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Financial Risks
Several types of financial risk are encountered in international marketing; the major problems include commercial, political, and foreign exchange risk.
(46)They include solvency, default, or refusal to pay bills. The major risk, however, is competition which can only be dealt with through consistently effective management and marketing.(47)Such risk is encountered when a controversy arises about the quality of goods delivered, a dispute over contract terms, or any other disagreement over which payment is withheld. One company, for example, shipped several hundred tons of dehydrated potatoes to a distributor in Germany.(48)The alternatives for the exporter were reducing the price, reselling the potatoes, or shipping them home again, each involving considerable cost.
Political risk relates to the problems of war or revolution, currency inconvertibility, expropriation or expulsion, and restriction or cancellation of import licenses.
(49)Management information systems and effective decision-making processes are the best defenses against political risk. As many companies have discovered, sometimes there is no way to avoid political risk, so marketers must be prepared to assume them or give up doing business in a particular market.
Exchange-rate fluctuations inevitably cause problems, but for many years, most firms could take protective action to minimize their unfavorable effects.(50)International Business Machine Corporation, for example, reported that exchange losses resulted in a dramatic 21.6 percent drop in their earnings in the third quarter of 1981. Before rates were permitted to float, devaluations of major currencies were infrequent and usually could be anticipated, but exchange-rate fluctuations in the float system are daily affairs.
A Political risk is an environmental concern for all businesses.
B One unique risk encountered by the international marketer involves financial adjustments.
C Commercial risks are handled essentially as normal credit risks encountered in day-to-day business1.
D The distributor tested the shipment and declared it to be below acceptable taste and texture standards.
E Floating exchange rates of the world's major currencies have forced all marketers to be especially aware of exchange-rate fluctuations and the need to compensate for them in their financial planning.
F Many international marketers go bankrupt each year because of exchange-rate fluctuation.