Managing business and export risk

As you identify potential markets, it’s important to have country risk on your radar and to conduct a thorough evaluation of each market. Knowing your risks allows you to plan for them—through insurance, hedging and other risk management activities. With a plan in place, your company will know exactly how to respond if a risk scenario presents itself once you are in the market.

Country analysts define country risk as the overall risk, in a certain country, that a situation or event could prevent you from getting paid or from delivering on a contract. Worst-case scenarios may cause a company to lose assets and inventory or to have human resources stranded in another country.

For some markets, country risk requires higher returns to justify taking the risk. Be sure to do a risk-return analysis for any new market you investigate. Understanding this risk allows you to prepare alternative scenarios so you’re prepared for a range of possibilities—and so you have contingency plans in place to deal with them.

Be sure to include country risk in your risk management plan.

There are 5 main types of country risk. Asking the right questions can prepare you to do the level of country risk assessment needed before deciding whether to enter that market. This is also an important exercise in strategic management. The answers will help guide your business decisions related to the market.

Political Risk

Changes in national or state governments—or even policy changes by a long-sitting government—can negatively impact how you do business in a country or region. To identify your political risks, ask yourself these questions:

• What is the political situation in the country? How might it affect your industry?
• What type of government leadership exists?
• Are the country’s tax laws, fiscal policies, trade tariffs and import/export policies likely to support business success?
• How peaceful is the country?
• Is a national election coming soon?
• Can the government take away potential profits? (see the Index of Economic Freedom)
• Does the country have foreign investment restrictions in place?
• Does bribery or corruption influence government decisions? (see the Corruption Perception Index)
• How will Canada’s legislation on foreign corrupt practices affect your business dealings in the market?

Financial (or economic) risk

Achieving your corporate goals depends on cash flow and access to working capital. If important financial supports falter in an overseas market, you will need to react quickly. Identify your in-market financial risks by asking:

• Is the country’s economy stable or volatile?
• What are the country’s exchange rates? Do they tend to fluctuate?
• Do the country’s monetary and fiscal policies support international businesses?
• Will your customer pay when your invoice comes due?
• How will a rise in the inflation rate affect your operations and your customers’ buying power? How will it change supply and demand in the country?

Social risk

Social risk refers to the socio-economic factors that can affect your business in an international market. Look carefully at social and cultural changes taking place in the country—and examine the trends and patterns influencing society. Ask yourself these questions:

• How important is culture in the market and how might it affect your business?
• Is the country’s middle class thriving, emerging or non-existent?
• Is unemployment high and disposable income low?
• Are corruption and bribery rampant?
• Does the government support or ignore women’s rights? Health and education? The environment?
• Does the country encourage or enforce socially responsible business practices, such as creating job opportunities for the local labour force or minimizing the displacement of citizens?

Legal risk

As an exporter, your company will sign contracts governed by the laws and policies set in your chosen market. Identify your legal risks by asking:

• What laws regulate your industry in the market?
• How would changes in legislation related to your industry impact your business?
• How might the country’s consumer laws, labour laws or safety standards affect your venture?
• How will your contracts be structured, in which language and how will issues be resolved?

Environmental risk

While you can’t influence the climate or weather in your target market, you can prepare for it. That’s why it’s important to know if your export market sits in an earthquake zone or deals with regular flooding. Ask yourself these questions to identify your environmental risks:

• What environmental concerns are relevant to your industry?
• How will the country’s climate, geographic location and weather affect your business?
• How will climate change impacts influence your industry?
• What environmental offsets does your business need to consider?

When you do business in international markets, especially in emerging markets, there’s always an element of risk. Country risks flow along a continuum from:

• Common (anticipated): A customer cancels a contract or does not pay.
• Serious (unanticipated): A national government changes its foreign investment rules in ways that threaten your business interests and assets in the country.

Even markets you know well, such as the United States, carry risks such as non-payment. Beyond preparing a risk management plan, there are other concrete steps you can take to mitigate your risk:

Do your research

Your export strategy is the first step to preparing for a new market. Make sure to conduct extensive market research to evaluate the country and confirm that it’s the right fit for your business. The following resources will help you assess the market and the country risk:

• The Trade Commissioner Service’s (TCS) market reports are available by region, country and industry sector free of charge. The U.S. Commercial Service also has a wide range of country commercial guides. EDC’s Economic Insights newsletter will help you identify opportunities and risks of doing business abroad by reporting on indicators and trends that could affect your business decisions.
• EDC’s market entry advisors in Canada can help you find the right people to connect with in the export markets that interest you.
• EDC’s country portal provides risk information on almost 200 markets
• Trade commissioners, located in 161 cities in Canada and abroad, are available to provide guidance, identify qualified leads and offer on-the-ground contacts in your chosen markets.

