As a senior leader of a multi-national corporation, international business expansion is not just an option for you, it is a strategic imperative for sustainable growth and long-term success. Expanding operations across borders allows your company to tap into new markets and capitalize on opportunities to increase revenue and diversify the supply chain. However, with the allure of international expansion comes a host of risks that executives must navigate. From cultural differences to regulatory challenges and hostilities between nations, conducting business internationally requires a strategic approach to mitigate potential pitfalls. It is crucial for companies to approach global expansion with a comprehensive understanding of the associated risks.
Let’s explore the key risks of international business and provide insight into how companies can proactively manage these challenges.
Cultural Risk
One of the foremost risks of conducting business internationally is the intricate web of cultural nuances and communication differences. What may be acceptable or even expected in one culture can be perceived quite differently in another. Misunderstandings can lead to strained relationships, failed negotiations and damage to a company’s reputation.
Hiring a local management team runs the risk that they prioritize local interests over corporate best interests. Relocating an expat to run foreign operations carries a risk of lacking language skills and cultural awareness.
So, how can your company ensure that your business is well represented internationally? You should carefully consider employee qualifications. It’s recommended to seek out international managers, who have demonstrated their reliability in similar positions and who can communicate effectively both with local employees and American management.
While effective cultural and sensitivity training is essential to any business, it is vital for companies with international operations. Devoting genuine interest to the local culture demands patience and dedication, benefiting not just the business, but the team as well. It pays for employees to understand and respect cultural norms of their colleagues.
Political Risk
As we have experienced throughout the world recently, international businesses encounter various types of political risk. Political instability in the form of conflict, rebellion, war and acts of terrorism have the potential to disrupt business operations across entire regions. Sudden changes in government policies, trade restrictions, and legal frameworks can have a profound impact on operations and potentially even the seizure of corporate assets.
To manage these risks, companies must stay abreast of political developments, maintain strong legal counsel and establish contingency plans that allow for agility in response to changing regulations. Being realistic with expectations, conducting careful research and taking extra precautions, like diversifying trade partners, will further mitigate potential risks. Another option to consider is working with an organization like the Multilateral Investment Guarantee Agency (MIGA) of the World Bank. MIGA is an agency of international experts that promotes economic growth in areas of political unrest and advises on international dealings to design a customized insurance policy at a reasonable price.
Supply Chain and Logistics Risk
International business can complicate or extend supply chains and presents other logistical concerns. The ability to source raw materials and deliver your product on time and on budget requires capable distribution channels. Disruptions caused by uncontrollable events, such as natural disasters, geopolitical actions or pandemics, can lead to delays in production and distribution.
The most common strategy to mitigate supply chain and logistics risk is supply chain diversification. Diversifying your supply chain with suppliers from multiple nations or regions may reduce local risk, such as severe weather or political unrest. This may hinder the ability to gain favorable pricing and limit negotiating strength, but it allows companies to ensure a resilient supply chain.
Another strategy could be to grant exclusive licensing agreements with supply chain partners, essentially transferring the risk to the partner. It will allow your company to negotiate more favorable pricing and service level agreements. The most important aspect of exclusive supply or distribution agreements is setting clear terms that are favorable to your business.
Regardless of the strategy, it is important to conduct thorough risk assessments and implement robust contingency plans to ensure a resilient supply chain.
Regulatory Risk
Operating in multiple international jurisdictions creates a myriad of regulatory concerns. These arise from the need to comply with diverse and, often, complex regulatory frameworks in various countries. There are many types of regulatory risk, but some of the most common involve environmental regulations, data privacy, labor and human rights laws, and taxes.
As an example, many countries have stricter environmental standards than the U.S.; managing international environmental regulations is a crucial aspect of corporate responsibility. It is important to understand the specific requirements, standards, and reporting obligations applicable to the company’s industry and activities. As a result of these regulations, local filing and permitting can be confusing, and investing in the infrastructure necessary to comply with the requirements can affect a business’s bottom line.
Data privacy laws continue to be a trending topic and a concern for most companies. The most widely known and influential regulation is the General Data Protection Regulation (GDPR), which went into effect in May 2018. It is a strict consumer privacy and data security law. Regardless of an organization’s location, this law affects and imposes obligations on those that process personal data of anyone in the European Union (EU). The GDPR enforces substantial fines for individuals or entities found in breach of its privacy and security regulations, with penalties soaring into the tens of millions of euros. In addition to the GDPR, and as reported by the United Nations Conference on Trade and Development, more than 100 countries have established data protection and privacy laws.
Corruption Risk
A serious anti-corruption compliance program is a crucial component for any business operating internationally. The U.S. Foreign Corrupt Practices Act (FCPA) was instituted with the objective of rendering it illegal for specific individuals and organizations to offer payments to foreign government officials with the aim of facilitating business acquisition or perseveration.
