Risk Factors Analysis Term Paper

Pages: 8 (2782 words)  ·  Bibliography Sources: 16  ·  File: .docx  ·  Level: Master's  ·  Topic: Business

Internationalization Risk Factor Analysis

Although the multinationalization of corporation began in earnest following the end of World War II, multinational companies were active in Europe from the 14th century and since around the fin de siecle in the United States. Today, though, a growing number of enterprises of all types and sizes have found their markets saturated at home and are seeking expanded business opportunities abroad. This trend, of course, has been fueled by recent innovations in telecommunications and transportation that facilitate such expansions to foreign countries. In their haste to launch a subsidiary in a foreign country, though, some corporate managers may be overlooking some of the fundamental risks that are associated with internationalizing their operations. To gain some fresh insights into the types of risks and their capacity to adversely affect the launch of a new enterprise in a foreign country, this paper reviews the relevant literature concerning intellectual property theft, governmental corruption, foreign exchange rate instability, terrorism, a lack of technological infrastructure, cross-cultural conflict and limits on foreign ownership. A summary of the research and important findings are presented in the conclusion.


The following risk factors are among the most salient for companies seeking to expand their operations abroad.

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Term Paper on Risk Factors Analysis Assignment

Intellectual property theft risk: In the Digital Age, intellectual property, frequently consisting of little more than ones and zeros, becomes increasingly difficult to protect. For instance, according to Miller, "The same technological advancements that have been instrumental in the globalization of markets have also resulted in expanded opportunities for the theft of intellectual property" (1999, p. 75). Not surprisingly, the problem with protection intellectual property rights is the most severe in emerging nations where relevant laws may be vague, nonexistent or poorly enforced. In this regard, Miller, "As demand has increased in developing countries for telecommunications and information-age technologies, it has created a large secondary market for pirated products and services. With the expanding digitization of information flow, this form of theft has become extremely difficult to contain" (1999, p. 75). Although the costs that are associated with intellectual property crimes to U.S. enterprises remains unclear because of the nefarious and secretive nature of these activities, with some analysts estimating the figure at between $15 billion and $40 billion, but with others placing the worth of intellectual property is stolen each year at as much as $200 billion (Miller, 1999).

Not only developing nations, but some industrialized nations are also risky with respect to intellectual property rights. For example, intellectual property rights are weak in Russia and the Czech Republic (Nivett, 2004). It should be noted, though, that Grigg (2003) suggests that China is among the worst such offenders, being cited time and again as a culprit. For instance, Grigg advises that, "Every firm that sets up for production in China has to turn over its technology [and] intellectual property theft by the Chinese is very common" (p. 13). These are especially salient factors for the U.S.-based companies lining up to doing business in this burgeoning economic powerhouse. Indeed, Pershern (2007) goes so far as to assert that, "China is notorious for tolerating rampant intellectual-property theft" (p. 698).


Government policy corruption risk.

One of the harsh realities in doing business abroad is the high incidence of corruption that can extend into the highest levels of governmental authority. When corruption is institutionalized in this fashion, bribery and kickbacks can become an absolute necessity for doing business. While corruption exists in all countries, the problem appears to be particularly acute in developing nations. In this regard, Wilhem and Milewicz point out that, "Entrepreneurial development in transitional economies has been hindered by underdeveloped legal and financial infrastructure and considerable administrative corruption in different government offices" (2000, p. 57). Moreover, corruption represents a significant risk because it can derail a company's honest efforts to promote its products and services, and the problem tends to feed on itself in a self-perpetuating manner. For example, Wilhem and Milewicz add that, "Without a legal regulatory framework, both efficiency and equity are adversely affected while crime and corruption are allowed to grow" (2000, p. 57). Although emerging nations are frequently characterized by high levels of corruption, the problem also extends to developing countries such as China as well. Indeed, according to Grigg, "Any investment banker familiar with the Chinese system will tell people preparing to set up over there that they should pad their expenses by at least 40% to allow for the graft, bribes, and other payoffs involved in doing business over there. Given the pandemic corruption of the Chinese system, the federal government's role in socializing risks and losses for U.S.-based firms looms even larger" (p. 13). Likewise, although many of the former Soviet-bloc nations continue to be plagued by corruption, Nivett points out that, "Russia is more affected by corruption than Central Europe" (p. 4).


