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developing a “world” car to be marketed and sold all over the globe. Procter &

Gamble and Kimberly-Clark compete for the disposable diaper market in Brazil.

A parade of U.S. mutual fund companies are rushing to Europe, Japan, and

Australia in pursuit of those nations’ retirement savings. For U.S. movie produc-

ers, international box-office results are as important as domestic revenues.

If opportunity is one side of the international business coin, the other side

is risk. Leveraging successes enjoyed in local markets to far-flung foreign oper-

ations is far from certain. These risks come in many categories.

ECONOMIC CONDITIONS The 1990s recession in Europe and the late 1990s

financial crisis in Southeast Asia caused dramatic falls in business and consumer

spending. Global firms with sales concentrated in these regions saw profits

evaporate and losses mount.

UNCERTAIN COSTS Because of low-skilled workforces, lack of capital, and prim-

itive distribution systems, the costs of doing business in developing countries are

frequently high and uncertain. Foreign firms assembling electronics goods in

Russia have been plagued by low worker productivity, vandalism, and crime.

DIFFERENT CULTURES Brazilians spend a higher percentage of income on their

children than do citizens of neighboring countries. They are eager for disposable

diapers, while Argentines are largely indifferent. Consumers in Southeast Asia are

accustomed to buying light meals from street vendors, not from fast-food restau-

rants. To cite an extreme case of cultural miscalculation, General Motors intro-

duced its popular Nova car model into South America. Only after disastrous sales

did the company realize that no vameans “does not go” in Spanish.

POLITICAL RISK Tax and regulatory burdens, government bureaucracy and

even corruption, and changing political parties and governments all contribute

to the risk of doing business abroad. Over the past 50 years, international busi-

nesses have been decimated by unrest and civil war in places such as Cuba,

Lebanon, El Salvador, Vietnam, and the Balkans. Today, outright expropria-

tion is much less frequent but remains a risk.

EXCHANGE-RATE RISK A firm that earns a significant part of its revenues

abroad is subject to exchange-rate risk when converting these to its home cur-

rency. For instance, a depreciating Japanese yen means lower dollar profits

from revenues earned in Japan. Similarly, the costs incurred by a foreign sub-

sidiary are subject to exchange-rate risk. Thus, the depreciating currencies of

Southeast Asia (by lowering the dollar-equivalent costs) make production in

that part of the world more attractive to global firms.

Even the most experienced international firms face unforeseen risks and suf-

fer missteps in foreign markets. Despite its marketing muscle and well-tested for-

mula for operating stores, McDonald’s has gained little market share in South

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