Risks and Uncertainties in International Business

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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)

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Quantifying RiskRisk = Probability (of the event) X Business impact (severity of the event)Difference between risks and uncertainties: risks can be calculated, uncertainties are genuinely unknown.

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Risk FactorsThe 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

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Political risksThe 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

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Political risksTherefore, political risks tend to be greater in countries experiencing social unrest and disorder, orIn countries where the underlying nature of society increases the likelihood of social unrest

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Economic RisksThe 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

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Economic risksEconomic risks arise from economic mismanagement by the government of a countryUsually interrelated to political risksA visible indicator economic mismanagement tends to be a countrys inflation rate, and/or level of business and government debt.

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Legal RisksThe likelihood that a trading partner will opportunistically break a contract or expropriate property rights.

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Natural (Disaster) RisksThe likelihood that natural disaster will cause severe damage to the companys assets/ cause major business interruptions

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Natural Risks2 types: NatureMan-madeNature: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.

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SOURCES OF RISKSPhysical environmentSocial environmentPolitical environmentOperational environmentEconomic environmentLegal environmentCognitive environment

RESOURCES EXPOSED TO RISKSPhysical resource exposuresHuman resource exposuresFinancial resource exposures

Risk ManagementThe 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 components4 major components:Risk identificationRisk analysisRisk reducing measuresRisk monitoring

End.

Thank you.

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