Risks in international business

August 2, 2023
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In the ever-expanding realm of globalisation, international business has become a crucial facet of growth strategies for many US tech startups. However, the step towards setting up an overseas branch, particularly in a diverse and complex landscape like India, is riddled with challenges and risks. 

This guide provides an in-depth analysis of the myriad of obstacles a tech firm might encounter while expanding into the Indian market without a local legal entity. Covering key areas such as political and regulatory risk, cybersecurity, intellectual property, commercial and cross-cultural risks, the discussion aims to equip US tech founders with the knowledge necessary to navigate these hurdles. 

Furthermore, it delves into effective strategies for managing economic risks and offers practical insights for hiring local talent. The article concludes with a comprehensive exploration of mitigation strategies, emphasising the role of a local partner like Rapid in ensuring seamless expansion and operation. 

Harness this guide to strategically chart your course through the fascinating yet challenging terrains of international business, with a special focus on the booming tech scene in India.

International Business: Risks and Challenges

International Business: Risks and Challenges

1. Foreign exchange risk

The dynamic landscape of international business is marked by the prevalent foreign exchange risk. Currency exchange rates fluctuate due to various factors, such as interest rates, inflation, political instability and economic performance. According to a 2022 J.P. Morgan report, 76% of US companies suffered financial loss due to unmanaged foreign exchange risk. 

US tech firms eager to venture into India's burgeoning market without establishing a local entity face a heightened threat from such volatility. Exchange rate variations could unpredictably squeeze profit margins and inflate operational costs. 

As Raghuram Rajan, the former governor of Reserve Bank of India, insightfully quoted, "Exchange rate volatility is much more a cause for concern than a depreciation in the currency." This underscores the critical need for implementing effective strategies to mitigate foreign exchange risk.

A comprehensive approach to managing foreign exchange risk could involve regular market monitoring, leveraging financial instruments like forward contracts or options and incorporating currency fluctuation considerations into business planning and strategy. By taking proactive measures, companies can protect their bottom lines and ensure sustainable overseas operations.

2. Political risk

Political risk is a significant aspect of international business, encompassing the potential impact of political instability or policy changes on a company's operations. In India, with its diverse and dynamic political landscape, such risks are magnified. 

Abrupt shifts in government policies or regulations can jeopardise a US tech firm's expansion plans, disrupt operations or erode profitability, particularly when operating without a local legal entity. Staying informed about the political climate and engaging with local experts can help in mitigating these risks.

3. Regulatory risk

Regulatory risk refers to the potential for a change in laws and regulations to impact a business's operations or its industry. For US tech companies eyeing the Indian market without a local entity, navigating through India's complex and frequently changing regulations could be a significant challenge. 

Any misinterpretation or lack of understanding of these laws could result in financial loss, legal complications, and reputational damage. To mitigate this risk, it's essential to stay updated on regulatory changes and seek advice from local experts or consultants.

4. Cybersecurity risk

As businesses evolve digitally, cybersecurity risk increasingly threatens international operations. For US tech companies planning an Indian venture without a local entity, this risk is heightened. The vibrant Indian tech scene unfortunately also plays host to a range of cyber threats. From potential data breaches to cyber attacks, these risks could compromise company secrets, intellectual property, and disrupt business continuity. 

Implementing robust cyber defence systems, promoting security awareness, and complying with global security standards are crucial measures to mitigate cybersecurity risks in international business.

5. Intellectual property risk

In the world of tech, intellectual property (IP) is a valuable asset. For US tech firms stepping into India without a local entity, safeguarding IP rights can pose significant challenges. Inadequate protection could lead to theft or misuse of patents, trademarks, copyrights, or trade secrets, eroding competitive advantages and causing substantial financial losses. 

Understanding India's IP laws, conducting regular audits, enforcing robust IP protection policies and using legal tools such as non-disclosure agreements can mitigate this risk, ensuring the safe-guarding of a company's innovation and competitive edge.

6. Commercial risk

Commercial risk, which entails potential loss from unsuccessful market operations or poorly executed strategies, is a critical consideration for US tech companies looking to venture into India without a local entity. Factors like insufficient market understanding, inappropriate product positioning, or inefficient operations can lead to commercial failure. 

Overcoming commercial risk requires thorough market research, comprehensive understanding of local consumer preferences and meticulous strategic planning. Aligning product offerings with market needs and establishing efficient operational processes can help mitigate commercial risks, ensuring sustainable business growth.

7. Cross-cultural risk

Cross-cultural risk, the potential misalignment between the corporate culture of a foreign business and local culture, is a significant concern for US tech companies entering the Indian market without a local entity. Misunderstandings due to different communication styles, business etiquette, or work values can hinder operational efficiency and productivity. A classic example is the infamous joint venture between Walmart and Bharti in India, which failed due to a significant cultural mismatch. 

Renowned management consultant Peter Drucker once stated, "Culture eats strategy for breakfast," highlighting the essential role culture plays in the success of international business operations. 

Addressing cross-cultural risk involves fostering cultural intelligence, facilitating effective cross-cultural communication, and adapting management practices to the local context.

Managing Economic Risks in International Business

1. Prepare for international fiscal crises

The global economy's volatility necessitates preparedness for fiscal crises, especially for US tech firms aiming to expand in India without a local entity. The 2008 global financial crisis is a stark reminder of how an economic downturn can affect businesses worldwide. 

As noted by economist Nouriel Roubini, "A systemic financial crisis is one you cannot avoid." Companies must develop robust contingency plans, maintain ample financial reserves, and consider diversification strategies. 

