The Risks of Conducting Business Internationally

International Business Risk
Conducting business internationally carries many risks that domestic business does not. International business involves exposure to local economic conditions, fraud, and bribery. Business can be interrupted by political problems such as insurrections, problematic diplomatic relations, hostility from locals, and volatile foreign governments. Unstable currency exchange rates and exchange restrictions can also complicate international dealings. Finally, foreign earnings and investments are subject to restrictions, and tariffs, foreign withholding, and other tax issues can further restrict returns.

With all of these challenges in play, companies operating internationally should keep a careful eye on local conditions and internal logistics.  Regular visits by an internal audit team will help make sure risks are effectively controlled and will secure the financial interest of the parent company. Ultimately, preparation and constant attention are the best protection against threats to international business.

Logistical Risk

International business complicates supply chains and presents other logistical concerns. Your ability to deliver your product on time and on budget requires capable suppliers.

Two common tactics to mitigate logistical risk are supply chain diversification and granting exclusivity to one trusted supplier. On the one hand, if you diversify your supply chain extensively with suppliers from multiple nations or regions, you may reduce risks local to each region, such as severe weather and political unrest. This tactic is only feasible for businesses that have the resources to cover diverse work and resources.

Granting single supplier an exclusive license might get you into their territory, but it can also limit your growth. If you do grant a company an exclusive distribution agreement, make sure to set clear terms within the agreement. Terms should clearly state that exclusive distribution is intended to develop the entire geographical market in no more than two years. Set challenging business goals for your exclusive licensee, and plan a way out if the supplier fails to meet goals.

Regulatory Risk

There are many types of regulatory risk, but two of the most common involve environmental regulations and taxes. Environmental regulations can affect the entire bottom line, and many countries have stricter environmental standards than the United States. International business ventures that consider and respect local environmental attitudes are often more successful. As a result, local filing and permit regulations can be confusing; it is ultimately most efficient and cheapest to collaborate with local businesspeople, accountants, or lawyers.

Corruption Risk

For years many U.S. companies have regularly engaged in bribery, fraud, false bookkeeping, and other corrupt business practices in international business. The international business scene is dominated by a “don’t ask, don’t tell” culture, which is contrary to popular domestic “speak up” policies that encourages whistleblowing and ethical leadership. A serious anti-corruption compliance program is a crucial component for any business operating internationally.

In recent years the Department of Justice has emphasized the requirements for an adequate Foreign Corrupt Practices Act (FCPA) compliance program. So far, the vast majority of investigations have not gone before the SEC, but it is still extremely important that your company handle incidents properly. FCPA violations, before the SEC or not, are expensive and damage your business. In particular, routine violations cause employees and investors to lose confidence in corporate leadership. This is particularly true in the case of bribes; although government officials may be the end target, company officials often profit from the corruption as well.

Health and Safety Risk

Detailed knowledge of a country’s health and safety risks is a prerequisite for low level business travel, let alone establishing a permanent company presence. Ensure employees are up to date on all recommended vaccinations and that they take all prophylactic medications as directed. The Centers for Disease Control and Prevention provides all the information you need on specific cases.

In-country access to emergency healthcare is essential for all employees, as is telephone access to an adequate 24-hour emergency health center. Employees should also be familiar with emergency evacuation options. Additionally travel medical insurance may be needed for some employees.

Legal Risk

Business owners and corporate lawyers need to understand major legal differences between the U.S. and other countries. The U.S. is an English Common Law country, while most of the rest of the world is based on European Civil Law. This means that American law is almost never sets global precedents; in fact, U.S. law is often considered irrelevant.

The legal burden is on U.S. companies to ensure compliance with local laws. Companies should also know international business law. If a company’s lawyer knows the relevant law, the company’s standard distributor agreement will be more efficient and there will be fewer disputes with distributors.

Cultural Risk

Unfortunately, most American businesspeople have very limited knowledge of foreign cultures. They often know even less about foreign law. It is difficult to find a management team that can operate internationally with strong language skills and cultural awareness. So how can your company ensure that your business is well represented internationally?

Good training is essential. In order to achieve success, your team needs to overcome these cultural barriers by networking and actively participating in international partnerships. Truly investing interest in the local culture takes time, but diligence benefits not only the business, but your team; a deeper understanding of everyday cultural norms, both in and out of the workplace, will enhance everyone’s experience. That said, international positions require intense effort, so consider short-term postings for your international positions and virtual collaborations to supplement your teams.

Financial Risk

The U.S. dollar isn’t the infallible currency that it used to be. Companies must be diligent to mitigate against financial risk. Carefully consider employee qualifications, especially when hiring domestic employees to work internationally. Most American businesses seek international managers who have demonstrated their reliability in similar positions and who can communicate effectively both with local employees and American management.

Local management teams should also be accustomed to working ethically. For example, the right local management may have experience with the local business scene, but this authority is only valuable if it was earned in line with local law and with your company’s Code of Business Conduct. You should verify the accuracy of a potential employee’s reports from previous work, ensure that he or she was compliant with best practices, and check that he or she avoided fraud and other ethical pitfalls. Make sure you have the cultural context to ask the right background questions of international candidates; more than 75% of FCPA cases involving U.S. businesses concern the actions of third parties. Due diligence lessens your third party risk.

Political Risk

International businesses face several types of political risk. Local authorities may fail or refuse to enforce business deals. War, insurrection, and terrorism can disrupt business across an entire region. International assets of U.S. businesses can be seized due to nationalization.

Careful research and extra precautions can mitigate your political risks. Know your limitations as a business and be realistic. One option is to work with an organization like the Multilateral Investment Guarantee Agency (MIGA) of the World Bank. This agency of international experts promotes economic growth in areas plagued by political unrest; MIGA can advise your international dealings and can design a customized insurance policy for your company at a reasonable cost.

Takeaways

Best practices for international business include strong risk assessment and mitigation strategies against fraud, misconduct, and other potential problems. The global business arena is constantly changing, so any good strategy will demand regular updates, including internal audit teams to monitor the status of satellite locations routinely. Research into the local financial, cultural, and legal practices will pay off in risks avoided and business maintained.


Veronika Fritz - Internal Audit ExecutiveThis blog post was written by Veronika Fritz. Veronika is a Managing Partner with Vonya Global, a premier provider of internal audit consulting services. Veronika is a CPA with over 18 years of audit and management experience. Her experience covers all areas of business including compliance, financial, operations and Information Technology. She has led the planning, development and successful execution of financial audits, Sarbanes-Oxley Engagements, pre- and post-implementation ERP system reviews, and business process evaluations. Veronika has expert knowledge in evaluating the design, integrity, effectiveness and reliability of internal controls for financial reporting processes and Enterprise Resource Planning software. She has been a trusted advisor to companies spanning various industries. If you would like more information about Vonya Global or if you have a questions for Veronika, you may contact her through this blog, the company website, twitter, or her LinkedIn Profile.