Cha

pter10

Managing Political Risk, Government Relations, and Alliances

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.

The specific objectives of this chapter are:

2

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

3

Country Risk

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Adapted from Figure 10–1: Country Risk

4

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

How does the US look to investors from Australia or Dubai?

5

Perceptions of International Corruption

Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

6

Perceptions of International Corruption

Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

7

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

8

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

9

Evaluation of Political Risk

Adapted from Table 10–2: A Guide to Evaluation of Political Risk

10

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

11

Managing Political Risk and Government Relations

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

Transfer risksTransfer risks

Political risks

12

Managing Political Risk and Government Relations

Operational risks Government policies and procedures that

directly constrain management and performance of local operations

Price controls Financing restrictions Export commitments Taxes Local sourcing requirements

Transfer risksTransfer risks

Operational risks

Operational risks

Political risks

13

Managing Political Risk and Government Relations

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

Transfer risksTransfer risks

Operational risks

Operational risks

Ownership control risks

Ownership control risks

Political risks

14

Assessing Political Risk

Transfer Operational Ownership control

Political Risks

Conglomerate

Vertical

Horizontal

Gen

eral

Inve

stm

ents

Special Investm

ents

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

16

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

17

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

18

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

19

Criteria for Quantifying Political Risk

Adapted from Table 10–3: Criteria for Quantifying Political Risk

20

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

21

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

22

Formulating and Implementing Responses to Political Risk

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

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

23

Use of Integrative, Protective and Defensive Techniques

Protective/defensive techniques

Inte

gra

tive

tec

hn

iqu

es

High 20

Moderate 10

Low 11

Low10

Moderate20

High

(11, 14)Low or stable technology

((7, 10)Advanced

management skill

Unified logistic, labor transmission

(16,6)

(14, 3)Dynamic high technology

Adapted from Figure 10–4: Use of Integrative and Protective and Defensive Techniques by Firms in Select Industries

24

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

26

Case

HP-Compaq