Key factors that companies must be aware of before deciding to do business in other country

Table of contents

Introduction 3
1.The essence of risk in international activities 3
3. Classification of international business risks 5
Conclusion 7
References 8

Introduction
The aim of this work is to study key risk factors that can influence the company’s business abroad.
When entering the foreign market, entrepreneurs face certain risks that are present throughout entire activity of the enterprise. Risk refers to the possible risk of loss arising from the specifics of certain natural phenomena and activities of human society. Risk is a historical and economic category.
As a historical category, risk is a perceived possible danger. It shows that risk is historically associated with the entire course of social development. As civilization develops, commodity-money relations appear, and risk becomes an economic category. As an economic category, risk is an event that may or may not occur.
Risk can be managed, that is, various measures can be used to predict the occurrence of a risk event to a certain extent and take measures to reduce the risk.
The problem of managing risk and overcoming uncertainty exists in any sector of the economy, which explains its constant relevance. Any economic entity at any level is inevitably faced with extraordinary situations, unplanned or unforeseen events that need to be adequately responded to in order not to incur losses.

1. The essence of risk in international activities
Business abroad is always connected with certain risks. In general, there are six approaches to determining risk in the work of various economists:
-probability of loss;
-amount of possible loss;
-a function that is primarily the result of the probability and amount of loss;
-variation in the probability distribution of all possible consequences of a risky course of action;
-a half-variation of the distribution of all outcomes, taken only for negative consequences and relative to some established baseline value;
-weighted linear combination of variation and expected value (mathematical expectation) of the distribution of all possible outcomes.
Thus, risk as a separate event has two most important properties from the point of view of risk management-probability and damage.

2.Characteristics of key risk factors in international activities
Transactions between residents of different countries are exposed to a risk that is not present in domestic operations. This risk is associated with the fact that operations are carried out either in partnership with a foreign counterparty, whose activities are predetermined by the characteristics of the external environment of his country, or directly on the territory of a foreign state, where the firm falls into an alien environment for it.
Since international economic activity is organized according to the concept of national sovereignty, many events at the national level can have a serious impact on the business climate in the country.
Events at the national level affect the relative characteristics of local companies and banks and their position relative to the rest of the world. All other things being equal, the liberalization of a country's monetary policy, which lowers interest rates and increases investment and consumption expenditures, will lead to a depreciation of the local currency against other currencies, which will make the export of local goods attractive. The result of foreign operations can be affected by political, social and geographical features of the market, especially such serious events as expropriation, revolution, natural disasters, and wars.
Taking into account these special circumstances, the theory of international business risks was formed. This theory is based on the definition of international business risk as instability in the profitability of international commercial operations caused by events in a particular country, as opposed to events related to an individual economic and financial agent.
The economic, financial and currency components of risk are based on market conditions and correspond to well-known concepts in modern economic and financial theory. Political risk is understood more broadly and includes the possibility or probability of making decisions at the political level that are unfavourable to the company's interests.
«Responsible investment and business operations plays an important role» in promoting business abroad (Responsible Business Conduct Abroad). International business risk refers to the risk arising from any type of international business related to the production of products, goods and services, their sale; monetary and financial transactions; Commerce, as well as the implementation of scientific and technical projects. There are many types of risks, and their classification is necessary for proper management and analysis of international business risks.

