1. Managing Political Risk, Government Relations, and Alliances
The specific objectives of this chapter are:
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.

2. The Nature and Analysis of Political Risk
The likelihood that a business’s foreign investment will be constrained by a host government’s policy
Macro political risk analysis
Analysis that reviews major political decisions likely to affect all enterprises in the country
Micro political risk analysis
Analysis directed toward government policies and actions that influence selected sectors of the economy or specific foreign businesses in the country

3. Country Risk Maximum 100 80 Risk 60 40 20 Minimum Singapore Hong Kong
Risk
Singapore
Hong Kong
Chile
Taiwan
Malaysia
Thailand
Poland
Israel
Hungary
India
Saudi Arabia
China
South Africa
Mexico
Brazil
Egypt
Iran
Colombia
Ukraine
Pakistan
Turkey
Nigeria
Indonesia
Cote d’Ivoire
Kenya
Venezuela
Angola
Argentina
Iraq
Adapted from Figure 10–1: Country Risk

4. Macro Risk Factors
Freezing the movement of assets out of the host country
Placing limits on the remittance of profits or capital
Devaluing the currency
Refusing to abide by the contractual terms of agreements previously signed with the MNC
Industrial piracy (counterfeiters)
Political turmoil
Government corruption How does the US look to investors from Australia or Dubai?

5. Perceptions of International Corruption
Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

6. Perceptions of International Corruption
Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

7. Micro Risk Factors “Some MNCs are treated differently than others”
Industry regulation
Taxes on specific types of business activity
Restrictive local laws
Impact of WTO and EU regulations on American MNCs
Government policies that promote exports and discourage imports

8. Expropriation Risk Expropriation Indigenization laws
The seizure of businesses by a host country with little, if any, compensation to the owners
Indigenization laws
Laws that require nationals to hold a majority interest in an operation

9. Evaluation of Political Risk
Adapted from Table 10–2: A Guide to Evaluation of Political Risk

10. Operational Profitability
Most MNCs are more concerned with operational profitability than expropriation
Will they be able to make the desired return on investment?
Requiring MNCs to use domestic suppliers vs. using supplies from other company-owned facilities or purchasing them in the world market
Restricting the amount of profit that can be taken out of the country
Wages and salaries that must be paid to the employees

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

12. Managing Political Risk and Government Relations
Political risks
Transfer risks
Operational risks
Government policies and procedures that directly constrain management and performance of local operations
Price controls
Financing restrictions
Export commitments
Taxes
Local sourcing requirements
Operational risks

13. Managing Political Risk and Government Relations
Political risks
Transfer risks
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
Operational risks
Ownership control risks

14. Assessing Political Risk
Special Investments
Conglomerate
Vertical
Horizontal
General Investments
Transfer
Operational
Ownership control
Political Risks
Adapted from Figure 10–2: A Three-Dimensional Framework for Assessing Political Risk

15. General Nature of Investment
Conglomerate investment
A type of high-risk investment in which goods or services produced are not similar to those produced at home
Vertical investment
The production of raw materials or intermediate goods that are to be processed into final products
Horizontal investment
An MNC investment in foreign operations to produce the same goods or services as those produced at home
Click here to see slide 15

16. Special Nature of Investment
Three sectors of economic activity
Primary sector, which consists of agriculture, forestry, and mineral exploration and extraction
Industrial sector, consisting of manufacturing operations
Service sector, which includes transportation, finance, insurance, and related industries

17. Special Nature of Investment
Special nature of foreign direct investments can be categorized as one of five types (see slide 15)
Type I is the highest-risk venture; type V is the lowest-risk
Risk factor is assigned based on sector, technology, and ownership
Primary sector industries usually have the highest risk factor, service sector industries have the next highest, and industrial sector industries have the lowest
Firms with technology that is not available to the government should the firm be taken over have lower risk than those with technology that is easily acquired
Wholly owned subsidiaries have higher risk than partially owned subsidiaries
Click here to see slide 15

18. Quantifying Variables in Political Risk
Factors that are typically quantified
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
Slide 20 provides an example of a quantitative list of political risk criteria
Click here to see slide 15
Click here to see slide 20

19. Criteria for Quantifying Political Risk
Adapted from Table 10–3: Criteria for Quantifying Political Risk

20. Formulating and Implementing Responses to Political Risk
Three related corporate political strategies
Relative bargaining power analysis
The MNC works to maintain a bargaining power position stronger than that of the host country
Integrative, protective, and defensive techniques
Integrative techniques help the overseas operation become a part of the host country’s infrastructure
Developing good relations with the host government and other local political groups
Producing as much of the product locally as possible with the use of in-country suppliers and subcontractors
Creating joint ventures and hiring local people to manage and run the operation

21. Formulating and Implementing Responses to Political Risk
Doing as much local research and development as possible
Developing effective labor–management relations
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 the responsibility of local personnel and hiring only those who are vital to the operation
Raising capital from local banks and the host government as well as outside sources
Diversifying production of the product among a number of countries

22. Formulating and Implementing Responses to Political Risk
Proactive political strategies
Lobbying, campaign financing, advocacy and other political interventions designed to shape and influence the political decisions prior to their impact on the firm
Formal lobbying
Campaign financing
Seeking advocacy through the embassy and consulates of the home country
Formal public relations and public affairs activities such as grassroots campaigning and advertising

23. Use of Integrative, Protective and Defensive Techniques
High 20
Moderate 10
Low 1
(11, 14)
Low or stable technology
Integrative techniques
Unified logistic, labor transmission
(16,6)
((7, 10)
Advanced management skill
(14, 3)
Dynamic high technology 1
Low 10
Moderate 20
High
Protective/defensive techniques
Adapted from Figure 10–4: Use of Integrative and Protective and Defensive Techniques by Firms in Select Industries

24. Managing Alliances
Alliances and joint ventures can significantly improve the success of MNC entry and operation, especially in emerging economies
Motivating factors
faster entry and payback, economies of scale and rationalization, complementary technologies and patents, and co-opting or blocking competition
Preparation for the likely eventual termination of the alliance
Legal issues (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)
Business issues (basic decision to exit, people-related issues, relations with the host government)

25. Role of Host Governments in Alliances
Alliance or joint-venture partners may be advantageous to MNC entry and expansion
Highly regulated industries such as banking, telecommunications, and health care
Cope with emerging-markets environments characterized by arbitrary and unpredictable corruption
May be required by host government
Host government may be unwilling to permit the alliance to terminate

26. Case
HP-Compaq