Free Online Course in International BusinessTranslation RiskTranslation risk involves the revaluation of foreign assets that are held in a foreign currency. There may be a difference in the current foreign exchange rate from the time of the original transaction to time of the fulfillment of the sales contract. Assets held on the balance sheet in foreign currency must periodically be revalued to the current market price of that currency. This kind of revaluation to the current market will create an exchange loss or gain. This exchange gain or loss is unrealized but still impacts the value of the assets held overseas.Plant and equipment of an international company are marked to market at year end for financial reporting purposes. Conditions throughout the year have caused a decline in the value of the currency of their foreign holdings of 20%. This decline has the immediate affect of reducing the value of these assets by 20%, which then has the direct impact of reducing the company's profitability for the year by the same value even though no direct transaction has occurred other than the revaluation to create this loss. Cultural RiskCultural risks occur as the result of different expectations, misunderstandings and miscommunications between a buyer and the seller.• A seller wants to make a large sale to meet a quarterly quota. The buyer wants to be polite and may be saying "yes," acknowledging the seller's explanation of the features and benefits of the product. The seller asks for the potential buyer's standard shipping instructions, which are then promptly provided. The seller enters the "order," and the shipment is made. But the buyer has never placed a proper order and therefore rejects the shipment. • A request for a quotation arrives that is misinterpreted to be a purchase order. A lack of communication resulting from language problems results in a shipment being made that has not been ordered. • A buyer promises to pay promptly when the goods are delivered. What the seller fails to realize is promptly will be after the month long holiday in the buyer's country during which the goods may be shipped but will not be picked up by the company until after the holiday. Thus payment is delayed, and demurrage costs may accumulate. • A seller, by not doing extensive marketing research, exports a product for distribution only to find out that for religious and cultural reasons it will not be purchased and therefore is rendered worthless. Risk is an inherent part of all business transactions. There is risk of slow or non-payment in domestic transactions that arise primarily from the unwillingness or inability of a buyer to pay a seller when payment is due. When international transactions take place, more risks are added because of the laws, regulations and politics of the buyers' and sellers' countries as well as possible third countries. The financial condition of a buyer's country may cause delayed or blocked payments. Changes in the relative value of buyers' and sellers' currencies pose risks. The number of documents required in many cross-border transactions opens the possibility of missing documents or discrepancies in the forms to be filed, leading to slow or blocked payment. There are many misunderstandings that can occur in business transactions negotiated among countries in distant time zones, with different languages, varying cultural practices and dissimilar ethical values. Any or all of these can contribute to payments not being received when due. SummaryThere are many forms of risk associated with business and more so with international business because of the added pressure caused by sovereign governments, geography and culture. A successful international business manager does not go into business with a blind eye. He/she identifies the potential risks, assesses the potential profits, and puts the appropriate risk mitigation tools into place. There are a variety of types of risk associated with international transactions, political, economic and commercial risk, all of which may render a buyer or seller incapable of conducting business (getting paid or receiving shipment). You must understand the complex interactions of the various kinds of risk. A simple way to differentiate commercial and country-risk is provided below:• country risk = political risk + economic risk • commercial risk = business transaction risk
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