Chapter 10 Managing Political Risk and Negotiations

Government Corruption 5 Most Corrupt Countries 1. Cameroon 2. Paraguay 3. Honduras 4. Nigeria 5. Indonesia 5 least Corrupt Countries 1. Denmark 2. Finland 3. Sweden 4. New Zealand 5. Iceland

Macro Analysis of Political Risk Purpose: To review the major political decisions likely to affect all business conducted in a country Examples tightening controls on flow of foreign currency bureaucratic legal systems requiring foreign investors to establish joint ventures with local partners

Micro Analysis of Political Risk Purpose: government policies that influence selected sectors of the economy or specific foreign business Examples industry regulation taxes on specific types of business activity restrictive local taxes

Political Risks Transfer Risks - policies that limit the transfer of capital, payments, production, people, and technology in or out of a country tariffs on exports or imports operational Risks - policies that constrain the management and performance of local operations price controls and financing restrictions Ownership control risks - polices that inhibit ownership or control of local operations foreign ownership limitations

The nature of investment 1. conglomerate investment - The production of goods or services dissimilar to those produced at home high risk 2. Vertical investment - production of raw materials or intermediate goods that are to be processed into final products moderate risk 3. Horizontal investment - production of goods or services similar to those produced at home low risk

Special Nature of Investment Economic Activity consists of: primary sector (agriculture, forestry, etc.) highest risk factor industrial sector (manufacturing operations) lowest risk factor service sector (transportation, finance, etc.) moderate risk factor

Technological Sophistication consists of: science-based industries high risk factor non-science-based industries lower risk factor

Patterns of ownership consist of: wholly owned businesses high risk factor partially owned businesses lower risk factor

integrative techniques Designed to help overseas operations become part of the host country’s infrastructure examples developing good relations with host government producing products locally creating joint venture participating in local research and development

Protective and defensive techniques Designed to discourage the host government from interfering in operations Examples doing little local manufacturing conducting little local research and development limiting responsibility of local personnel diversifying production in a number of countries

The negotiation process planning interpersonal relationship building exchanging task-related information persuasion agreement

do’s and don’t of negotiation do not identify the counterpart’s home culture too quickly beware of western bias toward “doing” try to counteract the tendency to formulate simple, stable images do not assume that all aspects of culture are equally significant do not overestimate your familiarity with your counterpart’s culture

Negotiation Tactics location time limits buyer-seller relations neutral meeting site is usually best time limits one party may be under a time constraint (e.g., holiday season) buyer-seller relations reciprocity