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Political Risks and Financial Risks in International Business

You are the financial analyst for an Irish based company which has invested in subsidiaries in the assigned countries. Your company also imports from, and exports to a number of countries. You have been contracted to analyse the company’s exposure to political and exchange rate risk, and to recommend a set of strategies that the firm should adopt.

The present study is based on the country risks to operate a business on an international basis; mainly there are two types of country risks which are political risks and financial risks. The study will evaluate and analyses both these risks and the impacts of these risks on business to operate overseas. The study will analyses country risks of these three key countries; China, Turkey and Finland which are either subsidiary or foreign associate of Irish company. By considering their risks, recommendations and strategies will be drawn to assist Irish company in doing their business effectively within these cited countries.

Political risk means the complications faced by government and business which might, as a result, affect the business in the ways of profitability or might impact expected result and the value of economic activity. Political risk refers to a practice of political power which can adversely impact the value of the business. Political risks can be born from several factors which can affect the income of the company in a negative manner or can strike the business strategies. These factors are inclusive of macroeconomic problems like high rates of interest, social issues and government actions (Cavusgil, Knight, Riesenberger, Rammal and Rose, 2014). Political risk is a risk wherein investors, companies and government experience high risks by the political decisions, situations or events which can considerably impact the business profitability and the potential value of specified economic action.  It can also affect business by altering its profitability of attaining the overall business goals; it is highly experienced by firms which can come in terms of strategic risk, personal loss, and financial loss due to the non-market factors.

A financial risk occurs when there is a denomination in a particular currency of financial transactions instead of the company’s base currency. The foreign exchange currency rate risk is considered as an element of the entire financial risk for corporations that makes a considerable amount of trade within the foreign market (Brink, 2017). Foreign exchange risks are also present when the firm’s foreign subsidiary manages a financial statement in the form of currency rather than the reported currency of consolidated firm. Further, the presence of risk might create an adverse effect on the exchange rate of denominated currency in regards to the base currency prior to the completion of transactional data. One of the main risks in involving with international business is the exchange rates; it is the primary risk related to the business is the fluctuations in the foreign exchange (Neelankavil, 2015). Since each country has its particular currency, and the value of the same might change with time because of the myriad factors which impact foreign exchange rates.

Country Risks in China

China

In China, a special type of political risk exists, and it is considered as the ongoing struggle between the central government of the country and the local government against the valid laws, and adherence and on-adherence of the same. Further, it creates a problem for the business operating in China to understand whether the rules are applicable or not. At present, the Chinese government is attempting to offset the economy far from the growth led by investment and the consumption. On the other hand, operating in China is said to be very challenging for business, since the country has commenced untying its economy in certain areas, there are several restrictions on the scale up to the operations of foreign companies in larger economic areas (Yabuki, 2018). New political developments have enlightened the emerging risks of business operations in China. Political risks are considered as the main and growing issue held in the country, either for internal country investments by global companies and in relation to the enhances existence of the Chinese companies as well as the investors in foreign markets.

The restrictive and rigid rules of foreign investments in China have now made it complex to operate and establish a business within China. Along with this, the complex conditions of currency in China have also resulted in currency risks thereby making it difficult for companies to start business effectively in China Hence, it is essential for the businesses who are willing to trade in China to for strategic plans while mitigating foreign exchange risks (Breslin, 2016). It is highly beneficial to do business in China; however, there are several risks and challenges to attain those rewards. Business is required to be prepared before setting their business in China, as China is ranked as 78th position in the world for the entire ease of conducting business and is placed on 28th position on the Global Competitiveness Index. There are high risks in China for foreign companies to establish or expand their business; they can face legal, social, political issues arising from every aspect (Deresky, (2017). Mitigation of these country risks in China is compelling and complex, which every new and existing business faces.

