The efficiency of production systems and economies of scale that companies did turn upon it out of its natural markets in order to continue to grow such as Coca Cola. Other companies grew through the development of a unique and exclusive product whose demand exist globally and that, therefore, required a global response here could mention to Kodak or Ford in the 1920's and 1930's. Others, finally, came to international business because it started as international business, ahem. the oil industry.
For whatever reason, until the 1950s the international business growth came mainly from within, from their own characteristics.
Technological development has made that firms should develop internationally by external causes. Improved communications technology and the ease of movement of capital and goods across the world thanks to the new media has made even smaller companies see the need to develop international activities.
But the extension of the activities of a company to the international arena is not easy. We saw, in discussing social factors, like every human society has developed its own way of seeing the world and human relationships as well as the government saw that view reflect the applicable law within their territories.
When a company was born and raised in a particular social environment are used to that environment, all members share the assumptions of that environment, and the work is carried out smoothly.
When a company comes to the international arena must learn to function in different environments, with different assumptions and different way of doing things. That change is difficult for everyone and sometimes impossible for some, and has a number of additional risks to the administrator, risks to be expected if you want to be successful.
Two Risks for an International Business
It arises from the existence of a foreign government that responds to social needs also outside the company. We said that the government responds to social expectations by providing security to the society it serves. That security may require the government to interfere with the activities of a company, which can reach interference seize the assets of the company.
The big expropriations by the revolutions of the twentieth century are an example of this, but other events expropriation, although less notable are in any way disturbing. The country boasts the largest entrepreneurial freedom, the United States, have laws that allow the government to acquire possession of the resources of companies and foreign investors according to general criteria such as national security assets of the enemy in case of war and simply protecting parties.
If this happens in the country more pro-business world simply increases the risk when we moved countries with more centralized governments and hoarders who resort to these measures to the detriment of foreigners under the reasoning that while they can present their actions as beneficial to his people the feeling abroad is less important.
Political risk is so important that companies should evaluate realistically. Regardless of the promises and guarantees that a government can give a company must not forget that the government responds, finally, not to the company but to their society.
International business requires, therefore, a careful analysis of the trends and social attitudes about business and especially towards foreigners expenses. A joint venture with a local company in the role of secondary partner can also be a good strategy to prevent problems with the local government.
It is also convenient to the local company of the parent company depends on issues such as technology, markets and other services that make local company, by itself, is not sustainable. This reduces the risk of expropriation by making it useless as the local company can not operate by itself without the support of the parent company. This was the strategy followed by the big multinationals like Kodak and IBM when establishing their plants in Overseas countries other than the United States.
Country's Economic and Financial Risk
The other type of risk is the financial risk incurred. Economic risk assumed various aspects, but you can tell that it is primarily a risk. Both the assets of the company and its revenues and profits are measured in the currency of another country. When that country, fundamental economic reasons or circumstantial changes the par value of its currency against the currency of the host country, the foreign assets of the company and its revenues and profits change with it.
When change is for, a revaluation, the company is benefited by the change, but when it devalued the company finds that their investments and income now worth what they were worth and the lower value corresponds get a loss for the year in which the change occurs. This change may negatively impact the company's results in full with consequent problems for her in the markets, its creditors, suppliers and customers.
There are ways to prevent risk and protect against it. The foreign exchange markets provide the so-called futures contracts where a market participant may sell, in advance, the currency of one country to another change ensuring an exchange rate that gives certainty to your financial calculations.
The exhibition company can sell the foreign currency equivalent to the profit you expect to receive in that foreign currency futures market, thus ensuring a favorable exchange rate which may ensure that obtaining an adequate return on investment. Obviously this protection costs and that cost should be considered as part of the cost of doing business abroad, but must say that some tax systems do not see this and not consider it as a legitimate expense for businesses.
The problem incurred to value the assets that the company has in countries other than the country of residence is critical only when you want to sell those assets and repatriate their cost. If the company is established abroad and the value of its assets declines due to a devaluation of the role this loss is not significant and does not have to impact the parent company.
However, when the parent company has attracted funding based on the value of their overseas investments decline in value of these investments has a negative impact on your creditworthiness and may, at any time, making the creditors press for guarantees additional outstanding loans in order to maintain safety margins. This represents a problem for the financial manager and it forces you to commit additional assets in the same credit transaction which means that you can not obtain additional financing if you need them.