Introduction to Political and Economic Risk

Unit 1.1-Introduction to Political and Economic Risk

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Return to Trade Finance Module 1: Political and Economic Risk

Unit 1.1- Introduction to Political and Economic Risk

International business requires a series of screenings of the four major areas of business: finance, marketing, personnel and production. The initial screening is to evaluate the basic need or potential for foreign trade and investment. The marketing department of a company is responsible for this evaluation domestically. The factors used in this evaluation process may have to be modified for the foreign market but are usually successful when such is done. The studies done for domestic markets do not apply in the foreign markets because of the different socio-cultural and socio-economic forces that come into play. Economic and financial sources are evaluated by the finance area of a company. This area does the planning and forecasting to evaluate costs and output which can be easily adapted to the foreign markets by adding in the additional costs associated with international trade. Investigations of political and legal forces are often outsourced by companies and are adequately covered by doing so. Several screenings that are often overlooked which can negatively impact a company if not properly evaluated are socio-cultural forces and competitive forces. Another factor is not knowing the foreign environment. This assessment usually requires a personal visit.

Unit Objective

The goal of this unit is to introduce you to the political and economic risks that arise when operating in a global environment. These include financial risks associated with slow or nonpayment as well as the financial consequences of the failure to perform contractual obligations. By the end of this unit your will be able to:

Identify the risks of slow or nonpayment in international trade
Identify the effect of the risk of slow or nonpayment
Identify the difference between a domestic risk and a risk as a result of international trade
Identify in general terms what is meant by a “country-related risk,” its categories and components

Unit Outline

Correlation: Materials from this unit correlate with NASBITE CGCP's Knowledge Statement 04/01/01: Knowledge of political and economic risks causing late and/or non-payment from overseas markets (e.g., cancellation/failure to grant U.S. export license, civil unrest, foreign currency delays/shortage)