Lec 9 Flashcards
(22 cards)
Political Risk
Unanticipated likelihood that a business’s foreign investment will be constrained by a host government’s policies
Evaluation of the inherent risk of doing business in emerging economies involves:
- > Policy and control mechanisms
- > Awareness of the historical treatment of MNCs within certain nations
examples:
- Freezing the movement of assets out of the host country
- Placing limits on the remittance of profits or capital
- Devaluing the currency
- Appropriating assets
Piracy rate in different countries–>china + hong kong very high
Americas trade war with china–> tarif battle
Macro and Micro Analysis of Political Risk
Macro:
- ->Reviews major political decisions that are likely to affect all enterprises in the country
- -> trumps foreign policy
- -> elections in europe
- ->putins foreign policy
- -> terrorism
Micro:
–>Directed toward government policies and actions that influence selected sectors of the economy or specific foreign businesses in the country
- -> european commission fines
- ->america chine export import tariffs
Expropriation
Seizure(Beschlagnahme) of businesses by a host country with little, if any, compensation to owners
Greatest risk - Extractive, agricultural, infrastructural industries
Tend to occur in less-developed economies that are unstable, and suspicious of foreign multinationals
Strategies to minimize the chances of expropriation
Bringing in local partners
Limiting the use of high technology so that if the firm is expropriated, the country cannot duplicate the technology
Acquiring an affiliate (ein verbundendenes unternehmen erwerben/schwestergesellschaft) that depends on the parent company for key areas of the operation
Overseas Expansion
MNEs need to be wary of the combative political environment that may exist
- ->Assess political risk
- ->Install modern security
- ->Compile crisis plans
- ->Prepare employees for possible situations
Comprehensive Framework
Identifies the various risks and then assigns a quantitative risk or rating factor to them
Should consider all political risks and identify those that are most important
–> categories of political risk
Categories of political risks
Transfer risks
Operational risks
Ownership-control risks
Transfer Risk
Government policies that limit the transfer of capital, payments, production, people, and technology in and out of country
- ->Tariffs on exports and imports
- ->Restrictions on exports
- ->Dividend remittance (Dividendenausschüttung–> Auszahlung von Gewinnen einer Aktiengesellschaft an die Aktionäre)
- ->Capital repatriation (Kapitalrückführung –> Verminderung des Eigenkapitals einer Kapitalgesellschaft)
Operational Risks
Government policies and procedures that directly constrain the management and performance of local operations
- ->Price controls
- ->Financing restrictions
- ->Export commitments
- ->Taxes
- ->Local sourcing requirements
Ownership-Control Risks
Government policies or actions that inhibit ownership or control of local operations
- ->Foreign-ownership limitations
- ->Pressure for local participation
- ->Confiscation
- ->Expropriation
- ->Abrogation of proprietary rights (Aufhebung von schutzrechten)
Nature of Investment
Conglomerate investment: The most likely target
Type of high-risk investment in which goods or services produced are not similar to those produced at home
Vertical investments: Symbiosis
Production of raw materials or intermediate goods that are to be processed into final products
Run the risk of being taken over by the government
Horizontal investments: A helping hand
MNC investment in foreign operations to produce the same goods or services as those produced at home
Not likely to be takeover targets
Special Nature of Foreign Direct Investment (FDI)
Sectors of economic activity :
Primary sector(The most likely target) - Agriculture, forestry, mineral exploration and extraction
Industrial sector (science-based industry)- Manufacturing operations
Service sector (A sensitive area)- Transportation, finance, insurance, and related industries
. Techniques for Responding to Political Risk
Relative bargaining power analysis
Integrative, protective, and defensive techniques
Proactive political strategies
Relative Bargaining Power Analysis
MNE works to maintain a bargaining power position stronger than that of host country
Gaining bargaining power depends on:
Host country’s perception of the MNE’s size
Experience
Legitimacy
Integrative Techniques
Help overseas operations become part of host country’s infrastructure
Developing good relations with host government and other local political groups
Producing as much of the product locally as possible with use of in-country suppliers and subcontractors
Creating joint ventures and hiring local people to manage and run operations
Doing as much local research and development as possible
Developing effective labor-management relations
Protective and Defensive Techniques
Discourage the host government from interfering in operations
Doing as little local manufacturing as possible and conducting all research and development outside the country
Limiting responsibility of local personnel and hiring only those who are vital to operations
Raising capital from local banks, host government, and outside sources
Diversifying production of the product among a number of countries
Proactive Political Strategies
Leveraging bilateral, regional, and international trade and investment agreements
Drawing on bilateral and multilateral financial support
Using project finance structures to separate project exposure from overall firm risk
Specific Proactive Political Strategies
Formal lobbying
Campaign financing
Seeking advocacy through the embassy and consulates of home country
Formal public relations and public affairs activities (Corporate social responsibility)
. Managing Alliance
Motivating factors to enter into alliances
Faster entry and payback
Economies of scale and rationalization
Complementary technologies and patents
Co-opting or blocking competition
Challenge - Managing operations with partners from different national cultures
Cultural differences may create uncertainties and misunderstandings in the relationship
Successful Management of Alliances
Depends on situational conditions, management instruments, and performance criteria
Success factors
Partner selection, cooperation agreement, management structure, acculturation process, and knowledge management
Important aspect - Preparation for the likely eventual termination of the alliance
Legal Issues Critical to Termination of Alliance
Conditions of termination
Disposition of assets and liabilities
Dispute resolution
Distributorship arrangements
Protection of proprietary information and property
Rights over sales territories and obligations to customers
The Role of Host Governments in Alliances
Are active in mandating that investors take on partners
Require investors to share ownership of their subsidiaries with local partners
Play a substantial role in the terms of formation and dissolution of alliances.
Having alliance or joint-venture partners may be advantageous to MNE entry and expansion
Seen in highly regulated industries such as banking, telecommunications, and health care