Regularly reviewing financial health, performance indicators, and market conditions can help detect early warning signs of a crisis and trigger pre-emptive action, ensuring resilience in the face of fiscal downturns.

2. Make appropriate budgetary provisions

Making judicious budgetary provisions is vital for US tech firms targeting the Indian market without a local entity. 

Accurate budgeting ensures operational efficiency and financial stability, especially in a dynamic market like India. For instance, the introduction of Goods and Services Tax (GST) in 2017 significantly impacted businesses' budgetary planning. 

The legendary founder of Wal-Mart, Sam Walton, once said, "Control your expenses better than your competition. This is where you can always find the competitive advantage." 

Companies must conduct thorough market research, predict potential expenses accurately, and set aside provisions for unexpected costs, ensuring a buffer against economic uncertainties.

3. Get in-country compliance right

Ensuring in-country compliance is crucial for US tech companies expanding in India without a local entity. Non-compliance can lead to severe legal penalties and harm business reputation. 

The 2018 Facebook-Cambridge Analytica scandal, which resulted in a $5 billion fine due to privacy law violations, underscores the importance of compliance. 

Renowned businessman Warren Buffet aptly stated, "It takes 20 years to build a reputation and five minutes to ruin it." Companies must understand and adhere to Indian laws, rules, and regulations, engage local experts for compliance-related matters and continuously monitor regulatory changes to mitigate compliance risks.

4. Prepare to combat energy price shocks

Energy price shocks can significantly disrupt international business operations, making preparation vital for US tech firms setting up in India without a local entity. A notable example is the 1973 oil crisis, which drastically affected businesses worldwide. 

Microsoft's CEO, Satya Nadella, emphasised, "Our industry does not respect tradition - it only respects innovation." 

Companies must innovate in their energy consumption, adopting energy-efficient technologies and renewable energy sources where possible. Regularly monitoring energy market trends, implementing energy-saving measures, and hedging against potential energy price fluctuations can help firms maintain their operational costs and business stability amidst energy price shocks.

5. Strategises against currency risks

Currency risks are a common peril in international business, warranting strategic management for US tech companies venturing into India without a local entity. The Asian Financial Crisis of 1997 showed how currency devaluation can lead to significant business losses. 

Paul Volcker, former Chair of the Federal Reserve, aptly observed, "A nation's exchange rate is the single most important price in its economy." 

Companies must develop hedging strategies, such as using forward contracts or options, to manage currency risk. Regular monitoring of currency markets and working with financial experts can help in devising effective strategies to mitigate the impact of currency fluctuations.

6. Hiring Staff

Hiring the right staff is a crucial component of managing economic risks for US tech firms expanding in India without a local entity. According to a study by the Society for Human Resource Management, the average cost of a bad hire can be up to five times the individual's annual salary. 

As Steve Jobs once noted, "The secret of my success is that we have gone to exceptional lengths to hire the best people." 

Companies must invest in rigorous recruitment processes, understand local employment laws, and adapt to the local culture to attract and retain top talent, thereby mitigating human resource risks.

Strategies to Mitigate Risks in International Business

1. Financial risk

Managing financial risk is paramount in international business, particularly for US tech companies venturing into India without a local entity. The 2008 global financial crisis illustrated how unmanaged financial risks could topple even giants in the industry. 

As billionaire investor Warren Buffet once said, "Risk comes from not knowing what you're doing." 

Companies must maintain healthy cash flows, ensure profitability, manage debts efficiently, and hedge against possible market risks. Utilising financial risk management tools, having an effective financial reporting system, and regularly auditing financial operations can help in effectively mitigating financial risks.

2. Political risk

Mitigating political risk is vital for US tech companies seeking to penetrate the Indian market without a local entity. Venezuela's nationalisation of foreign-owned oil assets in 2007 serves as a stark reminder of potential political risks. 

Political strategist Zbigniew Brzezinski once said, "We cannot dictate to other sovereign nations." 

Hence, companies need to stay informed about the political landscape, develop good relationships with local authorities, and adapt their strategies according to the political climate. Engaging with local experts who understand the nuances of the political landscape can significantly help in foreseeing and mitigating potential political risks.

3. Regulatory risk

For US tech companies expanding into India without a local entity, mitigating regulatory risk is crucial. The Volkswagen emission scandal is a clear example of how regulatory non-compliance can result in huge fines and damaged reputation. 

As former US Supreme Court Justice Louis Brandeis once stated, "If we desire respect for the law, we must first make the law respectable." 

Companies need to keep abreast of regulatory changes, engage in regular compliance audits, and develop a comprehensive understanding of local business laws. Engaging with local legal consultants can also help manage regulatory risks effectively.

4. Logistical risk

Logistical risks pose substantial threats to US tech companies launching in India without a local entity. For instance, the Suez Canal blockage in 2021 demonstrated how logistical disruptions can significantly affect global supply chains. 

As Tom Peters, a leading management guru, notes, "Excellent firms don't believe in excellence - only in constant improvement and constant change." 

Companies must ensure robust supply chain management, invest in advanced logistics technologies, and have contingency plans in place for unforeseen disruptions. Collaborating with reliable local logistics partners can also be instrumental in mitigating logistical risks, ensuring smooth and efficient operations.

Avoid International Business Risks With Rapid

Why Choose Rapid

At Rapid, we help you tackle the challenges of expanding into India by handling local laws, compliances, and employee liabilities. 

Our robust agreements offer you complete control and ownership of your assets, while our secured and scalable system protects your data, complying with global standards like GDPR, CCPA, and DPR. 

With our passionate team available 24x7, we ensure your business operates smoothly and successfully. 

Trust Rapid, and let us handle the hassles of international business while you focus on growing your tech venture.

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