Effects of Late or Non-payments/The 3 "C's" (International)

The 3 “C’s (International)
In international credit management, country, currency and culture risks are inextricably linked to assessing a buyer’s risk. They must be evaluated together for the assessment of one will depend on that of all others.

Country Risk
Globalization is not just a cliché. It is happening all around, as businesses increasingly look at the world as if it has no national boundaries. Governments, on the other hand, still tend to make policy in what they perceive to be their country's national interests. With globalization, competition sharpens worldwide, but nationalistic laws frequently make for a highly uneven playing field. There are three important principles in country risk assessment:

1. Countries are interdependent.

2. Country conditions affect customers.

3. The assessment must be systematic, objective and relevant.
 * a. Systematic means it must be proactive, looking ahead rather than being merely reactive. There must be specially assigned people charged with the task of country evaluation who can be held accountable. The process of assessment must be continuous for markets in which the company has an interest, not just a task undertaken when a new order comes in. The process requires regular, reliable, assured flows of information, both into the company and within the company, for instance, from international credit managers to sales people. The evaluation of country information must also be structured so that important signals are not overlooked and key questions are being asked.


 * b. Objective means that the evaluation should be free of all personal bias. Countries can and do change, both from good to bad and from bad to good, all too often within very short periods of time. External conditions also can change, as they did for Argentina when Brazil devalued its currency; so countries should be assessed not in isolation, but in the context of what goes on around them.


 * c. Relevance relates to how practical and pertinent the evaluation of the country risk elements fit with the needs of a seller. For example, if a seller is considering the risk factors of selling to Italy and Italy has a change in government, this change might not be enough of an impact for a seller to find it relevant to if or when he/she will be paid. A global credit manager may question the value and significance of examining the cultures that exist in countries where export business is projected. The pro-active company and international credit manager will recognize that personal and company relationships still are critical, both in the development of new markets and in ensuring that payment obligations are processed in a timely manner.

Currency Risk
Currency risk in international credit management arises from an export invoice (a receivable, an asset) that remains unpaid either because an importer's country has imposed exchange controls, making it impossible to convert the funds to the agreed upon currency or because a devaluation has taken place that raises the local currency cost of paying the invoice so much that an importer is unable to pay. The result can be nonpayment in convertible currency (even if local currency payment has been deposited with a local bank) or delayed payment in convertible currency.

Culture Risk
Even though an international credit manager may question the value and significance of examining the cultures that exist in countries where export business is projected, the mores and culture of a business located in an offshore country impact risk. In evaluating "culture" as a risk element, it is appropriate to consider examples of cultures in the world and the way they may impact how business is conducted. For example, in Japan, “WA” or “Inner Harmony” is a concept that many Westerners fail to grasp. When it may appear Japanese will have eyes closed at meetings, they are gathering their thoughts, not sleeping! Management in Japan is known to be very participative and team-oriented. In India, the caste system has larger gone, mostly in urban centers, with underlying cultural variables that structure the life of a person from India. Managers in India generally make most decisions; employees follow rules. In Latin America, the family is of central importance, and loyalty often determines career paths and promotions. In each of these examples, an international manager would be wise to try and understand the “cultural” elements of the business transaction which could impact the process of risk evaluation.

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