Political and Trade Forces Chapter 6 Political and Trade Forces

Political risk and uncertainty When considering an overseas investment, political stability is essential. Uncertainty over the political outlook may deter the international investors. Is Brazil a good investment location if your workforce must be made up of mostly Brazilian workers? Is India a good investment location considering the excessive beaurocracy and regulation? Euromoney Political Risk Index categorizes countries into six groups according to the political risks exist in these countries.

Government ownership of business Reasons for Nationalization of Businesses: To increase government revenues To increase profitability of the firms Ideologically, some communist or socialist governments may believe that the production units should be under the control of the government. Job preservation (to save jobs created by the firm) The government may want to control the money given to the firm. Happenstance (after the wars or conflicts, for example)

Nationalization may cause unfair competition Sometimes government firms may have advantages that the private firms do not have: They may reduce the prices unfairly, because they don’t have to make profits. They can get cheaper financing. They may get government contracts. They may get export assistance. They can hold down wages with government assisstance.

Privatization Privatization is the transfer of public sector assets to private sector, the transfer of management of state activities through contracts and leases, and contracting out of activities previously conducted by the state. Britain former prime minister Margaret Thathcer sold 30 government companies raising $65 billion and reducing the share of state-owned companies from 10% of the GDP to 3.9% of the GDP, for example. It can be in the form of leasing. Mozambique has contracted a British firm to run its customs administration.

Terrorism Terrorism is unlawful acts of violence committed for a variety of reasons, like for ransom, to overthrow a government, to gain release of imprisoned colleagues, to exact revenge, to punish non-believers, etc. Some of the terrorist groups: Al Qaeda, ETA, Japanese Red Army, PKK, etc. Ten highest risk countries according to Terrorism Risk Index are; Somalia, Pakistan, Iraq, Afghanistan, Palestinian Occuped Territory, Columbia, Thailand, the Phillipines, Yemen, Russia.

Chemical and biological terrorism Some examples: Nerve gas attack in Tokyo Subway killing 12 people. Pentagon scientists have been deployed in 25 countries and given diplomatic immunity to research and test deadly viruses, bacteria and toxins, in Georgia, Ukraine, the Middle East, South East Asia and Africa.

Country Risk Assessment (CRA) CRA is an evaluation, conducted by a bank or a business, that assesses a country’s economic situation and policies and its politics to determine how much risk exists of losing an investment or not being paid. CRA must be updated frequently, because the risks of countries are changing in time. Wars, revolutions and coups increase the riskiness of countries. Persistent BOP deficits, high inflation rates, militant labor unions also increase the risk level. Also taxes, currency convertibility, tariffs, quotas and labor permits cause concern.