Benefits and Risks of International Business

International business offers real benefits to the individual firm that undertakes it. The most direct benefit is access to a much larger market than the domestic one alone, which allows a firm to sell greater volumes and earn greater overall profit than it could by serving only its home country. Larger-scale production for a bigger combined market also allows the firm to achieve economies of scale, lowering its average cost per unit. A firm operating internationally can spread its business risk across several economies rather than depending entirely on the ups and downs of a single domestic market, and it is often exposed to newer technology, competitive practices, and management ideas that sharpen its own efficiency. Building an international presence can also enhance a firm's reputation and brand recognition beyond its home country.

At the same time, a firm engaging in international business takes on real risks. It is exposed to political risk — a change in a foreign government's policy, restrictions on foreign firms, or political instability can disrupt operations with little warning. It is exposed to currency risk, since an unfavourable movement in exchange rates between the transaction date and the settlement date can erode or even wipe out the profit on a deal. It faces cultural and communication risk, because a product, an advertisement, or even a business practice that works well at home may be misunderstood or rejected in a market with different customs, language, and consumer preferences. It also faces a heavier compliance burden, since it must simultaneously satisfy the laws, standards, and procedures of more than one country, and a longer, less certain supply chain, since goods often travel greater distances and pass through customs checks that add cost, delay, and the possibility of loss or damage in transit. …