#5976 - International Management Managing Political Risk Government Relations And Alliances - International Management

Managing Political Risk, Government Relations and Alliances

TERMS

• Political Risk – The unanticipated likelihood that a business’s foreign investment will be constrained by a host government’s policy.

• Macro Political Risk Analysis – Analysis that reviews major political decisions likely to affect all enterprises in the country.

• Micro Political Risk Analysis – Analysis directed toward government policies and actions that influence selected sectors of the economy or specific foreign businesses in the country.

• Expropriation – The seizure of businesses by a host country with little, if any, compensation to the owners.

• Indigenisation Laws – Laws that require nationals to hold a majority interest in an operation.

• Transfer Risks – Government policies that limit the transfer of capital, payments production, people and technology in and out of the country.

• Operational Risks – Government policies and procedures that directly constrain management and performance of local operations.

• Ownership Control Risks - Government policies r actions that inhibit ownership or control of local operations.

• Conglomerate Investment – A type of high risk investment in which goods or services produced are not similar to those produced at home.

• Vertical Investment – The production of raw materials or intermediate goods that are to be processed into final products.

• Horizontal Investment – An MNC investment in foreign operations to produce the same goods or services as those produced at home.

• Integrative Techniques – Techniques that help the overseas operation become a part of the host country’s infrastructure.

• Protective and Defensive Techniques – Techniques that discourage the host government from interfering in operations.

• Proactive Political Strategies – Lobbying, campaign, financing, advocacy and other political interventions designed to shape and influence the political decisions prior to their impact on the firm.

THE NATURE OF ANALYSIS AND POLITICAL RISK

• Both domestic and international political developments have a major impact on MNC’s strategic plans. MNC’s face hazards that originate directly from variation and unpredictability in political and governance systems around the world.

• The state and its various institutions and agencies continue to pose a direct threat to MNC’s through policy shifts in taxation or regulation, through outright or de facto expropriation, or by allowing the exploitation of assets by local firms.

• As government policies change MNC’s must be willing and able to adjust their local strategies and practices to accommodate new perspectives and actual requirements.

• Moreover in a growing number of geographic regions and countries, governments appear less stable and therefore these areas carry more risk than they did in the past.

• Examples of risk factors include freezing the movement of assets out of the host country, placing limits on the remittance of profits or capital, devaluing the currency, appropriating assets and refusing to abide by the contractual terms agreed.

• As rapid globalisation occurs MNC’s must be aware of the political risk factors present in doing business abroad and develop strategies to respond to them.

Macro and Micro Analysis of Political Risk

• Firms evaluate political risk in a number of ways. One is through macro political risk analysis and another approach is micro political risk analysis.

• Macro risk issues and examples

  • In recent years macro risk has become of increasing concern to MNC’s because of the growing number of countries that are finding their economies in trouble.

  • An example of macro consideration of political risk would be an analysis of what would happen to a company’s investment if opposition government leaders were to take control.

  • Another area of consideration for MNC’s regarding macro political risk is government corruption, such as prevalence of bribery and government rules and regulations that require the inclusion of certain locals in lucrative business deals.

• Micro risk issues and examples

  • Micro rick issues often take such forms as industry regulation, taxes on specific types of business activity and restrictive local laws.

  • The essence of these micro risk issues is that some MNC’s are treated differently from others, thus increasing the cost of doing business for some.

Terrorism and its Overseas Expansion

• Terrorism has existed for centuries, but has become more of a concern everywhere over the last few years.

• The ultimate goal of the violence is for government and citizens to change policies and ultimately to yield to the beliefs of terrorist groups.

• Three types of terrorism exist; classic, amateur and religiously motivated.

• Classic terrorism entails a specific, well defined objective pursued by well trained, professional, underground members.

• Amateur terrorism tends to occur once and often has poorly defined objectives and therefore members are not as committed.

• Religiously motivated terrorism is carried out by individuals holding very strong core beliefs, regardless of how well defined their objectives are. It tends to be more chaotic and scattered since the individuals involved are extremely passionate about the cause despite the lack of unified goals.

• MNC’s need to be wary of the combative political environment that may exist when they seek to engage in overseas expansion in certain geographic areas.

• It is clear that terrorism within a country can have a significant impact on the MNC in the macro sense. If a country has a high incidence of terrorist attacks against commercial businesses specifically companies will need to be even more wary about setting up operations.

• Typically terrorists target business areas or businesses that have a high status or those that have a great influence on initiating change.

• MNC’s must thoroughly evaluate the political environment, install modern security systems, compile a crisis handbook and prepare employees for situations that may arise.

Analysing the Expropriation Risk

• Some firms are more vulnerable to expropriation than others. Often those at greater risk are in extractive, agricultural or infrastructural industries, because of their importance to the country.

• In addition, large firms are more likely targets than small firms as more is to be gained.

• MNC’s can take a wide variety of strategies to minimise the chances of expropriation.

• They can bring in local partners, limit the use of high technology so that if the firm is expropriated the company cannot duplicate the technology. Acquire an affiliate that depends on the parent company for key areas of the operation such as financing, research and technology transfer so that no practical value exists in seizing the affiliate.

MANAGING POLITICAL RISK AND GOVERNMENT RELATIONS

• The process begins with a detailed analysis of the various risks with which the MNC will be confronted including a development of comprehensive framework that identifies the various risks and the assigns a quantitative risk or rating factor to them.

Developing a Comprehensive Framework or Quantitative Analysis

• A comprehensive framework for managing political risk should consider all three political risks and identify those that are most important.

• Schmidt offered a three dimensional framework that combines political risks, general investments and special investments.

• Political risks

  • Political risks can be broken down into three basic categories; transfer risks, operational risks and ownership control risks.

  • Examples of transfer risks include; tariffs on exports and imports, restrictions on exports, dividend remittance and capital repatriation.

  • Examples of operational risk include; price controls, financing restrictions, export commitments, taxes and local souring requirements.

  • Examples of ownership control risks include; foreign ownership limitation, pressure for local participation, confiscation, expropriation and abrogation or proprietary agreements.

• General nature of investment

  • The general nature of investment examines whether the company is making a conglomerate, vertical or horizontal investment.

  • Conglomerate investments are usually rated as high risk because foreign governments see them as providing fewer benefits to the company and greater benefits to the MNC than other investments.

  • Vertical investments run the risk of being taken over by the government as they are export orientated and governments like a business that helps them generate foreign capital.

  • Horizontal investments are typically made with an eye toward satisfying the host country’s market demands. As a result these are not very likely takeover targets.

• Special nature of investment

  • The special nature of foreign direct investment relates to the sector of economic activity, technological sophistication and pattern of ownership.

  • There are three sectors of economic activity; the primary sector (agriculture, forestry, extraction and mineral exploration), the industrial sector (manufacturing operations) and the service sector (transportation, finance, insurance etc.)

  • Levels of technological sophistication characterise science based industry and no science based industry. The difference between them is that science based industry requires the continuous introduction of new products or processes.

  • Patterns of ownership relate to whether businesses are wholly or partially owned

  • The special nature of foreign direct investment can be categorised as one of five types.

  • Type 1 is the highest risk venture and type V is the lowest risk venture.

  • This risk factor is assigned based on sector, technology and ownership.

  • Primary sector...