Domestic companies seek foreign expansion to expand their markets and even grow further to achieve their ambitions of becoming international companies. However, these domestic companies face various challenges such as foreign competition, political risk, and foreign exchange risks. There are many opportunities and benefits available when a domestic company chooses to expand its market internationally, but the company also need to take on some additional risks (Salamzadeh & Kawamorita Kesim, 2015). The company may face foreign competition from other similar companies; therefore, it is important for the enterprise to strategically evaluate the market demand in order to be able to strategically position itself to be able to be successful. To be able to mitigate foreign competition risk, the company can engage in joint venture partnership to spread the associated risk and minimize the capital investment requirements of starting and running the business (Kejzar, 2011).
Foreign exchange risk occurs when the company’s investment value fluctuates unexpectedly as a result of currency exchange rate changes. When there is an appreciation of the domestic currency against the foreign currency, the company’s earned returns are expected to decrease when they are exchanged back into the local domestic policy. This kind of risk is difficult to protect against, and it can greatly harm the company’s revenues. To protect against the risk, the company may hedge its foreign exchange risk through buying forwards, options or futures on the currency market. On the other hand, political risk happens when the foreign country that the company had invested in decides to change its policies abruptly. This may entail the introduction of trade barriers that can serve to limit the foreign company. In mitigating the risk, the company can acquire a political risk insurance to be able to protect their business against these specific political actions (Rowden, 2001).
References
Kejzar, K. Z. (2011). Does foreign direct investment induce domestic mergers? Open Econ Rev, 22, 271-291.
Rowden, R. W. (2001). Research note: How a small business enters the international market. Thunderbird International Business Review, 43(2), 257-268.
Salamzadeh, A., & Kawamorita Kesim, H. (2015). Startup Companies: Life Cycle and Challenges. SSRN Electronic Journal.