3. Classification of international business risks
In eneral, there are the following types of international business risks:
By the time of occurrence,risks are divided into retrospective, current and future risks. The analysis of retrospective risks, their nature and ways of reducing them makes it possible to forecast current and future risks more accurately.
According to the factors of occurrence, risks are divided into:
-political risks are risks caused by changes in the political environment affecting international business activities (border closures, bans on export of goods, military actions on the territory of the country, etc.). «Political risks for international businesses include nationalization and the seizure of assets, war and terrorism, and the failure of local authorities to enforce contracts in the region» (Morello, R.).
-economic (commercial) risks are risks caused by adverse changes in the economy of an enterprise or in the economy of a country. The most common type of economic risk in which private risks are concentrated is changes in market conditions, unbalanced liquidity (inability to meet payment obligations on time), changes in the management level, etc.
By the nature of accounting, risks are divided into:
-external risks are risks that are not directly related to the activities of an enterprise or its contact audience (social groups, legal entities and (or) individuals who show potential and (or) real interest in the activities of a particular enterprise).
-internal risks are risks caused by the activities of the company and its contact audience.
Before planning business abroad, one should first consider risks connected with taxation. “Tax issues, from bilateral tax treaties to indirect taxes, drive how a company’s overseas operations should be set up, how a company’s products should be priced, and how a company can manage its cash” (Vollmer, S.).
By the nature of the consequences, risks of foreign business are divided into:
-net risks (sometimes also called simple or static) are characterized by the fact that they almost always carry losses for international business. The causes of net risks can be natural disasters, wars, accidents, criminal acts, etc.
-speculative risks (sometimes also called dynamic or commercial) are characterized by the fact that they can carry both losses and additional profit for the entrepreneur in relation to the expected result.
By area of occurrence of risks (based on the area of activity and is the largest group). In accordance with the areas of international business, there are usually:
-production risk is the risk associated with the failure of an enterprise to fulfill its plans and obligations for the production of products, goods, services, and other types of production activities as a result of adverse environmental impacts, as well as inadequate use of new equipment and technologies, fixed and working capital, raw materials, and working time.
-financial risk - this risk that accompanies the company's activities and threatens to default on its financial obligations. The main components of financial risk are: currency risk, price risk, financial stability risk, insolvency risk, innovative financial risk, credit risk, and others.
-insurance risk is the risk of occurrence of events stipulated by the terms of insurance, as a result of which the insurer is obliged to pay insurance compensation (the insurance amount). The result of risk is losses caused by inefficient insurance activities both at the stage preceding the conclusion of the insurance contract, and at subsequent stages - reinsurance, formation of insurance reserves, etc. The main reasons for insurance risk are: incorrectly defined insurance rates, and the policyholder's gambling methodology.
Forming a classification related to production activities, the following risks of foreign business can be identified:
-organizational risks are risks associated with errors in the company's management;
-credit risks - risks that the counterparty will not fulfill its obligations in full on time. These risks exist both for banks (the risk of non-repayment of the loan), as well as for enterprises that have accounts receivable, and for organizations operating on the securities market.
-legal risks are the risks of losses due to the fact that the legislation was not taken into account at all, or changed during the transaction;
-technical and production risks - risks of causing damage to the environment (environmental risk); the risk of accidents, fires, breakdowns; the risk of disruption of the operation of the object due to errors in design and installation, a number of construction risks, etc.
-financial risks that play a special role in the classification of international business risks.

Conclusion
Thus, there are a large number of types and classifications of risks depending on the specifics of the company's activities abroad. Since only international business risks are considered, there is no need to consider other types of risks. «To asses the risks of engaging in business overseas, there are practical sources of information available to you» (Metcalf T.).
After classification, you need to understand the ways and methods of analyzing and evaluating the risks of international business. At each stage of the analysis and the risk assessment uses its own methods. The results of each stage become the initial data for subsequent stages, forming a decision-making system with feedback. This system ensures the most effective achievement of goals, since the knowledge obtained at each stage allows you to adjust not only the methods of exposure to risk, but also the goals of risk analysis and assessment for your business.
The basic stage that allows you to form a further risk management strategy is the risk analysis stage.
The objective of a qualitative risk analysis is to identify the sources and causes of risk, stages and activities in which the risk arises, that is, to identify potential risk areas; identify risks associated with the company's activities;predict the practical benefits and possible negative consequences of the identified risks.

References
1. Metcalf, T. Political, financial and economic risks in international business. https://yourbusiness.azcentral.com/political-financial-economic-risks-international-business-17322.html Reference date: August 13, 2020.
2 .Morello, R. Strategies that mitigate international business risks. https://smallbusiness.chron.com/strategies-mitigate-international-business-risks-43016.html Reference date: August 13, 2020.
3. Responsible Business Conduct Abroad. https://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/other-autre/csr-rse.aspx?lang=eng Reference date: August 13, 2020.
4. Vollmer, S. How to do business abroad. https://www.journalofaccountancy.com/issues/2013/feb/20125941.html Reference date: August 13, 2020.