Introduction to Political and Economic Risk/Cultural Risks
|Unit 1.1- Intro to Political and Economic Risk||
Cultural risks occur as the result of different expectations, misunderstandings and miscommunications between a buyer and the seller.
- A seller wants to make a large sale to meet a quarterly quota. The buyer wants to be polite and may be saying “yes,” acknowledging the seller’s explanation of the features and benefits of the product. The seller asks for the potential buyer’s standard shipping instructions, which are then promptly provided. The seller enters the “order,” and the shipment is made. But the buyer has never placed a proper order and therefore rejects the shipment.
- A request for a quotation arrives that is misinterpreted to be a purchase order. A lack of communication resulting from language problems results in a shipment being made that has not been ordered.
- A buyer promises to pay promptly when the goods are delivered. What the seller fails to realize is promptly will be after the month-long holiday in the buyer’s country during which the goods may be shipped but will not be picked up by the company until after the holiday. Thus payment is delayed, and demurrage costs may accumulate.
- A seller, by not doing extensive marketing research, exports a product for distribution only to find out that for religious and cultural reasons it will not be purchased and therefore is rendered worthless.
Risk is an inherent part of all business transactions. There is risk of slow or non-payment in domestic transactions that arise primarily from the unwillingness or inability of a buyer to pay a seller when payment is due. When international transactions take place, more risks are added because of the laws, regulations and politics of the buyers’ and sellers’ countries as well as possible third countries. The financial condition of a buyer’s country may cause delayed or blocked payments. Changes in the relative value of buyers’ and sellers’ currencies pose risks. The number of documents required in many cross- border transactions opens the possibility of missing documents or discrepancies in the forms to be filed, leading to slow or blocked payment.
There are many misunderstandings that can occur in business transactions negotiated among countries in distant time zones, with different languages, varying cultural practices and dissimilar ethical values. Any or all of these can contribute to payments not being received when due.