Prentice Hall, 2002Chapter 10 Daniels 1 Chapter Ten Risk Management and Asset Protection

Prentice Hall, 2002Chapter 10 Daniels 2 Chapter Objectives  To appreciate the difference between risk and uncertainty  To grasp the idea of managing risk as an opportunity versus risk as a hazard  To learn about foreign exchange risk and the tools that traders and companies use to manage it  To understand the idea of political risk, its principal types, and active versus passive management approaches  To profile competing views of the scope of intellectual property rights  To realize how companies establish and protect intellectual property rights

Prentice Hall, 2002Chapter 10 Daniels 3 Introduction  FDI, particularly in the economies of emerging markets, offers many opportunities  Sources of risk that especially menace international operations: Fluctuations in foreign exchange values Political disruption and turmoil Intellectual property violations

Prentice Hall, 2002Chapter 10 Daniels 4 The Idea of Risk Management  The best-laid plans of managers and companies run into challenges when things do not go as planned  Challenges can arise from: Internal conditions Abrupt shortage of money to finance expansions Unforeseen changes in the marketplace Uncertainty o Comes from changes in economic, social, and political trends Risk The chance that a specific company will gain or lose money on a particular investment activity

Prentice Hall, 2002Chapter 10 Daniels 5 The Idea of Risk Management The view of risk follows the notion that a basic relationship exists between risk and return Prudently managed risky markets promise terrific growth opportunities and great profit potential for the confident MNE Typically, the idea of risk conjures images of negative events such as devastating financial loss o Managing risk as a hazard pushes managers to come up with methods to reduce the odds of a negative event Globalization steadily pushes firms to see risk more as the price of better opportunities

Prentice Hall, 2002Chapter 10 Daniels 6 Foreign Exchange Risk  To many, the most striking operating differences between domestic and international business is the financial basis of exchange  Companies try to forecast exchange rate changes in the effort to reduce their possible costs  Companies try to limit the downside of currency fluctuation by: Modeling currency trends Forecasting exchange rate movements  Several factors violate the law of supply and demand: National governments

Prentice Hall, 2002Chapter 10 Daniels 7 Foreign Exchange Risk  The irony of government intervention in the foreign exchange market is that it is theoretically impossible for any form of intervention to permanently alter the value of a national currency  Government intervention tends to happen in hazardous styles that create extensive foreign exchange risk for international companies  Exchange rate changes can impact: Marketing decisions Production decisions Financial decisions

Prentice Hall, 2002Chapter 10 Daniels 8 Foreign Exchange Risk  Currency values change frequently  A change in the exchange rate can result in three different exposures for a company Translation exposure: created by the present measurement of past activity Transaction exposure: exchange rate fluctuations materially change the expected income from a transaction that is denominated in foreign currency Economic exposure: materially influence a firm’s future earning power

Prentice Hall, 2002Chapter 10 Daniels 9 Foreign Exchange Risk  Typically, managers use a mix of the major tools of the foreign exchange market: Spot exchange rate: the rate at which a foreign exchange market would willingly convert one currency into another currency Forward exchange rate: governs future deals Currency swap: refers to the simultaneous purchase and sale of a given amount of foreign exchange for different value dates  Management of economic exposure requires that a company carefully review its idea of risk and assemble the optimum mix of countries within which to build and operate its plants

Prentice Hall, 2002Chapter 10 Daniels 10 Political Risk  Political risk: the chance that political decisions, events, or conditions in a particular nation will affect the business environment in ways that lead investors to lose some or all of the value of their investment or be forced to accept a lower-than- projected rate of return  There are several types of political risk: Systemic political risk: generally, the political process within a particular nation does not routinely subject foreign operations to discriminatory treatment Procedural political risk: can interfere with the process of transactions Distributive political risk: this form may be subtle Catastrophic political risk: includes random political developments that adversely affect the operations of companies and MNEs

Prentice Hall, 2002Chapter 10 Daniels 11

Prentice Hall, 2002Chapter 10 Daniels 12 Political Risk  The actions of host governments and local political institutions and actors directly shape the success or failure of overseas operations  Methods of political risk management include: Active management: depends on identifying the indicators that best measure political risk Political risk management services Passive management: treat political risk as an unpredictable hazard of international business and seek ways to hedge their exposure OPIC Multilateral development banks (MDBs) Private insurance

Prentice Hall, 2002Chapter 10 Daniels 13 Intellectual Property Rights  Intellectual property: the creative ideas, innovative expertise, and intangible insight that gives an individual, company, or country a competitive advantage  Intellectual property rights (IPRs): refers to rights of the registered owner of the particular invention, literary or artistic work, symbol, name, image, or design  World Intellectual Property Organization (WIPO): a United Nations agency established in 1907, administers agreements  A country’s view of IPRs is influenced by: Level of economic development National cultural attitudes Social and economic institutions  Many organizations are trying to set minimum standards for the protection and enforcement of IPRs

Prentice Hall, 2002Chapter 10 Daniels 14

Prentice Hall, 2002Chapter 10 Daniels 15 Intellectual Property Rights  The basis and scope of disagreement among nations on IPRs create fundamental gaps that will not be easily resolved  Companies are trying to devise ways to manage this risk: Employee relations Dealing with outside parties A tough reputation