1. International Managemnt
International Management
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2. Managing Political Risk, Government Relations, and Alliances
Chapter 10
Managing Political Risk, Government Relations, and Alliances

3. Learning Objectives 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

4. Russian Roulette: Risks and Political Uncertainty
Political uncertainty has long been a part of doing business in Russia
Russia's unpredictable foreign policy actions have indirectly resulted in financial difficulties for MNCs

5. Russian Roulette: Risks and Political Uncertainty (continued)
Many foreign companies have found themselves incurring huge losses due to lost business and frozen assets
Internal rule-changing by the Russian government poses the potential to lead to major losses and frustration

6. Political Risk
Unanticipated likelihood that a business’s foreign investment will be constrained by a host government’s policies
Evaluation of the inherent risk of doing business in emerging economies involves:
Policy and control mechanisms
Awareness of the historical treatment of MNCs within certain nations

7. Macro and Micro Analysis of Political Risk
Macro political risk analysis
Reviews major political decisions that are likely to affect all enterprises in the country
Micro political risk analysis
Directed toward government policies and actions that influence selected sectors of the economy or specific foreign businesses in the country

8. Overseas Expansion
MNCs need to be wary of the combative political environment that may exist
MNCs must:
Assess political risk
Install modern security
Compile crisis plans
Prepare employees for possible situations

9. Expropriation
Seizure of businesses by a host country with little, if any, compensation to owners
Greatest risk - Extractive, agricultural, infrastructural industries
Tend to occur in non-Western countries that are poor, unstable, and suspicious of foreign multinationals

10. Expropriation (continued)
Strategies to minimize the chances of expropriation
Bringing in local partners
Limiting the use of high technology so that if the firm is expropriated, the country cannot duplicate the technology
Acquiring an affiliate that depends on the parent company for key areas of the operation

11. Comprehensive Framework
Identifies the various risks and then assigns a quantitative risk or rating factor to them
Should consider all political risks and identify those that are most important
Categories of political risks
Transfer risks
Operational risks
Ownership-control risks

12. Figure 10.1 - Three-Dimensional Framework for Assessing Political Risk

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

14. Operational Risks
Government policies and procedures that directly constrain the management and performance of local operations
Price controls
Financing restrictions
Export commitments
Taxes
Local sourcing requirements

15. 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

16. Nature of Investment Conglomerate investment Vertical investments
Type of high-risk investment in which goods or services produced are not similar to those produced at home
Vertical investments
Production of raw materials or intermediate goods that are to be processed into final products
Run the risk of being taken over by the government

17. Nature of Investment (continued)
Horizontal investments
MNC investment in foreign operations to produce the same goods or services as those produced at home
Not likely to be takeover targets

18. Special Nature of Foreign Direct Investment (FDI)
Relates to the sector of economic activity, technological sophistication, and pattern of ownership
Sectors of economic activity
Primary sector - Agriculture, forestry, mineral exploration and extraction
Industrial sector - Manufacturing operations
Service sector - Transportation, finance, insurance, and related industries

19. Special Nature of Foreign Direct Investment (FDI) (continued)
Can be categorized as one of five types
Type I - Highest-risk venture
Type V - Lowest-risk venture
Risk factor is assigned based on sector, technology, and ownership
Primary sector industries have highest risk factor, service sector industries have next highest, and industrial sector industries have lowest

20. Special Nature of Foreign Direct Investment (FDI) (continued)
Firms with technology that is not available to the government have lower risk than those with technology that is easily acquired if taken over
Wholly owned subsidiaries have higher risk than partially owned subsidiaries

21. Managing Political Risk
Some firms attempt to manage political risk through a quantification process
Factors that are quantified reflect:
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

22. Techniques for Responding to Political Risk
Relative bargaining power analysis
Integrative, protective, and defensive techniques
Proactive political strategies

23. Relative Bargaining Power Analysis
MNC works to maintain a bargaining power position stronger than that of host country
Gaining bargaining power depends on:
Host country’s perception of the MNC’s size
Experience
Legitimacy

24. Integrative Techniques
Help overseas operations become part of host country’s infrastructure
Developing good relations with host government and other local political groups
Producing as much of the product locally as possible with use of in-country suppliers and subcontractors

25. Integrative Techniques (continued)
Creating joint ventures and hiring local people to manage and run operations
Doing as much local research and development as possible
Developing effective labor-management relations

26. 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 responsibility of local personnel and hiring only those who are vital to operations

27. Protective and Defensive Techniques (continued)
Raising capital from local banks, host government, and outside sources
Diversifying production of the product among a number of countries

28. Proactive Political Strategies
Leveraging bilateral, regional, and international trade and investment agreements
Drawing on bilateral and multilateral financial support
Using project finance structures to separate project exposure from overall firm risk

29. Specific Proactive Political Strategies
Formal lobbying
Campaign financing
Seeking advocacy through the embassy and consulates of home country
Formal public relations and public affairs activities
Such as grassroots campaigning and advertising

30. Managing Alliances Partners may be:
Current or former state-owned enterprises
Controlled or influenced by government agencies
Alliance and joint ventures can significantly improve the success of MNC entry and operation
Managing the relationships inherent in alliances can be challenging

31. Alliance
Arena where both value-claiming and value-creating activities take place
Value-claiming - Competitive, distributive negotiation
Value-creating - Collaborative, integrative negotiation

32. Alliance (continued) Motivating factors to enter into alliances
Faster entry and payback
Economies of scale and rationalization
Complementary technologies and patents
Co-opting or blocking competition
Challenge - Managing operations with partners from different national cultures
Cultural differences may create uncertainties and misunderstandings in the relationship

33. Successful Management of Alliances
Depends on situational conditions, management instruments, and performance criteria
Success factors
Partner selection, cooperation agreement, management structure, acculturation process, and knowledge management
Important aspect - Preparation for the likely eventual termination of the alliance

34. Legal Issues Critical to Termination of Alliance
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

35. Business Issues Critical to Termination of Alliance
Basic decision to exit
People-related issues
Relations with the host government

36. Role of Host Governments in Alliances
Are active in mandating that investors take on partners
Require investors to share ownership of their subsidiaries with local partners
Play a substantial role in the terms of formation and dissolution of alliances

37. Role of Host Governments in Alliances (continued)
Having alliance or joint-venture partners may be advantageous to MNC entry and expansion
Seen in highly regulated industries such as banking, telecommunications, and health care

38. Be the Management Consultant
As an international management consultant, what advice would you give to a foreign company looking to move operations into Brazil?

39. Be the Management Consultant (continued)
Do you think Brazil still holds the potential for future growth?
As an investor, do you think that the "buy low" mindset applies to Brazil?
If not, what changes would you like to see before making any investment in the country?

40. Review and Discuss
What types of political risk would a company entering Russia and France face?
Identify and describe three
How are these risks similar? How are they different?

41. Review and Discuss (continued 1)
Most firms attempt to quantify their political risk, although without specific weights
Why is this approach so popular?
Would the companies be better off assigning weights to each of the risks being assumed?
Defend your answer

42. Review and Discuss (continued 2)
How has terrorism impacted foreign interest in Iran and Saudi Arabia, considering the vast oil reserves that are there?
How have terrorist attacks affected political relationships between countries such as the United States and Russia?

43. Review and Discuss (continued 3)
If a high-tech firm wanted to set up operations in Iran, what steps might it take to ensure that the subsidiary would not be expropriated?
Identify and describe three strategies that would be particularly helpful
How might proactive political strategies help protect firms from future changes in the political environment?

44. Review and Discuss (continued 4)
What are some of the challenges associated with managing alliances? How do host governments affect these?