POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT...
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Transcript of POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT...
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POLITICAL RISK
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POLITICAL RISK
ARISES FROM THE UNCERTAINTY OVER THE
CONTINUATION OF A GOVERNMENT AND POLICIES
THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.
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Moreover...
POLCIES, THAT ARE UNPLEASANT, DO NOT
CONSTITUTE RISK AS LONG AS THEY ARE TRANSPARENT
AND ENFORCED WITH CONSISTENCY.
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POLITICAL RISKS
INSTABILITY RISK
OWNERSHIP RISK
OPERATIONS RISK
TRANSFER RISK
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INSTABILITY RISK
ARISES FROM THE UNCERTAINTY ABOUT
STABILITY OF A GOVERNMENT.
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OWNERSHIP RISK
ARISES FROM THE UNCERTAINTY ABOUT A GOVERNMENT’S DECISION
TO REDUCE FOREIGN INVESTORS’ OWNERSHIP IN THEIR INVESTMENTS
IN THE COUNTRY.
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CONFISCATION
IMPOUNDING OF THE PROPERTY OF FOREIGN INVESTORS BY THE HOST
GOVERNMENT WITHOUT COPENSATION.
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EXPROPRIATION
PURCHASE OF PROPERTY FROM FOREIGN INVESTORS.
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NATIONALIZATION
PURCHASE OF PRIVATE BUSINESSES BY HOST GOVERNMENT.
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DOMESTICATION
PLANNED REDUCTION OF EQUITY HELD BY FOREIGN INVESTORS.
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OPERATIONS RISK
ARISES FROM THE UNCERTAINTY ABOUT HOST GOVERNMENT’S
POLICIES THAT MAY CONSTRAIN FOREIGN INVESTORS’ OPERATIONS
IN THE COUNTRY.
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They can change policies regarding...
• PRICES
• TERMS OF COMPETITION
• TAXATION
• PRODUCT SPECIFICATIONS
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MEASURES CAN BE HIGHLY VARIED AND UNLIMITED
AND
THEY CAN BE AS DEVASTATING AS EXPROPRIATION
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TRANSFER RISK
ARISES FROM THE UNCERTAINTY ABOUT GOVERNMENT POLICIES THAT MAY RESTRICT FOREIGN
INVESTORS’ ABILITY TO TRANSFER PROFITS OR CAPITAL OUT OF THE
COUNTRY.
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HOW TO ANALYZE POLITICAL RISKS
POLITICAL
SOCIAL
ECONOMIC
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EXTERNAL THREAT
QUESTION:
HOW LIKELY IS IT THAT AN OUTSIDE FORCE WILL DESTABILIZE THE GOVERNMENT OF A COUNTRY?
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THINGS TO LOOK FOR:
THE WORDS AND ACTIONS OF THE LEADERS OF THE ENEMY
COUNTRIES
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INTERNAL THREAT
QUESTION:
HOW LIKELY IS IT THAT THE GOVERNMENT WILL REMAIN
STABLE (ASSUMING THERE IS NO EXTERNAL THREAT)?
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A COUNTRY WHERE TRANSITION OF POWER FOLLOWS A FIXED
SCHEDULE AND IS PEACEFUL IS MORE STABLE .
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SUCH A COUNTRY ALLOW ITS PEOPLE TO CHOOSE THEIR RULERS AND
SPEAK THEIR MINDS.
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POLITICAL FREEDOM(ACCORDING TO FREEDOM HOUSE-99)
FREE PARTLY FREE NOT FREE
Argentina Armenia China
Bulgaria Brazil Egypt
Czech Rep Ghana Indonesia
Hungary Malaysia Nigeria
Taiwan Russia Saudi Arab
S. Africa Turkey Vietnam
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EXISTENCE OF DEMOCRATIC POLITICAL PROCESS DOES NOT
ALWAYS ENSURE POLITICAL STABILITY.
OTHER EXAMPLES INCLUDE:
INDIA, ISRAEL, ITALY, TURKEY
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LIKEWISE, EXISTENCE OF AN AUTOCRATIC GOVERNMENT DOES
NOT NECESSARILY IMPLY INSTABILITY.
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LOOK AT THE SIX ASIAN TIGERS
• CHINA IS A COMMUNIST COUNTRY.
• INDONESIA HAD MILITARY DICTATORSHIP & ONE PARTY RULE UNTIL RECENTLY.
• TAIWAN & SOUTH KOREAWERE AUTHORITARIAN STATES UNTIL RECENTLY.
• SINGAPORE HAS ELECTED AUTHORITARIAN GOVERNMENT
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HONG KONG’S COLONIAL GOVERNMENT WAS
UNDEMOCRATIC.
