Going Abroad Covered Against Risks

FOR A COMPANY, TO INTERNATIONALIZE OPERATIONS MEANS A CHANCE OF BETTER PERFORMANCE BUT ALSO A RISKIER BUSINESS. HERE'S HOW ITALIAN COMPANIES CAN USE FINANCIAL AND INSURANCE TOOLS TO REDUCE COUNTRY RISK

by Mario Vinzia, SDA Bocconi School of Management
Translated by Alex Foti

Market research shows that companies characterized by a high degree of internationalization, i.e. a high propensity to export and/or engage in direct investment abroad with permanent establishments, have on average better profit performance compared to companies of the same size in the same industry that are not internationalized.

Internationalization represents vast growth opportunities for Italian companies, as it allows them to be present in markets growing at faster rates with respect to the domestic market. Competing in the international arena can be a source of great satisfaction, but also requires an additional investment in knowledge and the ability to adapt to new and changing contexts, characterized by numerous uncertainties and pitfalls.

The dangers of entering other markets

A high level of internationalization, therefore, implies the need to know how to deal with risks that would not be incurred by operating solely in the domestic market and which result from cultural, political and economic differences existing in the foreign market. In general, a company that exports or settles abroad is exposed to country risk, i.e. the possibility of suffering from restrictions on trade and currency transfers, burden of red tape and corruption, down to the risk of expropriation/ nationalization of the company or political unrest and regime change. No less problematic are purely financial risks, i.e. credit risk, exchange rate risk, and risks due to interest rate and commodity price variations.

Current news tell us that certain markets are reopening to international trade, such as, for example, Iran, while others are drying up, even if only temporarily, due to the fall in oil prices and raw materials, whose receipts are vital for the health of certain economies.

The Iran case

In certain cases, foreign customers are not liquid enough to meet their commitments and try to transfer the financial risk onto their suppliers. Companies entering the international scene can be lured by attractive business opportunities, but should be careful not to take risks that they can’t handle. Of course, leaving all the burden of risk on the customer can be an easy way out, but it often endangers the successful conclusion of a contractual agreement. Conversely, accepting to take on risk facilitates the achievement the signing of an agreement with the customer, but companies need to equip themselves with the right means and tools, in order not to be adversely affected in the case of inauspicious outcomes.

Just think of flow of orders that can come from Iran: the falling price of oil does not make things easy for an oil exporter such as Iran, and thus a series of financial risks could fall on the shoulders of companies exporting or operating there.

To overcome this problem, the latter can find valuable support in the Italian system of assistance to companies, whose operational focus is formed by the Cassa Depositi e Prestiti (CDP). The CDP directly and its daughter companies SACE and SIMEST makes a range of financial and insurance products available to Italian companies, also through the involvement of multilateral banks, export credit agencies, intergovernmental organizations and private financial and insurance entities.

Companies therefore have a broad range of financing instruments, equity capital contribution and tools at their disposal for the mitigation of financial risk. They can also simply tap into the available wealth of knowledge and experience to learn how to successfully expand abroad, including the cultural leap required to successfully compete on the international stage.