Conducting business internationally has its own intrinsic risks. While many businesses strive to expand into global markets, they don’t consider the risks of doing international business properly. Challenges exist from one market to another and must be properly addressed or risk losing significant capital in the process.
Five Risks of Doing International Business
1. Unforeseen Regulatory Risks
Regulatory risks are ones that you should be working on immediately because they’re the easiest to protect against. Working with a team that knows the country’s regulations can help you safeguard your business. Understanding the regulatory risks of working in a country can take a large, upfront investment of money and time – but its well worth it and will greatly benefit you in the future.
Since every business is unique and different, it’s impossible to outline all potential risks in this article.
However, two risks that exist across all international markets and are something worth focusing on include:
- Environmental
- Taxation
Environmental risks are some of the most important to consider because they can lead to severe fines and penalties for your business. It’s crucial to fully know what environmental regulations are in place and your role in making sure that you adhere to them.
Taxation risks also exist.
You should know the tax ramifications for each country you plan on doing business in. While taxation may be lower in one country, it may be significantly higher in another. You need to understand these tax regulations because they can significantly impact your profit margins.
Businesses often need to readjust their pricing in a new market to account for higher tax levels.
2. Potential Logistical and Supply Chain Risks
Logistic and supply chain issues are some of the most impactful a business will face. If you have the best product in the world, your business will still fail if you can’t get it to consumers. A few of the things to consider mitigating these risks are:
- Work to diversify the supply chain to ensure that you have multiple points of contact in each region.
- Work with multiple suppliers and logistic companies that already have solid operations in the country.
You may be tempted to work with one supplier on an exclusive license. When you work exclusively, you can save money, but you’ll also risk:
- Limiting growth
- Failure if the supplier goes under
While an exclusive license may be attractive to you, it does pose the risk of the supplier going out of business and you having no means of getting your product to consumers. If you still want to pursue one of these licenses, it’s crucial to set clear terms on time to develop in the market, distribution expectations and more.
If the supplier fails, you need to have a backup plan in place to ensure your expansion into international markets can continue.
3. Cultural Risks
Every culture is slightly different. If your business doesn’t have exposure to foreign clients or cultures, doing business internationally can be challenging. You may find that certain promotions, words or colors may have an impact on your business.
Additionally, a phrase that is acceptable in your country may translate to something that is insulting in another.
Teams need to do a few things to overcome the cultural risks of entering into international business, such as:
- Networking and partnering with others in the country that understand the culture
- Building a team to research cultural differences and nuances in a country
- Training management and staff to deal with these differences properly
Working with a third-party who specializes in expanding into and doing businesses in international markets can help you overcome cultural risks you may face.
4. Fluctuations in Exchange Rates
Exchange rates can fluctuate rapidly. Depending on the exchange rate, you may earn more or less money from a product when the rate goes up or down. The rates can change dramatically due to:
- Economic instability
- Politics
- Diplomatic issues
It’s difficult to fully grasp exchange rate fluctuations until you experience them firsthand. Developing worst-case scenarios can help you understand how bad exchange rates can be until it’s time for you to pull products from the market.
5. Technological Risks
Operating in international markets introduces various technological risks, including data security vulnerabilities and infrastructure differences. Businesses must ensure compliance with local data protection laws, which can vary significantly between countries. Additionally, variations in technological infrastructure, such as internet speed and availability, can affect the deployment and performance of digital services.
Companies can invest in robust cybersecurity measures and conduct thorough assessments of local technological environments to mitigate these risks and ensure seamless operations across borders.
Risks of doing business internationally do not stop at just these five points. You’ll also need to consider:
- Political risks and if goods may be prohibited from the country in the future
- Intellectual property issues and how third parties may use this information
- Credit history, or lack of, which can make it difficult to obtain loans and financing in the country
- Dealing with customs and how it can slow goods from entering the market
While there will always be risks of doing international business, adapting to them will be crucial to your business’s success. You can only anticipate risks to a certain degree and do your best to meet these challenges as they arise. To speak with an international business consultant about risks of doing international business, reach out to us today.