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SIGNALS TO LOOK FOR:
• SEPARATIST MOVEMENTS
• POLITICAL MOVEMENTS
• RADICAL MOVEMENTS
• ETHNIC TENSIONS
• DISCONTENT
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OWNERSHIP RISKS
QUESTION:
WILL THE GOVERNMENT ACT IN A WAY THAT WILL DEPRIVE A
FOREIGN FIRM FROM CONTINUING ITS OWNERSHIP IN THE COUNTRY?
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Pay attention to the attitude of the leaders.
• And what they have to say about specific countries.
• Anger of the labor toward foreign policies…
• toward foreign firms of specific countries
• or firms.
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OPERATIONS RISK
QUESTION:
WHAT IS THE LIKELIHOOD THAT A GOVERNMENT WILL CHANGE
POLICIES THAT IMPACT ON FOREIGN FIRMS’ PROFITABILITY.
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THINGS TO LOOK FOR.
DEBT SERVICE RATIO
EXTERNAL DEPENDENCE
LIQUIDITY
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DEBT SERVICE RATIO
A COUNTRY’S ANNUAL DEBT INTEREST AND PRINCIPAL LIABILITY
AS A PERCENT OF EXPORTS OF GOODS AND SERVICES
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How do countries score?ACCEPTABLE <20%
Poland, Malaysia, Thailand
PRECAUTIONARY >20% BUT <30%
Chile, India, Mexico, Turkey
DANGEROUS >30%
Argentina, Brazil, Hungary, Indonesia
(Data is from 1995)
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It may be all right if a country:
• Has highly diversified export base.– Both products and markets.
• Can reduce imports in a crisis.– Fraction of total imports that comprise of oil
and food (over 35% is alarming).
• Has long-term capacity to repay debt.– Total debt/GDP (over 40% is alarming)
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How do these measure up?
Oil& Food Total Debt
Ratio-94 to GNP-97
• Argentina 07% 38%
• Brazil 26% 23%
• Hungary 19% 52%
• Indonesia Low 62%
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EXTERNAL DEPENDENCEA COUNTRY’S TOTAL EXPORT &
IMPORT BILL AS A PERCENTAGE OF ITS GNP (1998)
• Argentina 18%
• Brazil 15%
• Hungary 107%
• Indonesia 55%
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LIQUIDITY
LENGTH OF TIME A COUNTRY CAN CONTINUE TO IMPORT AT THE PRESENT LEVEL BY DRAWING
DOWN ITS FOREIGN EXCHANGE RESERVES.
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2-3 MONTHS IS PRECAUTIONARYLESS THAN 2 MONTHS IS ALARMING
(Data for 1998)
• Argentina 8.5 Months
• Brazil 6.5 Months
• Hungary 4.5 Months
• Indonesia 4.5 Months
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ECONOMIC POLICY
• IS THE COUNTRY INVESTING IN EDUCATION & INFRASTRUCTURE?
• IS IT OPEN TO TRADE?
• IS IT LETTING THE MARKET HAVE ITS WAY?
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INTERVENTION BY GOVERNMENT
BREEDS BUREAUCRACY THAT PULLS THE COUNTRY BACKWARDS.
IT BREEDS CORRUPTION AND INEFFICIENCY.
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POLITICAL RISK SCORES
LOW
Switzerland
Norway
Austria
Germany
Netherlands
Brunei
Japan
HIGH
Liberia
Somalia
Sudan
Iraq
Myanmar
Uganda
Ethiopia
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HOW TO COPE WITH POLITICAL RISK
Avoidance Approach
Insurance Approach
Negotiation Approach
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Insurance Approach
Political Risk Insurance
– Overseas Private Investment Corporation (OPIC)
– American International Group
– Lloyds of London
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Bargaining Approach
WHEN THE BARGAINING POWER POSITION OF A FIRM RELATIVE TO
THAT OF THE HOST GOVERNMENT IS STRONG, THE FIRM WILL
EXPERIENCE LOW LEVEL OF INTERVENTION IN ITS OPERATIONS.
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BARGAINING POWER OF MNCs
• Access to Technology
• Integration in Global Production
• Access to Global Markets
• Access to Foreign Exchange
• Provider of Jobs & Capital
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BARGAINING POWER OF COUNTRIES
• Market Size and Growth Potential
• Attractive Resource Base
• Attractive & Efficient Infrastructure
• History of Consistent , Flexible, and Fair Relations with Foreign Investors
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BARGAINING POWER FRAMEWORK
RELATIVE BARGAINING POSITION OF THE FIRM
AND
OUTCOME STAKE FOR THE FIRM
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Low Outcome Stake
Walk Away
If Charged, Avoid the Charge
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High Outcome Stake/Low Bargaining Position
Accede to Demands
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High Outcome Stake/High Bargaining Position
Negotiate