The pros and cons of international trade

Buying and selling in overseas markets offers the potential for businesses to develop and expand opportunities but not without risk

 
Manila, Philippines. International trade can be risky for any business - but with the right strategy, the rewards are great
Manila, Philippines. International trade can be risky for any business - but with the right strategy, the rewards are great

Author: Brooke Hunter

28 Oct 2014

Doing business in overseas markets certainly has its highs and lows, and can be intimidating, especially for SMEs and start-ups. But it is possible for small businesses and large corporations to reap the benefits of expanding operations internationally, and there are varying reasons companies choose to do so.

It is important though that a company researches the market it is trying to break into before making a decision – this includes weighing up the risks and benefits. And although the risks of expanding overseas are rather poignant, the benefits can outweigh them if foreign business is executed to good effect. Certainly this comes down to rigorous research of the country, culture and people the business is ultimately targeting in a foreign setting. Above all, patience is required as setting up any business overseas will take its time to become successful.

Pros:

International growth
According to the UKTI, there is a possibility exporting companies can achieve levels of growth not possible domestically in international markets. Therefore, a company’s sustained revenues from a well-diversified portfolio of overseas customers are vital for a business to benefit.

ROI
Business Case Studies asserts overseas trade works to increase financial performance and ultimately augment the returns on investment. There is then potential for businesses to amplify the commercial lifespan of existing products and services, even if they had become less popular in domestic markets.

Spreading business risk
Director of Smart Currency Exchange Director Charles Purdy says a company may protect itself from unprecedented global disasters and market upsets such as financial meltdown, earthquakes and civil unrest through overseas business. The home market of a business could contract or even disappear during these unstable times, but the business may be saved by the revenue it generates overseas.

Market competition
If a business competes in several markets then it may have the ability to thrive overseas, Business Case Studies states. Companies can improve their competitiveness through the observation of a range of trends in quality, product development, design and packaging.

Exchange rates
As a business begins to trade overseas the reliance it has on its domestic market reduces and risks can be spread, especially in relation to exchange rates according to Business Case Studies. For example, as BCS asserts, if a business does most of its trade in US Dollars it may be beneficial for said business to trade with Japan to spread the exchange rate risk between the Dollar and the Yen, therefore creating benefit for the company.

The benefits of international trade and investment certainly aren’t void of risks though and setting up overseas may not move as quickly and successfully as anticipated. Local customs and legislation can slow things down and a change in policy, cultural difference and exchange rate risks may hinder businesses looking to expand.

Cons:

Exchange rate risk
Because exchange rates fluctuate there is also risk business trading in foreign currencies may not be able to forecast finances accordingly. Eve Watkins of Business Works says currency fluctuations could affect either the value of existing assets or liabilities denominated in foreign currency. She says this could ultimately result in a business becoming less competitive overnight, resulting in a loss of sales and loss of revenue.

Political risk
Investing in different countries whose political regimes can change over time also poses a few risks. Governments could discriminatorily change laws, regulations or contracts governing an investment. According to the Harvard Business Review, interest in emerging markets has soared and host countries have learned more value can be extracted from foreign enterprises through regulatory control. Firms engaged in international business use a combination of legal contracts, insurance and trade in financial instruments to protect income streams. These approaches, however, offer little protection against policy risk.

Cultural risk
In addition to policy, cultural differences could create problems for businesses wanting to trade overseas. UKTI states failure to take into account different cultures might lead to damaging and costly mistakes. This could range from causing offence by not observing correct protocol, to inappropriate packaging and marketing. It goes without saying that the marketing of a certain business in one western country might differ to that of a country that is still developing and has differing cultural habits and beliefs.

Credit risk
It is very easy to overlook the risk of non-payment when trading overseas too, according to UKTI. Businesses should establish the credit rating of potential clients in many countries and guard against non-payment through, for instance, letter of credit or arrange credit insurance. The risk comes with the impact of a customer’s financial drawback of the firm and how to finance the offered credit period.

Related: