P. 1
Lecture 08

Lecture 08

|Views: 0|Likes:
Published by Rinky Shrestha

More info:

Published by: Rinky Shrestha on Dec 28, 2011
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as PPT, PDF, TXT or read online from Scribd
See more
See less





Political Risk and Political Risk Assessment


Political Risk Analysis
 Definitions
 Empirical relationships  Forecasting techniques  Using risk analysis  Managing political risks


3 .

actor responsible .Definition of Political Risk  Possibility of an unexpected politically- motivated event affecting the outcome of an investment  Instability vs. macro) 4 .nature of effect . risk  Classified based on .breadth (micro vs.

Types of Political Risks Cause Result Property Loss Income Loss Government Confiscation Discrimination Others Destruction Disruption de la Torre & Neckar (1988). p. 223 5 .

or will there be a backlash when privatization.is free enterprise here to stay.Economic need = > privatization . fails to provide widespread benefits? 6 .Key sectors already nationalized .Main Types of Political Risks a) Expropriation  “Forced divestment of equity ownership of a foreign direct investor” (Minor 1994)  Peaked in the mid-70s. etc. almost nil now  Mostly Africa till 1980.Regulate rather than expropriate   Many hosts have joined MIGA (Multilateral Investment Guarantee Agency) Some controversy over future: . then Latin America  Declined since: .

U. targets.L. kidnappings . public institutions . Iraq  Little research-seems to be primarily groups denied a voice in legitimate channels  Symbolism particularly important (MacDonalds. but spectacular . U. – owned corps. America #1 esp.S.Main Types of Political Risks (Continued) b) Terrorism  Terrorist acts infrequent.) c) Selective Intervention  Most risks are less dramatic changes in the rules of the game. Turley.China. etc. Israel etc.  Some areas of government policy affect foreign-owned companies more than most domestic ones 7 . India.S. Esp. -sept 11.

Main Types of Political Risks (Continued) Restrictions on Cross-Border Transfer of Resources  Tariffs. NTBs inhibit sourcing. exporting  FX controls limit repatriation  Capital controls  Labour regs Taxation Concerns  Restrictions on transfer pricing  Unitary taxation policies  Withholding taxes  Availability of tax holidays and other incentives 8 .

) 9  Unequal access to government procurement . local ownership  Transparency of licensing procedures  Requirements for disclosure of technology  Requirements for forced divestiture Operating Restrictions  limits on expansion. etc.Main Types of Political Risks (Continued) Investment Restrictions  Sectoral restrictions  Requirements for JVs. employment & export levels.g. ownership of land. etc. inputs  Restrictions on local market access  Performance requirements (e.  Discriminatory access to labour.

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

not abiding by election results) .the misuse of social issues as means of protectionism What kind of cross-fire problems associated with Iraq winemakers in the Bordeaux region faced? 11 .disregard for international agreements (e. use of prison labor.Main Types of Political Risks (Continued) d) “Crossfire” Problems  Activities may lead to international or home country sanctions or consumer boycotts against the country or firms that deal there .lack of concern for the environment. etc. endangered species. re nuclear nonproliferation) .conflicts with neighboring countries .g.g. .human rights abuses (e. imprisonment. persecution of minority groups. torture or murder of political opponents.

host countries with pervasive governments (“hands-on”) .JVs with the host government .medium-technology .Political Risk Empirical Relationship    Most studies examine correlates of expropriation Minor (1993): no link with stability Positive correlations (more risk) . service and key sectors .“obsolescing bargains” 12 .need for scapegoats .extractive.

integrated subsidiaries that depend on rest of network .lobbying  Makhija (1993): information indicating convergence of MNC actions and government economic objectives 13 .low/high tech .Empirical Relationship (Continued)  Negative correlations (less risk) .

access to top decision makers. personal evaluations . first-hand exposure. but 14 low-cost.taps expertise.econometric: use historical data. but superficial . may be helpful for initial screening . aggregate and give to same experts for chance to revise their views given what others think.may hear self-interested pleading  quantitative .tends towards “conventional” predictions . but may be dated.Forecasting Techniques  “old hands” = ask experts for gut instinct.Delphi: obtain expert views. macro-orientation. subjective or irrelevant  “grand tour” = send executives for personal visits . repeat until consensus .

15 .

The Economist Method Political Risk Service (PRS) -.100 points 33 points economic factors: falling GDP/per capita high inflation capital flight decline in productivity raw materials as percentage of exports 50 points politics: bad neighbours authoritarianism staleness illegitimacy generals in power war/armed insurrection 16 .

100 points 17 points society: urbanization race Islamic fundamentalism corruption ethnic tension 17 .The Economist Method Political Risk Service (PRS) -.

best if unitary actor and major decision .best for small decisions by bureaucracies Political bargaining type .rational actor-type .what is the logical action given goals .who has power and influence where .Political Analysis Expert qualitative studies .organizational type .best for fractionated power environments Results are best when model fits the characteristics of 18 the decision and the decision-maker .organizations do what they have always done .

technology transfer. improved balance of payment.Costs: Branch-plant Syndrome. market access .Example of Rational Actor Analysis: A Focus on Government Foreign Business Relationships  Examination of FDI costs and benefits . better jobs (?). job creation. training. tax revenue. sovereignty and National Security 19 .Benefits: Capital inflow.

taxation. expropriation. investment 20 . force companies’ to sell off all or part of a subsidiary below market value. Issue: technology transfer/control/ Actions: maximum foreign ownership rules.Government Actions When Interests Are in Conflict (Source: Head) Issue: division of spoils (assets and future profits) Actions: limit profit repatriation. jointventure requirements.

domestic control rules Issue: contribution to balance of payments Action: export requirements 21 .Government Actions When interests are in Conflicts (Source: Head) – cont’d Issue: sourcing of inputs Actions: tariffs and quota in key imported inputs.

 JVs with local or foreign partners  Local stakeholders  Structural dependency  Lobbying  Planned divestiture with s/t profits  Integrate with strategy  Security for expatriates  General rule: make the costs to the government of an undesirable move to the firm very costly. . Provide “incentives” for appropriate government regulations 22 and policies.Managing Political Risk (counter moves)  Insurance from EDC. etc.

You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->