The FCPA is enforced by the U.S. Department of Justice (DOJ) and the U.S. Securities Exchange Commission (SEC). In recent years, the DOJ has emphasized the requirements for an adequate FCPA compliance program. It is extremely important that a company handles incidents properly. Violations of the FCPA come at a significant cost, and it can harm your business. Routine violations cause employees and investors to lose confidence in corporate leadership. This is particularly true in the case of bribes; although government officials may be the intended target, company officials often profit from corruption as well.
Beyond the FCPA, multi-national companies are subject to anti-corruption laws in additional countries, such as the U.K. anti-bribery act. Those countries may even impose more stringent anti-corruption requirements, such as commercial bribery to private persons. Local management teams should be well versed in conducting their work with ethical standards.
Health and Safety Risk
Comprehensive awareness of a nation’s health and safety hazards is essential, not only for basic business travel, but also for the establishment of a permanent company presence. Ensure employees are up to date on all recommended vaccinations. The Centers for Disease Control and Prevention provides information and recommendations for specific cases.
In-country access to emergency healthcare is essential for all employees, as is telephone access to an adequate 24-hour emergency health center. Employees should also be familiar with emergency evacuation options. Further, travel medical insurance may be needed for some employees.
Legal Risk
It is crucial for both business owners and corporate lawyers to understand major legal differences between the U.S. and other countries. The U.S. is an English Common Law country, while most of the rest of the world is based on European Civil Law. This means that American law almost never sets global precedents. In fact, U.S. law is often considered irrelevant.
The legal burden is on U.S. companies to ensure compliance with local and international laws. If your corporate lawyer has a deep understanding of the relevant law, your standard distributor agreement will be more efficient and result in fewer disputes with distributors.
Financial and Currency Risk
The U.S. dollar is not infallible, and global businesses are exposed to currency risks due to the volatility of exchange rates. Fluctuations in currency values can impact the cost of goods, profit margins and overall financial stability. To combat financial and currency risk, companies should consider hedging some of its foreign investments. Hedges aim to limit the risks of adverse price movements that can negatively impact a company’s profits and return on investment. Additionally, closely monitoring currency trends, negotiating contracts in stable currencies, or utilizing financial instruments can provide a level of protection and help mitigate these risks.
Cybersecurity Risk
The importance of implementing a strong security infrastructure before expanding internationally cannot be underestimated. According to the Global Risks Report 2022 by the World Economic Forum (WEF), in 2020, malware attacks increased 358% and ransomware attacks increased 435%. It also noted that 95% of cybersecurity issues were traced to human error. The ever-changing cyber threat landscape makes it difficult to stay ahead of attacks, but with the proper infrastructure in place, establishment of internal controls, ongoing risk assessment, and training and monitoring, cybersecurity risk can be reduced.
Takeaways
Best practices for international business include strong risk assessment and mitigation strategies against fraud, misconduct, cybersecurity, and other potential issues. Given the ever-evolving nature of the global business environment, the strategy should be adaptable and revisited often. This includes the mobilization of your internal audit team. Internal audit plays a crucial role in the governance, risk management and internal control processes of multi-national corporations. By systematically reviewing and testing internal controls, internal audit teams ensure that an organization’s processes are aligned with its objectives and regulatory requirements. This proactive risk management approach is essential for safeguarding the company against potential financial losses, legal issues and damage to its reputation.
In addition, internal audit functions as a guardian of compliance by assessing an organization’s adherence to laws, regulations and internal policies across different jurisdictions. This includes evaluating the effectiveness of compliance programs, ensuring proper documentation, and providing assurance to senior management and stakeholders that the company is operating within legal and ethical boundaries.
If your business operates internationally or has plans to expand globally, our team can help identify and mitigate the various challenges you may encounter. We can be the linchpin in your governance structure, offering invaluable insights and assurance to management, the board of directors, and other stakeholders, contributing to the long-term success and sustainability of your company as you operate in a complex and dynamic global business environment. Contact us today to learn more about how our team can assist you.
About our authors
Kerri Urbanski
Kerri Urbanski, CPA, CFE, CRMA, is a director of Internal Audit Services with Sikich’s Governance, Risk and Compliance practice. She is responsible for her team’s delivery of internal audit and Sarbanes-Oxley compliance services. She has audit, risk management and business operations experience with a proven talent for aligning audit strategy with established risk management frameworks to achieve positive operational impact.
Veronika Fritz
Veronika Fritz, CPA, is a partner who has led the planning, development and execution of financial, application and operational audits, compliance reviews, system implementations, and business process evaluations. Her focus is an integrated approach, and her expertise spans all areas of business to help management with their process and control environment. Veronika’s strong business and technical skills enable her to understand business risks and recommend appropriate solutions.
