Managing Political Risk, Government Relations, and Alliances The specific objectives of this chapter are: EXAMINE how MNCs evaluate political risk. PRESENT some common methods used for managing and reducing political risk. DISCUSS strategies to mitigate political risk and develop productive relations with governments. DESCRIBE challenges to and strategies for effectively managing alliances.

The Nature and Analysis of Political Risk The likelihood that a business’s foreign investment will be constrained by a host government’s policy Macro political risk analysis Analysis that reviews major political decisions likely to affect all enterprises in the country Micro political risk analysis Analysis directed toward government policies and actions that influence selected sectors of the economy or specific foreign businesses in the country

Country Risk Maximum 100 80 Risk 60 40 20 Minimum Singapore Hong Kong Risk Singapore Hong Kong Chile Taiwan Malaysia Thailand Poland Israel Hungary India Saudi Arabia China South Africa Mexico Brazil Egypt Iran Colombia Ukraine Pakistan Turkey Nigeria Indonesia Cote d’Ivoire Kenya Venezuela Angola Argentina Iraq Adapted from Figure 10–1: Country Risk

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 the MNC Industrial piracy (counterfeiters) Political turmoil Government corruption How does the US look to investors from Australia or Dubai?

Perceptions of International Corruption Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

Perceptions of International Corruption Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

Micro Risk Factors “Some MNCs are treated differently than others” Industry regulation 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

Expropriation Risk Expropriation Indigenization laws The seizure of businesses by a host country with little, if any, compensation to the owners Indigenization laws Laws that require nationals to hold a majority interest in an operation

Evaluation of Political Risk Adapted from Table 10–2: A Guide to Evaluation of Political Risk

Operational Profitability Most MNCs are more concerned with operational profitability than expropriation Will they be able to make the desired return on investment? Requiring MNCs to use domestic suppliers vs. using supplies from other company-owned facilities or purchasing them in the world market Restricting the amount of profit that can be taken out of the country Wages and salaries that must be paid to the employees

Managing Political Risk and Government Relations Political risks Transfer risks Transfer risks Government policies that limit the transfer of capital, payments, production, people, and technology in and out of the country Tariffs on exports and imports Restrictions on exports Dividend remittance Capital repatriation

Managing Political Risk and Government Relations Political risks Transfer risks Operational risks Government policies and procedures that directly constrain management and performance of local operations Price controls Financing restrictions Export commitments Taxes Local sourcing requirements Operational risks

Managing Political Risk and Government Relations Political risks Transfer risks Ownership control risks Government policies or actions that inhibit ownership or control of local operations Foreign-ownership limitations Pressure for local participation Confiscation Expropriation Abrogation of proprietary rights Operational risks Ownership control risks

Assessing Political Risk Special Investments Conglomerate Vertical Horizontal General Investments Transfer Operational Ownership control Political Risks Adapted from Figure 10–2: A Three-Dimensional Framework for Assessing Political Risk

General Nature of Investment Conglomerate investment A type of high-risk investment in which goods or services produced are not similar to those produced at home Vertical investment The production of raw materials or intermediate goods that are to be processed into final products Horizontal investment An MNC investment in foreign operations to produce the same goods or services as those produced at home Click here to see slide 15

Special Nature of Investment Three sectors of economic activity Primary sector, which consists of agriculture, forestry, and mineral exploration and extraction Industrial sector, consisting of manufacturing operations Service sector, which includes transportation, finance, insurance, and related industries

Special Nature of Investment Special nature of foreign direct investments can be categorized as one of five types (see slide 15) Type I is the highest-risk venture; type V is the lowest-risk Risk factor is assigned based on sector, technology, and ownership Primary sector industries usually have the highest risk factor, service sector industries have the next highest, and industrial sector industries have the lowest Firms with technology that is not available to the government should the firm be taken over have lower risk than those with technology that is easily acquired Wholly owned subsidiaries have higher risk than partially owned subsidiaries Click here to see slide 15

Quantifying Variables in Political Risk Factors that are typically quantified Political and economic environment Domestic economic conditions External economic conditions Each factor is given a minimum or maximum score, and the scores are tallied to provide an overall evaluation of the risk Slide 20 provides an example of a quantitative list of political risk criteria Click here to see slide 15 Click here to see slide 20

Criteria for Quantifying Political Risk Adapted from Table 10–3: Criteria for Quantifying Political Risk

Formulating and Implementing Responses to Political Risk Three related corporate political strategies Relative bargaining power analysis The MNC works to maintain a bargaining power position stronger than that of the host country Integrative, protective, and defensive techniques Integrative techniques help the overseas operation become a part of the host country’s infrastructure Developing good relations with the host government and other local political groups Producing as much of the product locally as possible with the use of in-country suppliers and subcontractors Creating joint ventures and hiring local people to manage and run the operation

Formulating and Implementing Responses to Political Risk Doing as much local research and development as possible Developing effective labor–management relations Protective and defensive techniques discourage the host government from interfering in operations Doing as little local manufacturing as possible and conducting all research and development outside the country Limiting the responsibility of local personnel and hiring only those who are vital to the operation Raising capital from local banks and the host government as well as outside sources Diversifying production of the product among a number of countries

Formulating and Implementing Responses to Political Risk Proactive political strategies Lobbying, campaign financing, advocacy and other political interventions designed to shape and influence the political decisions prior to their impact on the firm Formal lobbying Campaign financing Seeking advocacy through the embassy and consulates of the home country Formal public relations and public affairs activities such as grassroots campaigning and advertising

Use of Integrative, Protective and Defensive Techniques High 20 Moderate 10 Low 1 (11, 14) Low or stable technology Integrative techniques Unified logistic, labor transmission (16,6) ((7, 10) Advanced management skill (14, 3) Dynamic high technology 1 Low 10 Moderate 20 High Protective/defensive techniques Adapted from Figure 10–4: Use of Integrative and Protective and Defensive Techniques by Firms in Select Industries

Managing Alliances Alliances and joint ventures can significantly improve the success of MNC entry and operation, especially in emerging economies Motivating factors faster entry and payback, economies of scale and rationalization, complementary technologies and patents, and co-opting or blocking competition Preparation for the likely eventual termination of the alliance Legal issues (conditions of termination, disposition of assets and liabilities, dispute resolution, distributorship arrangements, protection of proprietary information and property, rights over sales territories and obligations to customers) Business issues (basic decision to exit, people-related issues, relations with the host government)

Role of Host Governments in Alliances Alliance or joint-venture partners may be advantageous to MNC entry and expansion Highly regulated industries such as banking, telecommunications, and health care Cope with emerging-markets environments characterized by arbitrary and unpredictable corruption May be required by host government Host government may be unwilling to permit the alliance to terminate

Case HP-Compaq