Managing Political Risk, Government Relations, and

Alliances

chapter ten

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

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Chapter Outline

• Political risk– Macro risk factors– Micro risk factors– Evaluating political risk

• Types of political risk– Terrorism– Nationalization and expropriation– Operational risks

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Chapter Outline (2)

• Techniques for responding to political risks– Maximizing the company’s bargaining

power– Integrative techniques – Protective and defensive techniques– Proactive political strategies

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Chapter Outline (3)

• Managing alliances and joint ventures– Why companies use alliances– The alliance challenge– Preparing for the termination of an alliance– The role of host governments in alliances

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Chapter Objectives

The four 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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Political Risk

• Definitions of political risk1. The likelihood that a business’s foreign

investment will be constrained by a host government’s policy

2. The likelihood that political forces will cause major changes in a country’s business environment that adversely affect the profits and strategic goals of one or more businesses

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AnalyzingMacro and Micro Political Risk

• Macro political risks– Major political decisions that are likely to affect all

enterprises in the country• Micro political risks

– Government policies and actions that influence selected industries or specific foreign businesses in the country

• Analysis of political risks should consider whether a major change in control of the government is possible and what the effects of such a change might be

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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 MNC• Industrial piracy (counterfeiters)• Political turmoil• Government corruption

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Micro Risk Factors

• Some MNCs are treated differently than others• Industry-specific regulations• 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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Evaluation of Political Risk

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Terrorism and Its Overseas Expansion

• Terrorism: the use of force or violence against others to promote political or social views

• Three types of terrorism: amateur, religiously motivated, and classic

• MNCs are hesitant to set up operations in countries with high terrorism risk

• MNCs must assess political risk, install modern security, compile crisis plans, and prepare employees for possible situations

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Nationalization

• Nationalization is the conversion of a private enterprise to government ownership.– The government may or may not pay the company's

stockholders or investors for the enterprise. – When the companies are paid for the property, the

price is usually set by the government and is usually far below the market value of the property.

• Nationalization is more likely in countries that are poor, politically unstable, and suspicious of foreign companies

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Nationalization (2)

• Large companies are more likely to be nationalized than small ones

• Wholly owned subsidiaries are more likely to be nationalized than joint ventures.

• Nationalization is more likely in some industries than others– Extractive industries, such as oil, gas, and mining– Agriculture– Utilities and transportation

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Operational Profitability in Risk Analysis

• Most MNCs are more concerned with operational profitability than expropriation

• They are concerned with ability to make desired return on investment– Require MNCs to use domestic suppliers vs. those

from other company-owned facilities or purchase in world market

– Restrict the amount of profit taken out of the country

– Wages and salary that must be paid to employees

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Techniques for Managing Political Risk

1. The company attempts to maximize its bargaining power with the government.

2. Integrative techniques are designed to help the company’s operations become part of the host country’s economy or infrastructure.

3. Protective and defensive techniques are designed to limit the ability of the host country’s government to interfere with the company’s business

4. Proactive political strategies attempt to influence political decisions before they can affect the company

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Maximizing the Company’s Bargaining Power

• A company is more likely to have high bargaining power with the host government if:– The company offers something that is important to

the government (jobs, exports, etc.)– The company has credible alternative locations

elsewhere– The government has few or no other alternatives

for getting what the company is offering. – The company is willing to make a long-term

commitment to the country. – Over time, the company may offer new things to

keep bargaining power.

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Integrative Techniques for Managing Political Risk

• Develop good relationships with the host government and other groups that have political influence.

• Make the product as “local” as possible, by using host country labor, suppliers, and subcontractors

• Create a joint venture and hire host country people as managers

• Develop good labor-management relations. • Do as much local research and development as

possible.• Be a good corporate citizen.• Some of these techniques will not apply in all

situations.

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Protective and Defensive Techniques

• Do as little local manufacturing as possible.• Do all research and development outside the host

country.• Limit the responsibility of local employees.• Use home country managers.• Raise capital from local banks, the host government,

and outside sources• Produce the product in several countries.• If expropriation or a non-convertible currency is a risk,

get risk insurance from the Overseas Private Investment Corporation (U. S. firms only) or the Multilateral Investment Guarantee Agency

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Proactive Political Strategies

• Proactive political strategies– Lobbying, campaign financing, advocacy and other

political interventions designed to shape and influence political decisions prior to impact on firm

• Formal lobbying• Campaign financing when that is legal• Seeking advocacy through embassy and

consulates of home country• Formal public relations and public affairs

activities such as grassroots campaigning and advertising

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Why Companies Use Alliancesand Joint Ventures

• Alliances can improve a company’s chances for success, especially in an emerging market

• Alliances permit faster market entry and a shorter payback period for foreign direct investment

• Partners can share complementary knowledge and skills

• Some companies form an alliance with a potential competitor

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The Alliance Challenge

• Structuring the alliance– What does each partner contribute?– What does each partner get?– Can redundant activities be eliminated?

• Key success factors– Choosing the right partner– Determining the scope and limits of the

alliance at the beginning

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The Alliance Challenge

• Managing cultural issues– Differences in uncertainty avoidance and

time orientation (long-term vs. short-term) are the hardest to manage

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Preparing for theTermination of an Alliance

• Business issues– The decision to exit– What happens to employees?– Relationship with the host government

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Preparing for theTermination of an Alliance (2)

• Legal issues– Disposition of assets and liabilities– Distributorship arrangements– Protection of proprietary information and property– Rights to sales territories– Dispute resolution

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Role of Host Governments in Alliances

• In highly regulated industries -- such as banking, telecommunications, and health care – a local partner can help with market access and deal with regulations

• A local partner can help the company deal with emerging markets environments characterized by arbitrary and unpredictable corruption

• A local partner may be required by the host government

• The host government may block termination of the alliance