1. TAMÁS NOVÁK Global Business Environment
Political risks

2. Definition of Political Risk
Possibility of an unexpected politically-motivated event affecting the outcome of an investment
Instability vs. risk
Classified based on
- actor responsible
- nature of effect
- micro vs. macro

3. The World economy according to development level
Before Today
Developed market economies Developed market economies („first world”)
Socialist economies Countries in transition („second world”)
NICs
Developing countries Oil exporting countries („third world”) Middle income countries
Low income countries
LDCs

4. Types of Political Risks
Cause
Result
Government
Others
Property Loss
Confiscation
Destruction
Income Loss
Discrimination
Disruption
Source: de la Torre & Neckar

5. Main Types of Political Risks
Expropriation
“Forced divestment of equity ownership of a foreign direct investor”. Peaked in the mid-70s; almost nil now
Mostly Africa till 1980, then Latin America
Declined since:
Key sectors already nationalized
Economic need = > privatization
Regulate rather than expropriate
Many hosts have joined MIGA (Multilateral Investment Guarantee Agency)
Some controversy over future:
is free enterprise here to stay, or will there be a backlash when privatization, etc. fails to provide widespread benefits?

6. Main Types of Political Risks
Terrorism
Terrorist acts infrequent, but spectacular
- L. America: kidnappings; U.S. public institutions
- China, India, Turkey, Israel etc.
Groups denied a voice in legitimate channels
Symbolism particularly important (MacDonalds, etc.)

7. Main Types of Political Risks
Selective Intervention
Most risks are less dramatic changes in the rules of the game.
Some areas of government policy affect foreign-owned companies more than most domestic ones
Restrictions on Cross-Border Transfer of Resources
Tariffs, exporting
FX controls limit repatriation
Capital controls
Labour regulation

8. Main Types of Political Risks
Taxation Concerns
Restrictions on transfer pricing
Withholding taxes
Availability of tax holidays and other incentives
Investment Restrictions
Sectoral restrictions
Requirements for JVs, local ownership
Transparency of licensing procedures
Requirements for disclosure of technology
Requirements for forced divestiture

9. Main Types of Political Risks
Operating Restrictions
limits on expansion, ownership of land, etc.
Discriminatory access to labour, inputs
Restrictions on local market access
Performance requirements (e.g. employment & export levels, etc.)
Unequal access to government procurement

10. Main Types of Political Risks
Non-Neutrality of the Legal Environment
Judges or other arbiters insulated from political pressure
International and regional conventions
International conventions on compensation
Guarantees of national treatment
Regulations with Differential Effects on Foreigners
Some may be much harder for foreign companies to comply with

11. Main Types of Political Risks
“Crossfire” Problems
Activities may lead to international or home country sanctions or consumer boycotts against the country or firms that deal there
human rights abuses (e.g. imprisonment, torture or murder of political opponents; use of prison labor; persecution of minority groups; not abiding by election results)
conflicts with neighboring countries
lack of concern for the environment, endangered species, etc.
disregard for international agreements (e.g. re nuclear non-proliferation)
the misuse of social issues as means of protectionism

12. Forecasting Techniques
“old hands” = ask experts for personal evaluations
expertise, but may be dated, subjective or irrelevant
“grand tour” = send executives for personal visits
access to top decision makers, first-hand exposure, but superficial may hear self-interested pleading
quantitative
Delphi: obtain expert views, aggregate and give to same experts for chance to revise their views given what others think; repeat until consensus. Tends towards “conventional” predictions. Econometric: use historical data, macro-orientation, but low-cost, may be helpful for initial screening

13. THE MEASUREMENT OF POLITICAL RISK
1. Political factors measured by:
a. Frequency of government changes
b. Level of violence
c. Number of armed insurrections
d. Conflict with other states

14. THE MEASUREMENT OF POLITICAL RISK
Economic Factors
1. Indicators of political unrest
a. Rampant inflation
b. Extreme balance of payment deficits
c. Slowed growth of per capita GDP

15. THE MEASUREMENT OF POLITICAL RISK
Subjective Factors
1. Profit Opportunity Recommendation
2. Political Risk and Uncertain Property Rights

16. THE MEASUREMENT OF POLITICAL RISK
Capital Flight
a. Definition:
the export of savings by a nation’s citizens because of safety-of-capital fears.
b. Measurement: use the balance-of- payment account

17. THE MEASUREMENT OF POLITICAL RISK
Causes of capital flight
1.) Inappropriate economic policies
2.) Expectation of devaluation
3.) High political risk

18. Managing Political Risk (counter moves)
Insurance
JVs with local or foreign partners
Local stakeholders
Structural dependency
Lobbying
Planned divestiture with profits
General rule: make the costs to the government of an undesirable move to the firm very costly. Provide “incentives” for appropriate government regulations and policies.