Professional Documents
Culture Documents
Political risk
Momo Deretic
Sauder School of Business
Political Risk
Major Points:
Learn how to anticipate and prepare for risks
related to
Acts of governments
Apply a four-step plan to influence host
government actions to limit political risk
Bolivia nationalizes natural gas
industry
Associated Press
SANTA CRUZ DE LA SIERRA, Bolivia
-- Soldiers guarded natural gas fields
and refineries after Bolivia's leftist
president ordered the nationalization
of the sector, threatening to evict
foreign companies unless they give
Bolivia control over production within
six months.
Analysis vs Strategy
Analysis: When the actions of host
governments are beyond the influence of
individual firms, like the weather.
Risk is exogenous.
Strategy: When the MNEs actions have
an important influence on the host
governments decisions.
Risk is endogenous.
Responses to Exogenous Risk
Anticipate
Prepare
Insure
Litigate/arbitrate
Anticipate: Sources of information
Corruption measures: Transparency International
publishes corruption rankings
Government websites: CIA World Factbook, World
Banks Doing Business Database, etc. (see course
webpage links)
Credit ratings (Moody, Standard and Poor): These
rate the creditworthiness of the government. This
indicates soundness of fiscal and monetary policies.
Once the risk is understood, firms should require higher
returns on investments in risky countries.
Insurance against political risk
Most insurance against political risk is provided by
government export credit agencies.
MIGA (Multilateral Investment Guarantee Agency (An
agency of the World Bank)), EDC (Export Development
Canada), an organization owned by Canadian federal
government)), and OPIC (Overseas Private Investment
Corporation, an independent agency of US federal
government) provide insurance cover against
inconvertibility of funds, expropriation, and political
violence. MIGA also covers non-payment by a foreign
government. The EDC will only insure projects that
benefit Canada, OPIC only U.S. nationals. MIGA
provides insurance to World Bank Members (154
countries).
Risk definitions: Political Risk Insurance (EDC)