Risk assessment of China

Risk

Score (Low  to high)

0

1

2

3

4

5

Complexity of laws

Restriction for foreign companies

Currency risks

Strategies and recommendations

Initially, a business must operate with the domestic government to compress the government of China in order to admire its commitment towards the open market, while instituting fundamental rules and enforcing the applicable set of rules with the protections towards the intellectual property rights. China stays in between those economic aspects which are not considered as transparent, viable and legal according to the WTO’s rules.  By considering this aspect, businesses can assess these as their short-term strategies that will thereby challenge foreign forms. It is also essential to eliminate reputational risks at domestic areas, and the foreign firms must form, and viable comply with the corporate responsibility acts and standards (Li, Song & Wu, 2015). The leaders should be aware of the government of China and their enforced rules and regulations, to not to perform anything which is not acceptable by the administration, government and Chinese marketplace. In addition, foreign firms must do preparation in such specified manner by which they are able to tackle and address likely challenges in China.

Country Risks in Turkey

The strategies to address financial and political risks in China, the businesses are required to form emergency and backup response plans, to respond immediately at the time of conflict or crises. It is also important for the business to develop strategies for recruiting and training skilled managers and employees since China has recruitment issues wherein there is lack of talented and skilled personnel. By considering the intellectual property concerns, it is vital for the business to protect the intellectual property rights. There is increased competition in the Chinese market, so for the business, it is significant to under the completion to be competitive. Furthermore, businesses are also required to develop strategies to exercise CSR to do business viable and fairly with proper compliance with laws and rules.

For conducting business in China with no interruptions and risks of politics and economy, it is essential for a business to take profession and legal advice and consider the activities to do business. Businesses must get referral lists of the firm's based ion China to have records thereby keeping the business on track from the very beginning (Gilboy, 2016).  Companies attempting to make their initial investments in the country or are willing to expand their business should be completely aware of the risks to conduct business in China, with proper preparation to take suitable steps to mitigate these risks. For the businesses, they must get insights regarding the operations of the business in China, which can result beneficial to learn in better management of financial and political risks.

Turkey

Turkey is said to the world’s largest economy ranked on the 18th position. It is predicted to be ranked as the 10th position by 2023 it possesses the youngest and the rapidly increasing population in Europe. Turkey is expected to an experience ongoing risks that are faced at the time of 2017 that is civil unrest, not-settled economy; continual threats occurred due to terrorist groups and foreign policy forces. Inflation continued to stay at the top and was assumed at the 10.9% during 2017, attaining double-digits in the 9 years for the first time (Nudrali & O’Reilly, 2016). Inflation is likely to stay as high in 2018 because of increased demand, high-cost pressure and increasing expectations of inflation put forth on the pressure. The interest rate of the central bank in Turkey has been increased by 500 bps during 2017, which is inadequate to include inflation. Moreover, requirements of foreign finance stay as showing a deficit in the large current account, which is likely to remain above 5% of gross domestic product in 2018. With the programming of fiscal stimulus to be taken back in 2018 that is rising of the corporate tax rate by 2 points to 22 percentages by 2020 and continued to be local and domestic risks, growth is likely to transform in 2018.

Strategies to Address Risk in China and Turkey

Turkey has offered key opportunities during the period of poor growth in the international economy. The political and economic stability of the country is greatly vulnerable uncertainties, whereas its protection has experienced increasing threats from local Islamist terrorists. Good investors are those who are able to gain a better understanding of the relationship among their sectors, regional partners and policies, allowing them to control their exposure to the upcoming crises within the country.

On the other hand, Turkey has increased instability in politics and a rigid regional business landscape which creates high barriers for the business and foreign investors to enter (Bekaert, Harvey, Lundblad and Siegel, 2016). Meanwhile, protection risks stay from the Islamists terrorists and politics of Turkey being unstable. By considering this aspect, a considerable part of the developments have been charged by the financial markets, which has impacted trade and business operations. Turkey has presented a variety of challenges to conducting business, inclusive of complexity, high barriers to entry and at times unstable politics, inconsistency in neighbouring countries.

Risk assessment of Turkey

Risk

Score (Low  to high)

0

1

2

3

4

5

Complexity of laws

Restriction for foreign companies

Currency risks

Strategies and recommendations

For the businesses willing to open and operate a business within Turkey are required to develop effective strategies and follow up key findings and recommendations to drive the market of Turkey (Bekaert, Harvey, Lundblad and Siegel, 2016). Businesses are required to obtain suitable insurance cover, as it is considered as the powerful means to mitigate the political and financial risks. It is also essential for the businesses to spot and drive opportunities while gaining a better understanding of challenges to do business in Turkey.

