What are the two types of political risk that affect companies conducting global business?

Cross-cultural risk refers to a situation or event where a cultural miscommuni- cation puts some human value at stake. Cross-cultural risk is posed by differences in language, lifestyles, mindsets, customs, and/or religion. Values unique to a culture tend to be long-lasting and transmitted from one generation to the next. These values influence the mindset and work style of employees and the shopping patterns of buyers. Foreign customer characteristics differ significantly from those of buyers in the home market. Language is a critical dimension of culture. In addition to facilitating communication, language is a window on people’s value systems and living conditions. For example, Eskimo languages have various words for “snow” while the South American Aztecs used the same basic word stem for snow, ice, and cold. When translating from one language to another, it is often difficult to find words that convey the same meanings. For example, a one-word equivalent to aftertaste does not exist in many languages. Such challenges impede effective communication and cause misunderstandings. Miscommunication due to cultural differences gives rise to inappropriate business strategies and ineffective relations with customers. (Cavusgil, Rammal, & Freeman, 2011, p.12)

Country risk (also known as political risk) refers to the potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country. Country risk includes the possibility of foreign government intervention in firms’ business activities. For example, governments may restrict access to markets, impose bureaucratic procedures on business transactions, and limit the amount of earned income that firms can bring home from foreign operations. The degree of government intervention in commercial activities varies from country to country. For instance, Singapore and Ireland are characterized by substantial economic freedom—that is, a fairly liberal economic environment. By contrast, the Chinese and Russian governments intervene regularly in business affairs. Country risk also includes laws and regulations that potentially hinder company operations and performance. Critical legal dimensions include property rights, intellectual property protection, product liability, and taxation policies. Nations also experience potentially harmful economic conditions, often due to high inflation, national debt, and unbalanced international trade (Cavusgil, Rammal, & Freeman, 2011, p.13).

Currency risk (also referred to as financial risk) refers to the risk of adverse fluctuations in exchange rates. Fluctuation is common for exchange rates, or the value of one currency in terms of another. Currency risk arises because international transactions are often conducted in more than one national currency. When Frankfort, Michigan based fruit processor Graceland Fruit, Inc. exports dried cherries to confectioneries in Japan, it will normally be paid in Japanese yen. When currencies fluctuate significantly, however, the value of the firm’s assets, earnings, and operating income can be reduced. The cost of importing parts or components used in manufacturing finished products can increase dramatically if the value of the currency in which the imports are denominated rises sharply. Inflation and other harmful economic conditions experienced in one country may have immediate consequences for exchange rates due to the growing interconnectedness of national economies.(Cavusgil, Rammal, & Freeman, 2011, p.11)

Commercial risk refers to the firm’s potential loss or failure from poorly developed or executed business strategies, tactics, or procedures. Managers may make poor choices in such areas as the selection of business partners, timing of market entry, pricing, creation of product features, and promotional themes. While such failures also exist in domestic business, the consequences are usually more costly when they are committed abroad. For example, in domestic business a company may terminate a poorly performing distributor simply with advance notice. In a foreign market, however, terminating business partners can prove costly due to regulations that protect local firms. Marketing inferior or harmful products, falling short of customer expectations, or failing to provide adequate customer service may harm the firm’s reputation and international performance (Cavusgil, Rammal, & Freeman, 2011, p.12).