Get to know the market

Visit

Take the time to visit the market as often as you need. Get to know the country, its business climate, its culture and its people. Meet decision makers and potential business partners. Before you go, enlist the support of a translator to translate your corporate and marketing materials into the local language.

You might also need to book an interpreter for your visits to the market. The trade commissioners in Canada’s embassies and consulates can connect you with reliable interpreters or other professional services in your target market.

Join a trade mission

EDC, along with the Government of Canada, provincial and territorial governments, and industry associations all host trade missions to key markets abroad. Some focus on specific industry sectors, while others are open to a variety of industries. Learn more about upcoming Government of Canada trade missions.

Go to an industry trade show

What better way to explore a market’s potential than to attend a trade show or event? Trade shows offer excellent opportunities to conduct market research, evaluate the competition, make contacts and meet potential customers and partners. The Trade Commissioner Service maintains an up-to-date list of international trade shows and events around the globe.

Find reliable partners

Success in any country depends on the people you choose as partners in your export journey: accountants, banks and financial institutions, customs brokers, distributors and others. It takes time to build a reliable network of on-the-ground professionals with the expertise and local knowledge you need to succeed.

• Accountants will help you navigate the country’s banking system, taxation system and other financial requirements of doing business in the market.
• Banks and financial institutions (including insurance companies and export credit agencies like EDC) work with you to protect cash flow and extend credit in export markets.
• Customs brokers can clear your import shipments, prepare documentation for export shipments, and collect duties and taxes.
• Investors may provide the much-needed funds your company requires to expand into the market.
• Lawyers can clarify the language of trade agreements and advise you on a country’s customs laws, tariffs and other legal issues.
• Local distributors buy your products from you, warehouse them and sell them to resellers or consumers in your target market.
• Sales agents can represent your company and sell your products or services in the market, usually in exchange for a commission.
• Technology partners often bring expertise and innovative solutions to enhance or support your offering in the market.

Choose your market entry strategy

When entering new markets, most exporting companies ask themselves some important questions: Should we sell our products directly to the market? Use a distributor? Hire a sales agent? Open a local office? While the choice is up to you, each has its pros and cons:

Direct sales to the market

Direct sales within a market occur when you have established a relationship with a customer in-person, online or by telephone. also sell through your web site and by telephone. When you sell directly to a market, it’s important to visit the market regularly.

Distributors

A distributor will buy from you, warehouse your products and sell them to the market and their customers.

Sales agent

A sales agent sells your products or services in the market and receives a commission to do so.

Opening a local office

Establishing a local presence means you open a branch or subsidiary in the target market or enter into a joint venture with a local company.

Foreign affiliate: is it right for you?

A foreign affiliate is a company related to, but not strictly controlled by, a corporation. This may be a subsidiary company that is owned or controlled by another company. It operates as a local business, which means it follows the regulations and laws of the country in which you establish your presence. You also pay local country taxes.

A foreign affiliate is the most common way that Canadian companies tend to set up operations abroad. It can take any of the following forms:

• Foreign office—Also known as a local office, this is when a company establishes a presence in the market.
• Joint venture—A joint venture is when you partner with another company, or multiple parties, to share the cost of operating in an international market. You may partner with a company that is well-established in the market to position your venture for success when you enter the country.
• Manufacturing plant—Your company may purchase or establish a manufacturing plant in a market to enhance your presence there or to benefit from reduced operational costs to produce your product.
• Purchase locally—Some international investors choose to buy an existing company in the market to leverage its brand and customer base.

While opening a foreign affiliate is generally the most expensive and time-consuming way to enter a market, the rewards can be great for companies that choose this route.

Most Canadian companies use their foreign affiliates to sell their products and services in the market. Others use them to produce products for the market or to warehouse products for local distribution.

Operating a foreign affiliate has helped many Canadian companies thrive. In a survey of Canadian companies with foreign affiliates, EDC found that companies reported the following benefits:

Here are some valuable resources to help you investigate and plan for country risk:

• EDC’s Country Risk Quarterly provides risk information on more than 100 countries.
• The World Bank Group’s Doing Business website examines business rules that apply to local firms in 190 countries and in selected cities worldwide. The rankings section looks at how easy it is to do business in these places.
• Transparency International, based in Germany with 100 chapters elsewhere, publishes the yearly Corruption Perceptions Index that measures the perceived level of public sector corruption in 180 countries.