Business must be involved with the other parties and agents to gain the market information of Turkey, and get updates on the operational and regulatory issues, main projects and developments in business. Investors and business have shown their concerns regarding the regulatory changes that take place with the short-term adoptions and time frames and inadequate analysis of the wide results of the concerned sectors. Business must consider these issues in a deep manner, with proper evaluations and search for ways to eliminate barriers and cope with these issues while overcoming with high competitiveness with effective strategies (Lehkonen & Heimonen, 2015). On the other hand, there are concerns regarding the overrule and controls of law, inclusive of impartiality and liberty of state institutions; a business must carefully take these issues into account to be successful.


Moreover, business is required to recommend with analysts and professionals on a timely basis to gain better knowledge about Turkish market; it is significant to monitor the updates and paling of systems to analyse the actual implications on the business of uncertainty and unexpected events. These are said to be useful aspects of doing long-term planning and developing strategies.  It is significant to complement interpret the microeconomics and macroeconomic impacts. With sufficient foresight and adequate insights, it is possible for the companies to amend to actual realities and get benefits even at the instabilities and uncertainties. Businesses must also reduce fixed investments by considering the costs, risks and benefits of the strategic diversification and business elements throughout the economy (Arikan, (2017).

The Economic Climate in Turkey

Companies can do minimization of risks by conducting business with a new customer, agents and partners within Turkey by making use of program, campaigns and commercial services. This can offer updated and latest information that is inclusive of the bank as well as trade references, principles names, officers, managers and lines of the brand, financial data, reputation, perspectives, employees’ number and sales volumes.

Finland

Political risks are considered from the Finland covers two perspectives, which can oblige forces on making imports and exports trade. The first one is the bank, which covers many of the rules and restrictions to entering into and trade imports and exports. It has numerous aspects that contribute to the overall political risks; the second perspective is the FDI that is foreign direct investments by the firms doing imports and exports (Butler, 2016).    The long-term private investments wherein the business is controlled from overseas, integrating the ownership and involvement of management which is highly complex for them to consider all these aspects from the abroad. There are risks of macroeconomic and microeconomics in political risks of Finland; these can result in uncertainties and unanticipated event. The risks of microeconomics occur where the changes in the environment are meant to impact some specified field of business activities or foreign firms with certain elements. The macro risks are considered as the most dramatic as compared to micro which is prevalent.

In the political and financial risks of Finland, the forces cause remarkable changes in the business environment of the country thereby making imports and exports more complex. These risks are inclusive of limited liberalization of movement of goods, restrictions on foreign companies, barriers to entry and strict rules and regulations to enter a foreign market. Further, these can impact the objects and revenues of the foreign companies (Bilgin, Gozgor & Lau, 2017). The country risks of Finland to do trade and business are related to multiple issues. The sources of risks may be the core issue in the political and financial system of the country. Moreover, the legislation level has also gained much importance, while scrutinizing the concept of political and financial risks in the country. These are inclusive of economic risks in a given country; it is essential for the company to do intellectual property protection in terms of complying with applicable rules and laws related to export and import transaction with a certain amount of period. These risks are inclusive of foreign exchange insufficiencies changes; government acts, restrictions and strict rules and laws to do the free flow of goods and services.

Risk assessment of Finland

Risk

Score (Low  to high)

0

1

2

3

4

5

Complexity of laws

Restriction for foreign companies

Currency risks

It is essential to develop strategic risk management and financial risk management that can act as an effective tool to overcome with financial and political risks. While risks are present in developed countries and market in a rapid manner, which requires the eligibility of foreign companies to dealing with the same in an effective manner. The requirement of government involvement is there to promote the globalization, and foreign company’s engagement in their economy and the make way for global activities as well as foreign investment in Finland. To enter the foreign market, companies are required to call for more specific actions in order to mitigate risks. They are required to manage their credit risks and capture opportunities to act viable at the time of crises while assessing the possible credit risk in the country to conduct trade with a proper review of the procedures.


