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PowerPoint slides by R. Dennis Middlemist, Professor of Management, Colorado State University
Chapter
10
Managing Political Risk, Government
Relations, and Alliances
The specific objectives of this chapter are:
1. EXAMINE how MNCs evaluate political risk.
2. PRESENT some common methods used for managing and
reducing political risk.
3. DISCUSS strategies to mitigate political risk and develop
productive relations with governments.
4. DESCRIBE challenges to and strategies for effectively
managing alliances.
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The Nature and Analysis of
Political Risk
Political risk
The 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
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Country Risk
Maximum 100
80
Risk
60
40
20
Minimum 0
Adapted from Figure 10–1: Country Risk
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Macro Risk Factors
Freezing the movement of assets out of the host country
Placing limits on the remittance of profits or capital
Devaluing the currency
Refusing to abide by the contractual terms of agreements
previously signed with the MNC
Industrial piracy (counterfeiters)
Political turmoil
Government corruption
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Perceptions of International Corruption
Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index
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Perceptions of International Corruption
Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index
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Micro Risk Factors
“Some MNCs are treated differently than others”
Industry regulation
Taxes on specific types of business activity
Restrictive local laws
Impact of WTO and EU regulations on American MNCs
Government policies that promote exports and discourage
imports
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Expropriation Risk
Expropriation
The seizure of businesses by a host country with little, if
any, compensation to the owners
Indigenization laws
Laws that require nationals to hold a majority interest in an
operation
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Evaluation of Political Risk
Adapted from Table 10–2: A Guide to Evaluation of Political Risk
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Operational Profitability
Most MNCs are more concerned with operational
profitability than expropriation
Will they be able to make the desired return on investment?
Requiring MNCs to use domestic suppliers vs. using supplies
from other company-owned facilities or purchasing them in the
world market
Restricting the amount of profit that can be taken out of the
country
Wages and salaries that must be paid to the employees
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Managing Political Risk and
Government Relations
Political risks
Transfer risks Transfer risks
Government policies that limit the
transfer of capital, payments, production,
people, and technology in and out of the
country
Tariffs on exports and imports
Restrictions on exports
Dividend remittance
Capital repatriation
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Managing Political Risk and
Government Relations
Political risks
Transfer risks Operational risks
Government policies and procedures that
Operational directly constrain management and
risks performance of local operations
Price controls
Financing restrictions
Export commitments
Taxes
Local sourcing requirements
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Managing Political Risk and
Government Relations
Political risks
Transfer risks Ownership control risks
Government policies or actions that
Operational inhibit ownership or control of local
risks operations
Foreign-ownership limitations
Ownership Pressure for local participation
control risks
Confiscation
Expropriation
Abrogation of proprietary rights
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Assessing Political Risk
General Investments
Conglomerate
Vertical
Horizontal
Transfer Operational Ownership
control
Political Risks
Adapted from Figure 10–2: A Three-Dimensional Framework for Assessing Political Risk
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General Nature of Investment
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
Click here to see slide 15
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Special Nature of Investment
Three sectors of economic activity
Primary sector, which consists of agriculture, forestry, and
mineral exploration and extraction
Industrial sector, consisting of manufacturing operations
Service sector, which includes transportation, finance,
insurance, and related industries
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Special Nature of Investment
Special nature of foreign direct investments can be
categorized as one of five types (see slide 15)
Type I is the highest-risk venture; type V is the lowest-risk
Risk factor is assigned based on sector, technology, and
ownership
Primary sector industries usually have the highest risk factor,
service sector industries have the next highest, and industrial
sector industries have the lowest
Firms with technology that is not available to the government
should the firm be taken over have lower risk than those with
technology that is easily acquired
Wholly owned subsidiaries have higher risk than partially
owned subsidiaries
Click here to see slide 15
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Quantifying Variables in Political Risk
Factors that are typically quantified
Political and economic environment
Domestic economic conditions
External economic conditions
Each factor is given a minimum or maximum score, and
the scores are tallied to provide an overall evaluation of
the risk
Slide 20 provides an example of a quantitative list of
political risk criteria
Click here to see slide 15 Click here to see slide 20
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Criteria for Quantifying Political Risk
Adapted from Table 10–3: Criteria for Quantifying Political Risk
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Formulating and Implementing
Responses to Political Risk
Three related corporate political strategies
Relative bargaining power analysis
The MNC works to maintain a bargaining power position
stronger than that of the host country
Integrative, protective, and defensive techniques
Integrative techniques help the overseas operation become a
part of the host country’s infrastructure
Developing good relations with the host government and other
local political groups
Producing as much of the product locally as possible with the use
of in-country suppliers and subcontractors
Creating joint ventures and hiring local people to manage and run
the operation
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Formulating and Implementing
Responses to Political Risk
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 the responsibility of local personnel and hiring only those
who are vital to the operation
Raising capital from local banks and the host government as well
as outside sources
Diversifying production of the product among a number of
countries
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Formulating and Implementing
Responses to Political Risk
Proactive political strategies
Lobbying, campaign financing, a oraxy and other political
interventions designed to shape and influence the political
decisions prior to their impact on the firm
Formal lobbying
Campaign financing
Seeking advocacy through the embassy and consulates of the home
country
Formal public relations and public affairs activities such as
grassroots campaigning and advertising
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Use of Integrative, Protective and
Defensive Techniques
High 20
Integrative techniques
(11, 14)
Low or stable technology
Moderate 10 Unified logistic,
((7, 10) labor transmission
Advanced (16,6)
management skill
(14, 3)
Dynamic high technology
Low 1
1 10 20
Low Moderate High
Protective/defensive techniques
Adapted from Figure 10–4: Use of Integrative and Protective and Defensive Techniques by Firms in Select Industries
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Managing Alliances
Alliances and joint ventures can significantly improve the success of
MNC entry and operation, especially in emerging economies
Motivating factors
faster entry and payback, economies of scale and rationalization,
complementary technologies and patents, and co-opting or blocking
competition
Preparation for the likely eventual termination of the alliance
Legal issues (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)
Business issues (basic decision to exit, people-related issues, relations
with the host government)
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Role of Host Governments in Alliances
Alliance or joint-venture partners may be advantageous to
MNC entry and expansion
Highly regulated industries such as banking,
telecommunications, and health care
Cope with emerging-markets environments characterized by
arbitrary and unpredictable corruption
May be required by host government
Host government may be unwilling to permit the alliance to
terminate