POLITICAL RISK

ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

Moreover... POLCIES, THAT ARE UNPLEASANT, DO NOT CONSTITUTE RISK AS LONG AS THEY ARE TRANSPARENT AND ENFORCED WITH CONSISTENCY.

POLITICAL RISKS INSTABILITY RISK OWNERSHIP RISK OPERATIONS RISK TRANSFER RISK

INSTABILITY RISK ARISES FROM THE UNCERTAINTY ABOUT STABILITY OF A GOVERNMENT.

OWNERSHIP RISK ARISES FROM THE UNCERTAINTY ABOUT A GOVERNMENT’S DECISION TO REDUCE FOREIGN INVESTORS’ OWNERSHIP IN THEIR INVESTMENTS IN THE COUNTRY.

CONFISCATION IMPOUNDING OF THE PROPERTY OF FOREIGN INVESTORS BY THE HOST GOVERNMENT WITHOUT COPENSATION.

EXPROPRIATION PURCHASE OF PROPERTY FROM FOREIGN INVESTORS.

NATIONALIZATION PURCHASE OF PRIVATE BUSINESSES BY HOST GOVERNMENT.

DOMESTICATION PLANNED REDUCTION OF EQUITY HELD BY FOREIGN INVESTORS.

OPERATIONS RISK ARISES FROM THE UNCERTAINTY ABOUT HOST GOVERNMENT’S POLICIES THAT MAY CONSTRAIN FOREIGN INVESTORS’ OPERATIONS IN THE COUNTRY.

They can change policies regarding... PRICES TERMS OF COMPETITION TAXATION PRODUCT SPECIFICATIONS

MEASURES CAN BE HIGHLY VARIED AND UNLIMITED AND THEY CAN BE AS DEVASTATING AS EXPROPRIATION

TRANSFER RISK ARISES FROM THE UNCERTAINTY ABOUT GOVERNMENT POLICIES THAT MAY RESTRICT FOREIGN INVESTORS’ ABILITY TO TRANSFER PROFITS OR CAPITAL OUT OF THE COUNTRY.

HOW TO ANALYZE POLITICAL RISKS POLITICAL SOCIAL ECONOMIC

EXTERNAL THREAT QUESTION: HOW LIKELY IS IT THAT AN OUTSIDE FORCE WILL DESTABILIZE THE GOVERNMENT OF A COUNTRY?

THINGS TO LOOK FOR: THE WORDS AND ACTIONS OF THE LEADERS OF THE ENEMY COUNTRIES

INTERNAL THREAT QUESTION: HOW LIKELY IS IT THAT THE GOVERNMENT WILL REMAIN STABLE (ASSUMING THERE IS NO EXTERNAL THREAT)?

A COUNTRY WHERE TRANSITION OF POWER FOLLOWS A FIXED SCHEDULE AND IS PEACEFUL IS MORE STABLE.

SUCH A COUNTRY ALLOW ITS PEOPLE TO CHOOSE THEIR RULERS AND SPEAK THEIR MINDS.

POLITICAL FREEDOM (ACCORDING TO FREEDOM HOUSE-99) FREE PARTLY FREENOT FREE ArgentinaArmeniaChina BulgariaBrazilEgypt Czech RepGhanaIndonesia HungaryMalaysiaNigeria TaiwanRussiaSaudi Arab S. AfricaTurkeyVietnam

EXISTENCE OF DEMOCRATIC POLITICAL PROCESS DOES NOT ALWAYS ENSURE POLITICAL STABILITY. OTHER EXAMPLES INCLUDE: INDIA, ISRAEL, ITALY, TURKEY

LIKEWISE, EXISTENCE OF AN AUTOCRATIC GOVERNMENT DOES NOT NECESSARILY IMPLY INSTABILITY.

LOOK AT THE SIX ASIAN TIGERS CHINA IS A COMMUNIST COUNTRY. INDONESIA HAD MILITARY DICTATORSHIP & ONE PARTY RULE UNTIL RECENTLY. TAIWAN & SOUTH KOREAWERE AUTHORITARIAN STATES UNTIL RECENTLY. SINGAPORE HAS ELECTED AUTHORITARIAN GOVERNMENT

HONG KONG’S COLONIAL GOVERNMENT WAS UNDEMOCRATIC.