It is also essential for businesses to ensure the management of supply chain that can stand against the unexpected disruptions while preparing and training the personnel to response at the time of crises. Along with the businesses must plan their risks management wisely to ensure coverage of every essential matter (Krishnan, 2016). Since Finland is considered as the most stable country, so it is not that hard to trade within the same, but the main thing to consider is the appropriate knowledge of information, Finland market, applicable laws and rules and compliance to the economy of the country in a fair and acceptable manner. Moreover, Finland is considered as stable, and it is said for the foreign market as a safe ground to make investments but wisely (Shenkar, Luo & Chi, 2014). Business must take suitable consultancy from the experts regularly to have the entire information about the market of Finland, thereby resulting in timely updating of systems. Businesses are also needed to develop strategies that define ways of getting contacts to trade in the specified country while delivering their exports in the same country. Business is obliged to provide documents for imports and exports to the countries and must satisfy the regulations to ensure security, quality and compliance. While forming a time frame for the export and import plan, a business must make sure to put all the related risks and factors in the global market research (Huang, Wu, Yu and Zhang, 2015).

Conclusion

By taking the findings and the analysis of the present study, it can be concluded that international business requires appropriate risk management as the foreign market is volatile and uncertain in comparison to domestic markets. Due to this sector, business entities are required to develop appropriate strategies by analyzing foreign countries through their political environment, economic regimes. The main risks of country risks are political risks and financial risks, which can cause an adverse impact on the business doing business on an international scale. Based on the present study, it can be said that before conducting business in foreign markets it is essential to consider these risks for getting long-term success

References

Arikan, H. (2017). Turkey and the EU: an awkward candidate for EU membership?. Routledge.

Bekaert, G., Harvey, C. R., Lundblad, C. T., & Siegel, S. (2014). Political risk spreads. Journal of International Business Studies, 45(4), 471-493.

Bekaert, G., Harvey, C. R., Lundblad, C. T., & Siegel, S. (2016). Political risk and international valuation. Journal of Corporate Finance, 37, 1-23.

Bilgin, M. H., Gozgor, G., & Lau, C. K. M. (2017). Institutions and gravity model: the role of political economy and corporate governance. Eurasian Business Review, 7(3), 421-436.

Breslin, S. (2016). China and the global political economy. Springer.

Brink, C. H. (2017). Measuring political risk: risks to foreign investment. Routledge.

Butler, K. C. (2016). Multinational Finance: Evaluating the Opportunities, Costs, and Risks of Multinational Operations. John Wiley & Sons.

Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International business. Pearson Australia.

Deresky, H. (2017). International management: Managing across borders and cultures. Pearson Education India.

Gilboy, G. J. (2016). The myth behind China's miracle. In SEEKING CHANGES: The Economic Development in Contemporary China (pp. 1-16).

Huang, T., Wu, F., Yu, J., & Zhang, B. (2015). Political risk and dividend policy: Evidence from international political crises. Journal of International Business Studies, 46(5), 574-595.

Krishnan, R. (2016). Energy security through a framework of country risks and vulnerabilities. Energy Sources, Part B: Economics, Planning, and Policy, 11(1), 32-37.

Lehkonen, H., & Heimonen, K. (2015). Democracy, political risks and stock market performance. Journal of International Money and Finance, 59, 77-99.

Li, S., Song, X., & Wu, H. (2015). Political connection, ownership structure, and corporate philanthropy in China: A strategic-political perspective. Journal of Business Ethics, 129(2), 399-411.

Neelankavil, J. P. (2015). International business research. Routledge.

Nudrali, O., & O’Reilly, K. (2016). Taking the risk: the British in Didim, Turkey. In Lifestyle Migration (pp. 147-162). Routledge.

Shenkar, O., Luo, Y., & Chi, T. (2014). International business. Routledge.

Yabuki, S. (2018). China's New Political Economy: Revised Edition. Routledge.

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