Managing Political Risk, Government Relations, and Alliances chapter ten Managing Political Risk, Government Relations, and Alliances McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Chapter Outline Political risk Types of political risk Macro risk factors Micro risk factors Evaluating political risk Types of political risk Terrorism Nationalization and expropriation Operational risks

Chapter Outline (2) Techniques for responding to political risks Maximizing the company’s bargaining power Integrative techniques Protective and defensive techniques Proactive political strategies

Chapter Outline (3) Managing alliances and joint ventures Why companies use alliances The alliance challenge Preparing for the termination of an alliance The role of host governments in alliances

Chapter Objectives The four 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.

Political Risk Definitions of political risk The likelihood that a business’s foreign investment will be constrained by a host government’s policy The likelihood that political forces will cause major changes in a country’s business environment that adversely affect the profits and strategic goals of one or more businesses

Analyzing Macro and Micro Political Risk Macro political risks Major political decisions that are likely to affect all enterprises in the country Micro political risks Government policies and actions that influence selected industries or specific foreign businesses in the country Analysis of political risks should consider whether a major change in control of the government is possible and what the effects of such a change might be

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 MNC Industrial piracy (counterfeiters) Political turmoil Government corruption

Micro Risk Factors Some MNCs are treated differently than others Industry-specific regulations 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

Evaluation of Political Risk

Terrorism and Its Overseas Expansion Terrorism: the use of force or violence against others to promote political or social views Three types of terrorism: amateur, religiously motivated, and classic MNCs are hesitant to set up operations in countries with high terrorism risk MNCs must assess political risk, install modern security, compile crisis plans, and prepare employees for possible situations

Nationalization Nationalization is the conversion of a private enterprise to government ownership. The government may or may not pay the company's stockholders or investors for the enterprise. When the companies are paid for the property, the price is usually set by the government and is usually far below the market value of the property. Nationalization is more likely in countries that are poor, politically unstable, and suspicious of foreign companies

Nationalization (2) Large companies are more likely to be nationalized than small ones Wholly owned subsidiaries are more likely to be nationalized than joint ventures. Nationalization is more likely in some industries than others Extractive industries, such as oil, gas, and mining Agriculture Utilities and transportation

Operational Profitability in Risk Analysis Most MNCs are more concerned with operational profitability than expropriation They are concerned with ability to make desired return on investment Require MNCs to use domestic suppliers vs. those from other company-owned facilities or purchase in world market Restrict the amount of profit taken out of the country Wages and salary that must be paid to employees

Techniques for Managing Political Risk The company attempts to maximize its bargaining power with the government. Integrative techniques are designed to help the company’s operations become part of the host country’s economy or infrastructure. Protective and defensive techniques are designed to limit the ability of the host country’s government to interfere with the company’s business Proactive political strategies attempt to influence political decisions before they can affect the company

Maximizing the Company’s Bargaining Power A company is more likely to have high bargaining power with the host government if: The company offers something that is important to the government (jobs, exports, etc.) The company has credible alternative locations elsewhere The government has few or no other alternatives for getting what the company is offering. The company is willing to make a long-term commitment to the country. Over time, the company may offer new things to keep bargaining power.

Integrative Techniques for Managing Political Risk Develop good relationships with the host government and other groups that have political influence. Make the product as “local” as possible, by using host country labor, suppliers, and subcontractors Create a joint venture and hire host country people as managers Develop good labor-management relations. Do as much local research and development as possible. Be a good corporate citizen. Some of these techniques will not apply in all situations.

Protective and Defensive Techniques Do as little local manufacturing as possible. Do all research and development outside the host country. Limit the responsibility of local employees. Use home country managers. Raise capital from local banks, the host government, and outside sources Produce the product in several countries. If expropriation or a non-convertible currency is a risk, get risk insurance from the Overseas Private Investment Corporation (U. S. firms only) or the Multilateral Investment Guarantee Agency

Proactive Political Strategies Lobbying, campaign financing, advocacy and other political interventions designed to shape and influence political decisions prior to impact on firm Formal lobbying Campaign financing when that is legal Seeking advocacy through embassy and consulates of home country Formal public relations and public affairs activities such as grassroots campaigning and advertising

Why Companies Use Alliances and Joint Ventures Alliances can improve a company’s chances for success, especially in an emerging market Alliances permit faster market entry and a shorter payback period for foreign direct investment Partners can share complementary knowledge and skills Some companies form an alliance with a potential competitor

The Alliance Challenge Structuring the alliance What does each partner contribute? What does each partner get? Can redundant activities be eliminated? Key success factors Choosing the right partner Determining the scope and limits of the alliance at the beginning

The Alliance Challenge Managing cultural issues Differences in uncertainty avoidance and time orientation (long-term vs. short-term) are the hardest to manage

Preparing for the Termination of an Alliance Business issues The decision to exit What happens to employees? Relationship with the host government

Preparing for the Termination of an Alliance (2) Legal issues Disposition of assets and liabilities Distributorship arrangements Protection of proprietary information and property Rights to sales territories Dispute resolution

Role of Host Governments in Alliances In highly regulated industries -- such as banking, telecommunications, and health care – a local partner can help with market access and deal with regulations A local partner can help the company deal with emerging markets environments characterized by arbitrary and unpredictable corruption A local partner may be required by the host government The host government may block termination of the alliance