Managing Political Risk, Government Relations and Alliances

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Chapter 10

• Managing Political Risk, Government Relations and
  Alliances

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Political Risk
Political Risk Likelihood that a businesss fo
reign investment will be constrained by a host
governments policy
Macro Political Risk To review the major
political decisions that affect all business
conducted in a country Factors devaluing the
currency, piracy, corruption, political turmoil
Examples tightening controls on flow of foreign
currency requiring foreign investors to
establish joint ventures with local partners
Micro Political Risk government policies that i
nfluence selected sectors of the economy or
specific foreign business (specific)
Factors industry regulation, local laws, impact
of WTO regulations on American MNCS
Examples industry regulation taxes on specific
types of business activity restrictive local
taxes
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Country Risk
Risk
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Expropriation, Nationalization and Indigenization

• Expropriation
• When a host country seizes business with little
  compensation to the owners
  
• Industries Most at Risk
• Nationalization
• When a host country seizes business and it
  becomes government owned and run
  
• Indigenization laws
• Laws that require that nations hold a majority
  interest in the operation

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Evaluating Risk
Relations with border countries
Regional instabilities Policy toward US US polic
y toward country Government in power Political p
arties Unions/labor movements Religious groups
Media Ethnic confrontation Unemployment Taxes

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Types of Political Risk

• policies that limit the transfer of capital,
  payments, production, people, and technology in
  or out of a country
  
• tariffs on exports or imports
• policies that constrain the management and
  performance of local operations
  
• price controls and financing restrictions
• polices that inhibit ownership or control of
  local operations
  
• foreign ownership limitations

Transfer risks
Operational risks
Ownership control risks
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• Can
• Political
• Risk
• Be
• Eliminated?

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Responses to Political Risk
Relative Bargaining Power Integrative Technique
Designed to help overseas operations become par
t of the host countrys infrastructure (be
perceived as less foreign) Develop good relatio
ns with host government Produce products locally
Create joint venture Develop good labor- managem
ent practices Defensive Technique Designed to di
scourage the host government from interfering in
operations Do little local RD and manufacturing
Only hire necessary local personnel Diversify
production Proactive Strategy Lobbying, campaign
financing, public relations
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Use of Integrative and Defensive Techniques
Low or stable technology
United logistic, labor transmission
Advanced management skill
Dynamic high technology