Foreign currency exchange rate instability risk.

Companies that internationalize their operations run two distinct risks with respect to foreign currency exchange rate instability. For instance, according to Love (1999), "Selling overseas introduces two categories of risk beyond problems resulting from governmental interference in international transactions whether in U.S. dollars or foreign currency. Exchange rate risk occurs when sales are denominated in currencies other than the seller's. What will the currency be worth when it is received and converted into dollars?" (p. 33) The potential for unstable foreign currency exchange rates is one of the more perplexing risks that companies encounter when they internationalize their operations. In this regard, Murphy (2000) points out that, "foreign currency exchange rate changes systematically affect the average investment and therefore can not be diversified away" (p. 37). As a result, American companies can incur an enormous loss of value on their currency as a result in fluctuations in the foreign currency exchange rate. The increasing volatility of the foreign exchange market in recent years has been attributed to several factors, including the following; (a) exchange rate fluctuations that are much larger and tend to persist longer than assumed, (b) the inability of central banks to defend or stabilize their currencies through intervention, (c) the declining role of fundamental factors in explaining the behavior of the market, (d) the steady growth in the use of foreign currency derivatives, (e) the growing size of the market because of rapid globalization, and (f) the increasing use of automated trading and real-time information which are believed to have at least contributed to the increase in the volatility of the market (Ramcharran, 2000, p. 40)..

In some cases, this loss can represent a significant percentage of the currency value as experienced following the onset of the so-called "Great Recession" that persisted from 2007 to 2009. In this regard, Rose (2010) advises that the most important bilateral exchange rate as a gauge of economic health is the dollar to euro rate. Before the onset of the recent Great Recession in August 2007, the exchange rate was $1.36 per euro and on 1 January 2008 it stood at $1.47; however, by the end of 2008, the exchange rate had plummeted to just $1.39 (Rose, 2010). By November 2009, as the lingering effects of the global economic downturn abated, the exchange rate returned to its January 2008 level and stood at $1.48 to the euro (Rose, 2010).


Terrorist strikes risk: the risk of having terrorist attacks

Some authorities maintain that terrorist attacks currently represent a far greater threat than other anthropomorphic and natural disasters and risk that are associated with corporate internationalization. For example, Wolfendale (2007) argues that, "Non-state terrorism threatens many things: security, lives, values, freedom, democracy, and the existence of civilization itself, and poses a greater threat than the threats posed by war, invasion, accident, natural disasters, and criminal activity" (p. 75). Likewise, Lee (2006) also places the threat from international terrorism above all other types of threats today. In this regard, Lee emphasizes that, "International terrorism (especially its nuclear form) is the most serious non-state threat the world currently faces" (p. 242). Among the countries that are currently at relatively high risk of being adversely affected by high levels of international terrorist activity is the United Kingdom where the growing presence of religious fundamentalists represents a national security threat (Martinez, 2006). This threat increased significantly following the terrorist attacks of September 11, 2001, and current signs indicate that the risk of further terrorist attacks in the United Kingdom are no so much as matter of "if" but "when," with London being at particular risk (O'Brien, 2006). For example, O'Brien reports that, "A study conducted in 2003 into the risk of a terrorist attacks identified London as a 'top terrorist target,' and the city has been on a higher risk rating of attack than the rest of the United Kingdom" (2006, p. 64).


Lack of technological infrastructure risk.

In order to take advantage of the information and communications technology (ICT) that fuel modern business, a country must have the requisite infrastructure in place. Companies that rely on their ICT resources to… [END OF PREVIEW] . . . READ MORE

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