Corporate Training Magazine

Going Global: The Risks to Get the Rewards
Vol 2 Issue 5- Sept 2006

By Kevin S. Liskowich

Many companies look at the opening of global markets as the proverbial promised land. And while the opportunities may be bountiful, making the move to international markets is not for the feint of heart.

'Going global' is not without inherent risks, and exporters need to be aware of and prepared for these dangers as part of their entry strategy. These risks can include political, economic, legal as well as other factors that aren't experienced on the domestic market.

Political Risk
Some countries may experience major political instability, which could result in defaults on payments, exchange transfer blockages, nationalization or confiscation of property.

Look no further than post-war Iraq. Even with the overthrow of Saddam Hussein, the installation of a democratic political system and the election of a new ruling body, the country still faces significant political turmoil. Though there is a strong level of support from the people for the new system, there is as much dissention from other segments of the population. The result is a lack of sustainable civil order and an ever-present danger from insurgents trying to topple the government.

Even if the new democratic government is able to maintain power and bring order to the nation, it doesn't mean that entering Iraq is a safe option. There is a strong anti-American and anti-West sentiment among the majority of Iraqis, which could still pose a significant risk to exports to Iraq.

Economic Risk
Economic Stability
There are many different factors that can lead to economic instability. In regions such as South America in the 80s and 90s, soaring inflation and the devaluation of domestic currency sent national economies into a tailspin. Other circumstances for instability can be seen in China, where the nation's banking system was laden with bad debts amid the transfer to a market economy and take its place in the international arena. Pay close attention to the measures taken by the domestic governments, as they play a crucial role in the restabilization of their national economy.

Credit,, Financing and Currency
To protect against payment default, it is prudent–-at least initially–-to use payment methods that provide you with some security, such as irrevocable letters of credit. Your bank will be able to provide advice on payment options and their relative advantages. Banks also advise how you can protect yourself against changes in currency relativities due to fluctuations in both an importer's and exporter's currency.

To illustrate, on September 1, 2001, the Canadian dollar was trading at $0.644US, making our nation's exports very desirable to our neighbours to the south. Only five years later, the Canadian dollar is trading at $0.922.US. The increased valuation of the Canadian dollar substantially raised the cost of Canadian goods in the US. One protection for exporters is to hedge their foreign receivables or payables by using 'forward-currency contracts' provided by the banks.

Embargoes
Trade boycotts can not only cripple the economies of countries facing the ban, they can also punish exporters doing business in those countries. Such was the case with the US embargo on Cuba, which began in 1960 as a partial ban, and advanced in 1961 to become a total economic embargo. It was only four years ago that the US partially lifted the ban on trade and travel to Cuba--a ban that spanned more than four decades--despite nearly unanimous votes by the UN General Assembly conducted since 1992 to end the US embargo.

Legal Risk
Differences in law can be expected in overseas countries. These may have an impact in such areas as import procedures, taxation, employment practices, currency dealings, property rights, the protection of intellectual property and agency/distributorship arrangements. Obtaining advice from respected legal practitioners in the countries concerned is imperative.

One legal aspect that needs to be identified and addressed is corruption. This is particularly common in some of the less developed regions such as South America. In some countries, this is done to a limited degree and behind closed doors. In others, the practice is much more open and is accepted as a standard cost of doing business.

The risk this imposes is like a double-edged sword. Not complying can mean that the host country can limit or even entirely block exporters from doing business in their country. On the other side, many of the more developed countries have enacted legislation against companies involved in this practice, regardless of whether it occurs on home soil or within another nation's borders. For example, under the Australian Federal Government's Criminal Code Amendment (Bribery of Foreign Public Officials) Act, it's an offence to offer illegal payments, and action can be taken against you on your return to Australia.

Quarantine Risk
The Canadian beef industry became well aware of this risk in May 2003 when the nation reported its first ever case of BSE or Mad Cow disease. The response from other nations was swift and severe, as international borders closed to imports of Canadian beef. A second reported case two months later strengthened the trade quarantine imposed even by the industry's largest trading partners, the US and Japan. The two-year quarantine crippled the country's beef industry and cost Canadian producers billions in lost revenues.

China experienced a similar case when avian (or 'bird') flu was found to be rampant across the country. When word of the outbreak hit international newswires, borders were closed around the world and export channels for the country's poultry were frozen. In efforts to prevent the spread of the disease, the Chinese government ordered the culling of confirmed or potentially infected chickens and poultry. Estimates on the number of birds killed are in the hundreds of thousands.

The problem quarantine risk poses for exporters is that little can be done to predict its occurrence. One approach to hedge against the threat is to diversify markets as well as continue to cultivate domestic opportunities so that should the situation arise, companies will still be able to remain viable and sustainable.

Social Risk
It is not uncommon for social determinants to arise in the target country. These can include cultural norms and practices as well as religious beliefs. But sometimes the risks are driven by forces outside of the international market being entered. in some cases, the pressures arise much closer to home. This is exactly what Talisman Energy faced after the company expanded into the Sudan.

Talisman Energy began its operations in the African nation in October of 1998 with the acquisition of Arakis, another Canadian oil company. Only days after the company announced the deal, the US bombed a suspected terrorist site in Sudan. The raid drew international attention to Sudan's internal woes and reinforced its status as a 'pariah state' in the eyes of US policy makers and others.

The international community took a strong stance against Talisman's presence in the region, asserting that Sudan's Islamic government was using oil revenue to wage war against black Christian and animist rebels in southern Sudan and that Talisman was profiting from this human suffering.

Further criticism and pressure also came on the home front, one of the most heartfelt from a Sudanese refugee living in Calgary. In May 2006, Natalina Yoll spoke out at Talisman's annual meeting and recounted how she learned to hide in the bush when soldiers periodically raided her southern Sudanese village for crops, cattle and women. In tears, she said marauding government soldiers had tied up her ailing father and eldest brother, and then thrust them into a hut with other men to be burned alive. She pleaded with Talisman: "Please stop supporting the genocide of my people."

Export risk will always exist. The best protection is proper and thorough research and planning. Knowing the risks ahead of time will allow you to make an informed decision on whether to proceed, and will aid in the development of a strategy should you decide to move ahead.