Political Environment of Global Markets

Political Risks - Confiscation - Expropriation - Domestication - Protectionism Regulations:  Export Controls  Import Restrictions  Exchange Controls  Local-Content Laws  Tax Controls  Price Controls  Labor Problems - Political and Social Activity Violence, War Spill over of Country Perception

Image of American Brands in Foreign Countries The Bush Factor? Handelsblatt 11 August 2004, p.9

Protectionism Protectionism: Governmental Restrictions on Trade to Protect Home Industry mainly through Tariffs (Tax on Imported products) and Quotas (Restriction Placed on Amount of Imports) Arguments for Protectionism:  Infant Industry  Jobs at Home  Protection of Home Industry  Conservation of natural Resources  National Defense  Retaliation Lasting Protectionism has always been detrimental to countries in the long run.

The Price of Protectionism Industry Total Costs to Number of Cost per Consumers Jobs Saved Job Saved (in $ millions) Textiles and apparel $27,000 640,000 $ 42,000 Carbon Steel 6,800 9,000 $ 750,000 Autos 5,800 55,000 $ 105,000 Dairy products 5,500 25,000 $ 220,000 Shipping 3,000 11,000 $ 270,000 Meat 1,800 11,000 $ 160,000 SOURCE: Michael McFadden, “Protectionism Can’t Protect Jobs,” Fortune, May11, 1987, pp. 125.

Source: 2002 Annual Report—Federal Reserve Bank of Dallas

Managing Political Risk Quantify Political Risk - Use of Internal and External Experts - Use of Risk Management Companies Economic Freedom Index https://www.heritage.org/index/ranking Market Potential Index http://globaledge.msu.edu/resourcedesk/mpi/

Business Environment Risk Intelligence (BERI) Beri Provides a Rating of Countries According to Their Political Risks 1. Identification of Risk Factors 2. Correlation of Factors with Occurrence of Damage 3. Quantitative Weighing of Risk Factors

Risk Factors (examples): - Mentality, including Xenophobia, Nationalism, Corruption, Nepotism - Social Conditions, including Population Density, Wealth Distribution - Organization and Strength of Radical Forces - Dependence on Major Powers - Negative Influence of Regional Political Forces - Societal Conflict, involving Demonstrations, Strikes, Street Violence - Instability through Assassinations, non-Constitutional Changes, Guerrilla Wars

Balance reward and risk Managing Political Risk Balance reward and risk Adjust discount factor (required return) in capital budgeting analysis. Scenario analysis of “one-off” events Potential loss vs. size of MNE Relative importance of the market

OPIC (Overseas Private Investment Corp) insurance Managing Political Risk Monitor and Control Political Risk Amount of investment - diversification of production and/or markets - local sourcing Mode of entry - local investor to limit exposure - lease, JV, licensing rather than solo investment Structure to share possible losses OPIC (Overseas Private Investment Corp) insurance - http://www.opic.gov/ Hermes Cover in Germany - local financing

Managing Political Risk Monitor and Control Political Risk Monitor political and economic developments. Respond via lobbying, public relations and corporate social responsibility to maintain political support. Structure the enterprise to encorporate local interests local partners (mode of entry) local sourcing Accelerate repatriation of profits

Some web pages: http://www.state.gov/ The U.S. Department of state provides a wide variety of information on international topics including a rudimentary analysis of political and economic risk in foreign countries. http://www.census.gov/foreign-trade/www/index.html This governmental site provides information about foreign trade statistics http://www.beri.com This privately held for-fee site provides information about country risk. Upon request BERI analyses and evaluates industry specific political risk in foreign countries