1. Political Environment of Global Markets

2. Political Risks - Confiscation - Expropriation - Domestication
- Protectionism
Regulations:  Export Controls
 Import Restrictions
 Exchange Controls  Local-Content Laws  Tax Controls  Price Controls  Labor Problems
- Political and Social Activity
Violence, War
Spill over of Country Perception

3. Image of American Brands in Foreign Countries
The Bush Factor?
Handelsblatt 11 August 2004, p.9

4. Protectionism
Protectionism: Governmental Restrictions on Trade to Protect Home Industry mainly through Tariffs (Tax on Imported products) and Quotas (Restriction Placed on Amount of Imports)
Arguments for Protectionism:
 Infant Industry
 Jobs at Home
 Protection of Home Industry
 Conservation of natural Resources
 National Defense
 Retaliation
Lasting Protectionism has always been detrimental to countries
in the long run.

5. The Price of Protectionism
Industry Total Costs to Number of Cost per
Consumers Jobs Saved Job Saved
(in $ millions)
Textiles and apparel $27, ,000 $ 42,000
Carbon Steel 6,800 9,000 $ 750,000
Autos 5,800 55,000 $ 105,000
Dairy products 5,500 25,000 $ 220,000
Shipping 3,000 11,000 $ 270,000
Meat 1,800 11,000 $ 160,000
SOURCE: Michael McFadden, “Protectionism Can’t Protect Jobs,” Fortune, May11, 1987, pp. 125.

6. Source: 2002 Annual Report—Federal Reserve Bank of Dallas

7. Managing Political Risk
Quantify Political Risk
- Use of Internal and External Experts
- Use of Risk Management Companies
Economic Freedom Index
Market Potential Index

8. Business Environment Risk Intelligence (BERI)
Beri Provides a Rating of Countries According
to Their Political Risks
1. Identification of Risk Factors
2. Correlation of Factors with Occurrence of Damage
3. Quantitative Weighing of Risk Factors

9. Risk Factors (examples):
- Mentality, including Xenophobia, Nationalism, Corruption,
Nepotism
- Social Conditions, including Population Density,
Wealth Distribution
- Organization and Strength of Radical Forces
- Dependence on Major Powers
- Negative Influence of Regional Political Forces
- Societal Conflict, involving Demonstrations, Strikes,
Street Violence
- Instability through Assassinations, non-Constitutional Changes,
Guerrilla Wars

10. Balance reward and risk
Managing Political Risk
Balance reward and risk
Adjust discount factor (required return) in capital budgeting analysis.
Scenario analysis of “one-off” events
Potential loss vs. size of MNE
Relative importance of the market

11. OPIC (Overseas Private Investment Corp) insurance
Managing Political Risk
Monitor and Control Political Risk
Amount of investment
- diversification of production and/or markets
- local sourcing
Mode of entry
- local investor to limit exposure
- lease, JV, licensing rather than solo investment
Structure to share possible losses
OPIC (Overseas Private Investment Corp) insurance -
Hermes Cover in Germany
- local financing

12. Managing Political Risk
Monitor and Control Political Risk
Monitor political and economic developments.
Respond via lobbying, public relations and corporate social responsibility to maintain political support.
Structure the enterprise to encorporate local interests
local partners (mode of entry)
local sourcing
Accelerate repatriation of profits

13. Some web pages: http://www.state.gov/
The U.S. Department of state provides a wide variety of information on international topics including a rudimentary analysis of political and economic risk in foreign countries.
This governmental site provides information about foreign trade statistics
This privately held for-fee site provides information about country risk. Upon request BERI analyses and evaluates industry specific political risk in foreign countries