Dealing with the risk of terrorism

The threat of terrorism is now ever-present worldwide. For example, Australian tourists for generations have enjoyed the country’s geographical position in Asia by holiday-making in beautiful and tranquil Pacific islands such as Bali. But, sadly, on Tuesday 12 October 2004, many Australians took part in ceremonies in both Australia and Bali to mark the second anniversary of the Bali bombing, which killed 202 people, 88 of them Australian. 0

Australia as a country is still considered to be relatively free from fear of terrorist attacks, but in many regions they present a severe and random political risk, not least so because an act of terrorism is difficult to define." Perhaps the most honest definition is that terrorism is violence committed by those we disapprove of.

In any case, Fido, the Australian Securities and Investment Commission Financial Tips and Safety Checks, warns that many insurers reviewed the terms of their travel insurance policies and/or the way their policies were applied to specific events after terrorist attacks early this decade. As a result, definitions of terrorism and the nature of cover for terrorism vary from insurer to insurer.

The key point about terrorism is that it is politically motivated. This is what distinguishes it from, say, murder or football hooliganism. But the motive is not always clear – especially if no one has claimed responsibility. Another essential ingredient is that terrorism is calculated to terrorize the public or a particular section of it. But does it include threats, as well as actual violence?

Another suggested characteristic of terrorism is that targets must be random – the intention being to make everyone fear they might be the next victim. Thus the increasing incidence of terrorism, especially random acts of terrorism, concerns everybody. In particular, the kidnapping of business executives and employees has become a serious threat.

In May 2006 gunmen abducted an American working for the United Nations in southern Somalia. Robert McCarthy, employed by the UN Children's Fund (UNICFF) was kidnapped on the outskirts of the Afmadow region. Kidnapping foreign workers has become a lucrative business for many militias and warlords in Somalia. Many aid organizations have chosen to work through local agencies or staff due to the significant risks involved in delivering aid to the country's 10 million people.

One precaution by business managers against their firms becoming terrorist targets is to try to develop a benevolent image through charitable contributions to the local community. Foreign direct investment (FDI) is another kind of contribution to host countries and particularly important for developing countries. Private firms there are critical to economic growth. They provide not only goods and services but also the vast majority of jobs, and they are the primary source of taxes that contribute to public health, education, infrastructure and other services.

Foreign firms in developing countries can increase productivity by providing training and development in management best practices. These firms can also increase national income by generating sales and developing business for local companies. Foreign firms tend to be large and to hire local suppliers. They provide technical assistance and other information to improve the quality of their products.

Foreign firms sometimes bring with them innovative technology and budgets for further research and development. This technology' is transferred to sectors of the local economy through employee and supplier training and technical assistance, thereby decreasing the technology gap between developed and developing nations.

Technology is also diffused by foreign firms through local licenses. Employees of multinational firms are trained in new technology and management. Once they leave the foreign firm for a local company, or to create their own company, they bring their new expertise to their new positions.

Foreign direct investment normally expands women’s employment opportunities and increases women’s wages in the developing world. The gender wage gap tends to be lower in countries with higher net levels of such investment.

Apart from the above contributions, foreign firms’ managers generally find it safer to maintain low profiles and minimize publicity in host countries. They rent or buy modest accommodation, both residential and business. They employ local people as much as they can, celebrate local festivals, commission discreet corporate signs at company sites, paint slogans in the local language on their transport vehicles and generally blend in as much as possible with the local population.

ECONOMIC RISK

In financing a project, the economic risk is that the project’s output will not generate sufficient revenues to cover operating costs and to repay debt obligations. However, in international terms it refers to risks associated with changes in exchange rates or local regulations, which could favor the services or products of a competitor.

Economic risks may threaten foreign corporations through their subsidiary operations or other investments overseas. These may become unprofitable through no fault of the parent – for instance, if relevant government policies should change.

The University of Sydney Library Newsletter of May 2002 reported that the cost of books and journals was increasing at rates greater than other commodities. The challenge for libraries had been complicated further by devaluation of the Australian dollar. More than 80% of the information resources purchased by the library are imported and are paid in a foreign currency. Around 50% of these transactions are in US dollars.

Thus even small movements in the currency exchange rates have significant effects on relatively small corporate budgets; and the larger the company the more the risk.

LEGAL ENVIRONMENTS

The United Nations Convention on Contracts for the International Sale of Goods is an international agreement that regulates business worldwide by spelling out the rights and obligations of sellers and buyers. The Convention became law on 1 January 1988 and applies to contracts for the sale of goods between countries that have adopted it.

Prudent global managers consult with legal services, both locally and at headquarters, to comply with host-country regulations and to maintain cooperative long-term relationships. If managers wait until problems arise, little legal recourse may be available apart from local interpretation and enforcement.

This has been the experience of some foreign managers in China, where financial and legal systems have not kept pace with internalization. Chinese managers sometimes simply ignore their debts to foreign companies and Beijing does not always stand behind the commitments of its state-owned enterprises. However, managers of foreign subsidiaries or foreign operating divisions must and usually do comply with the host country's legal system. Such systems, derived from common law, civil law or Muslim law, are a reflection of the country’s culture, religion and traditions.

Under common law, used in Australia, the United States and 25 other countries of English origin or influence, past court decisions act as precedents to the interpretation of the law and to common custom.

Civil law is based on a comprehensive set of laws organized into a code. Interpretation of these laws is based on reference to codes and statutes. About 70 countries, predominantly in Europe (e.g. France and Germany), are ruled by civil law, as is Japan.

In Islamic countries, such as Saudi Arabia, the dominant legal system is Islamic law; based on religious beliefs, it dominates all aspects of life. Islamic law is followed in approximately 27 countries and combines, in varying degrees, civil, common and indigenous law. ‘Our Lord! Give us good in this world, and good in the Hereafter,.. So begins the invitation of the Dow Jones Islamic Index Fund to people to invest in accordance with fundamentalist Islam.

Contract law

Under contract law, agreements are made between parties on the rules that will govern a business transaction. Contract law plays a major role in international business because of differences in respective legal systems and because the host government may be a third party in the contract.

Both common law and civil law countries enforce contracts, although their means of resolving disputes differ. Under civil law, it is assumed that a contract reflects promises that will be enforced without specifying the details in the contract; under common law, the details of promises must be written into the contract to be enforced.

Western company negotiators are inclined to believe they can avoid political risk by spelling out every detail in a contract, but in non-Western cultures the contract is in the relationship, not on the paper, and the way to ensure the reliability of the agreement is to nurture the relationship.

Astute international managers recognize that they will have to draft contracts in legal contexts different from their own, and so they prepare themselves accordingly by consulting with experts in international law before going overseas.

Neglect of contract law may leave firms burdened with agents who do not perform expected functions, or faced with laws that prevent management from laying off employees (often the case, for example, in Australia, Belgium, France, Germany, The Netherlands, New Zealand and Sweden).

In general, law has three basic characteristics in every society: it sets rules for 'good' behavior, demands these rules be followed and punishes those who break them. The four functions of law are to inform individuals of their rights and duties in society; to control and prevent undesirable behavior; to promote social and economic welfare of society; and lo reflect the norms, values, aims and general beliefs (the culture) of the society.