SIGNALS TO LOOK FOR: SEPARATIST MOVEMENTS POLITICAL MOVEMENTS RADICAL MOVEMENTS ETHNIC TENSIONS DISCONTENT

OWNERSHIP RISKS QUESTION: WILL THE GOVERNMENT ACT IN A WAY THAT WILL DEPRIVE A FOREIGN FIRM FROM CONTINUING ITS OWNERSHIP IN THE COUNTRY?

Pay attention to the attitude of the leaders. And what they have to say about specific countries. Anger of the labor toward foreign policies… toward foreign firms of specific countries or firms.

OPERATIONS RISK QUESTION: WHAT IS THE LIKELIHOOD THAT A GOVERNMENT WILL CHANGE POLICIES THAT IMPACT ON FOREIGN FIRMS’ PROFITABILITY.

THINGS TO LOOK FOR. DEBT SERVICE RATIO EXTERNAL DEPENDENCE LIQUIDITY

DEBT SERVICE RATIO A COUNTRY’S ANNUAL DEBT INTEREST AND PRINCIPAL LIABILITY AS A PERCENT OF EXPORTS OF GOODS AND SERVICES

How do countries score? ACCEPTABLE <20% Poland, Malaysia, Thailand PRECAUTIONARY >20% BUT <30% Chile, India, Mexico, Turkey DANGEROUS >30% Argentina, Brazil, Hungary, Indonesia (Data is from 1995)

It may be all right if a country: Has highly diversified export base. –Both products and markets. Can reduce imports in a crisis. –Fraction of total imports that comprise of oil and food (over 35% is alarming). Has long-term capacity to repay debt. –Total debt/GDP (over 40% is alarming)

How do these measure up? Oil& FoodTotal Debt Ratio-94to GNP-97 Argentina07%38% Brazil26%23% Hungary19%52% IndonesiaLow62%

EXTERNAL DEPENDENCE A COUNTRY’S TOTAL EXPORT & IMPORT BILL AS A PERCENTAGE OF ITS GNP (1998) Argentina18% Brazil15% Hungary107% Indonesia55%

LIQUIDITY LENGTH OF TIME A COUNTRY CAN CONTINUE TO IMPORT AT THE PRESENT LEVEL BY DRAWING DOWN ITS FOREIGN EXCHANGE RESERVES.

2-3 MONTHS IS PRECAUTIONARY LESS THAN 2 MONTHS IS ALARMING (Data for 1998) Argentina8.5 Months Brazil6.5 Months Hungary4.5 Months Indonesia4.5 Months

ECONOMIC POLICY IS THE COUNTRY INVESTING IN EDUCATION & INFRASTRUCTURE? IS IT OPEN TO TRADE? IS IT LETTING THE MARKET HAVE ITS WAY?

INTERVENTION BY GOVERNMENT BREEDS BUREAUCRACY THAT PULLS THE COUNTRY BACKWARDS. IT BREEDS CORRUPTION AND INEFFICIENCY.

POLITICAL RISK SCORES LOW Switzerland Norway Austria Germany Netherlands Brunei Japan HIGH Liberia Somalia Sudan Iraq Myanmar Uganda Ethiopia

HOW TO COPE WITH POLITICAL RISK Avoidance Approach Insurance Approach Negotiation Approach

Insurance Approach Political Risk Insurance –Overseas Private Investment Corporation (OPIC) –American International Group –Lloyds of London

Bargaining Approach WHEN THE BARGAINING POWER POSITION OF A FIRM RELATIVE TO THAT OF THE HOST GOVERNMENT IS STRONG, THE FIRM WILL EXPERIENCE LOW LEVEL OF INTERVENTION IN ITS OPERATIONS.

BARGAINING POWER OF MNCs Access to Technology Integration in Global Production Access to Global Markets Access to Foreign Exchange Provider of Jobs & Capital

BARGAINING POWER OF COUNTRIES Market Size and Growth Potential Attractive Resource Base Attractive & Efficient Infrastructure History of Consistent, Flexible, and Fair Relations with Foreign Investors

BARGAINING POWER FRAMEWORK RELATIVE BARGAINING POSITION OF THE FIRM AND OUTCOME STAKE FOR THE FIRM

Low Outcome Stake Walk Away If Charged, Avoid the Charge

High Outcome Stake/Low Bargaining Position Accede to Demands

High Outcome Stake/High Bargaining Position Negotiate