical, upholding a thorough reporting system and utilizing facts to support your arguments should also be at the forefront of any individual's mind when seeking to achieve business success in the country.