Risk Management in a Globalized World

In exchange for access to a substantially vast marketplace, globalized companies take on significant risks. Firms looking to expand into new markets or establish a footprint in a foreign economy must update their risk management practices to align with the more complex issues that can arise in international business.

Types of Risk

Global business risks generally fall into the following categories.

Country risk

When a firm operates outside of its own nation, it is subject to the laws, rules, and regulations of the host country. Even in countries that are culturally similar, legal systems and business regulations may be vastly different.

Many countries implement protective barriers that make it more difficult for foreign companies to gain an edge over local competitors. This scenario is even more difficult and risky for conducting business in a host nation that has poor relations with the home nation at the geopolitical level.

Some nations have far more rigid safeguards than the United States. For example, the European Union bans 100x more chemical additives and ingredients than the FDA. The EU also has more stringent data privacy laws, which can incur severe penalties if violated.

On the opposite end of the spectrum, some nations have very few resources dedicated to security and intellectual property protection. This can make it more difficult for companies to safely produce or market their products abroad.

Country-level risks also refer to political instability. Coups, political violence, and conflicts between or within borders often have wider consequences that can impact foreign companies. 

Technological risk

While the internet remains operating at a global level, it is becoming more and more decentralized. Many governments already filter which websites and platforms can be accessed through their nations. This can pose a risk for companies by challenging their marketing tactics or sales channels.

Other nations have intermittent internet access, high latency, and poor broadband infrastructure. As most modern companies rely on cloud-based services, ongoing connection problems are highly difficult to overcome. 

Financial risk

Companies operating in a foreign country will be exposed to currency risk. Even if the main business transactions are conducted in the home currency, companies must still pay local costs, such as rent, utilities, and other expenses in local money. Countries that experience instability often have volatile currency rates. There is a much higher risk of going over budget, as currency rates can fluctuate wildly. 

Financial risks can also occur due to issues in the global supply chain or commodities markets. Underdeveloped foreign markets are often more susceptible to global economic issues. 

Companies will also have to consider that the business environment can change rapidly, especially if there is a shift in political power. New governments may introduce tariffs, raise taxes, or levy new taxes. 

Commercial risk

International businesses face many of the same operating challenges as domestic businesses. Multinationals must be aware of existing competition, threats to the market, and opportunities for growth. In many countries, foreign companies require local partners. If this partnership is weak or poorly managed, it can impact the company’s bottom line.

Cultural risk

Interpersonal interactions are governed by social norms and etiquette that vary by culture. Work expectations and management styles can contrast greatly between two countries, and often clash against each other. Language barriers can also cause problems in operating and managing an international company.

External Mitigation Tactics

External mitigation strategies focus on elements that are beyond a company’s control. For example, while a multinational cannot directly prevent an economic or political risk, companies can minimize their financial vulnerability by reducing debt and holding a higher amount of reserve capital. 

Businesses can also conduct thorough risk studies and analyses using third party risk management solutions to have a deeper understanding of the potential obstacles that can arise from doing business in a specific country. 

Companies can also overcome utility disruptions or unreliable infrastructure by investing in private systems, such as generators, satellite internet, and chartered transportation.

Internal Mitigation Tactics

Companies can also employ internal mitigation strategies to protect their workforce, assets, and investments from risks. 

For example, to reduce the risk of intercultural misunderstandings, companies can provide their workforce with cross-cultural communication and language courses. Multinationals should also vet in-country partners according to their understanding of host and home country regulations and norms. 

All international companies should create a risk management plan that includes responses for any scenario. For example, companies operating in countries with ongoing political instability should have an evacuation plan in place. All employees should be familiar with this plan and be able to follow instructions with little prompting. If possible, multinationals can purchase insurance plans to transfer some financial risks to third-parties.