Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Chapter 10
Managing Political Risk, Government Relations, and Alliances

True/False Questions

1. Policy and control mechanisms, along with awareness of the historical treatment of
multinational companies (MNCs) within certain nations, allow firms to evaluate the inherent risk
of doing business in those countries.
Answer: True
Feedback: Policy and control mechanisms, along with awareness of the historical treatment of
multinational companies (MNCs) within certain nations, allow firms to evaluate the inherent risk
of doing business there. As rapid globalization continues, MNCs must be aware of the political
risk factors present in doing business abroad and develop strategies to respond to them.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

2. Macro risk has been losing importance in the recent years because a growing number of
countries are able to successfully transition to a market-driven economy.
Answer: False
Feedback: In recent years, macro risk analysis has become of increasing concern to multinational
companies (MNCs) because of the growing number of countries that are finding their economies
in trouble, as in Southeast Asia, or, even worse, that are unable to make the transition to a
market-driven economy. India provides plenty of examples of macro political risks for MNCs.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

3. International political developments have a major impact on multinational companies' (MNCs)

strategic plans, and domestic political developments have a minor impact on those plans.
Answer: False
Feedback: Both domestic and international political developments have a major impact on a
multinational company's strategic plans.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
10-1
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Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Topic: The Nature and Analysis of Political Risk

4. Micro political risk analysis is directed toward government policies and actions that influence
selected sectors of the economy or specific foreign businesses.
Answer: True
Feedback: Micro political risk analysis is directed toward government policies and actions that
influence selected sectors of the economy or specific foreign businesses.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

5. Tensions continue to rise as U.S. politicians have become frustrated by China's unwillingness
to revalue the yuan, and concerns have grown over the safety of goods imported from China.
Answer: True
Feedback: Tensions continue to rise as U.S. politicians have become frustrated by China's
unwillingness to revalue the yuan, and concerns have grown over the safety of goods imported
from China. Tainted pet food, unsafe toys, suspect drywall imported from China, and recalls by
many U.S. companies that import products from China, such as the massive toy recall by Mattel,
have caused many in the United States to question the safety and reliability of Chinese products.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

6. Macro risk issues often take such forms as industry regulations, taxes of specific types of
business activity, and various restrictive local laws.
Answer: False
Feedback: Micro risk issues often take such forms as industry regulation, taxes on specific types
of business activity, and restrictive local laws. The essence of these micro risk issues is that some
multinational companies are treated differently from others, thus increasing the cost of doing
business for some.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

7. In some instances, it is not clear whether macro or micro political risk is at work.
Answer: True
10-2
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Feedback: In some instances, it is not clear whether macro or micro political risk is at work.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

8. Terrorism is the use of force or violence against others to promote political or social views.
Answer: True
Feedback: Terrorism is the use of force or violence against others to promote political or social
views. The ultimate goal of the violence is for government and citizens to change policies and
ultimately yield to the beliefs of the terrorist group.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

9. Examples of ownership-control risks include tariffs on exports and imports, as well as

restrictions on exports.
Answer: False
Feedback: Ownership-control risks are embodied in government policies or actions that inhibit
ownership or control of local operations. Examples include foreign-ownership limitations,
pressure for local participation, confiscation, expropriation, and abrogation of proprietary rights.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

10. Conglomerate investments usually are rated as low risk because foreign governments see
them as providing fewer benefits to a multinational company and greater benefits to the country
than other investments.
Answer: False
Feedback: In a conglomerate investment, the goods or services produced are not similar to those
produced at home. These types of investments usually are rated as high risk because foreign
governments see them as providing fewer benefits to the country and greater benefits to the
multinational company than other investments.
AACSB: Analytic
Bloom's: Remember

10-3
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

11. Vertical investments run the risk of being taken over by the government because they are
export-oriented, and governments like a business that helps them generate foreign capital.
Answer: True
Feedback: Vertical investments run the risk of being taken over by the government because they
are export-oriented, and governments like a business that helps them generate foreign capital.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

12. The service sector of economic activity includes agriculture, forestry, and mineral
exploration and extraction.
Answer: False
Feedback: The service sector of economic activity includes transportation, finance, insurance,
and related industries. The primary sector of economic activity consists of agriculture, forestry,
and mineral exploration and extraction.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

13. In the context of the special nature of foreign direct investment (FDI), patterns of ownership
relate to whether businesses are wholly or partially owned.
Answer: True
Feedback: The special nature of foreign direct investment (FDI) relates to the sector of economic
activity, technological sophistication, and pattern of ownership. Patterns of ownership relate to
whether businesses are wholly or partially owned.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations
10-4
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

14. The difference between a science-based industry and a non-science-based industry is that a
non-science-based industry requires the continuous introduction of new products or services.
Answer: False
Feedback: Levels of technological sophistication characterize science-based industry and non-
science-based industry. The difference between them is that science-based industry requires the
continuous introduction of new products or processes.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

15. In the context of the special nature of foreign direct investment (FDI), primary sector
industries usually have the highest risk factor, service sector industries have the next highest, and
industrial sector industries have the lowest.
Answer: True
Feedback: Primary sector industries usually have the highest risk factor, service sector industries
have the next highest, and industrial sector industries have the lowest. There are three sectors of
economic activity: (1) the primary sector, which consists of agriculture, forestry, and mineral
exploration and extraction; (2) the industrial sector, consisting of manufacturing operations; and
(3) the service sector, which includes transportation, finance, insurance, and related industries.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

16. Firms with technology that is not available to the government should the firm be taken over
have higher risk than those with technology that is easily acquired.
Answer: False
Feedback: 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.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations
10-5
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

17. Comprehensive political strategies are most important in stable policy environments.
Answer: False
Feedback: Comprehensive strategies are especially important in unstable and transitional policy
environments.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

18. Local knowledge can be internalized primarily as a result of a multinational company (MNC)
operating in that market.
Answer: False
Feedback: Some kinds of local knowledge cannot be internalized simply as a result of an MNC
entering and operating in a foreign market; acquisition of some kinds of local knowledge
requires local firm participation.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-04 DESCRIBE challenges to and strategies for effectively managing
alliances.
Level of Difficulty: 1 Easy
Topic: Managing Alliances

19. Collaboration facilitates rapid market entry by allowing firms to share costs and risks,
combine product and market complementarities, and reduce the time-to-market.
Answer: True
Feedback: Collaboration facilitates rapid market entry by allowing firms to share costs and risks,
combine product and market complementarities, and reduce the time-to-market. How an alliance
relationship is developed is largely a function of interfirm negotiation.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-04 DESCRIBE challenges to and strategies for effectively managing
alliances.
Level of Difficulty: 1 Easy
Topic: Managing Alliances

20. Alliances are an arena where both value-claiming activities and value-creating activities take
place.
Answer: True

10-6
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Feedback: Alliances are an arena where both value-claiming activities (competitive, distributive
negotiation) and value-creating activities (collaborative, integrative negotiation) take place. In
order to lay claim to a larger share of the alliance pie, firms tend to seek an advantage over their
partners.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-04 DESCRIBE challenges to and strategies for effectively managing
alliances.
Level of Difficulty: 1 Easy
Topic: Managing Alliances

Multiple Choice Questions

21. Which of the following statements is true of the impact of domestic and international
political developments on multinational companies?
A. Multinational companies are well protected from the hazards that originate directly from
variation and unpredictability in political and governance systems around the world.
B. The state and its various institutions and agencies protect multinational companies by
refraining from making policy shifts in taxation or regulation.
C. As government policies change, it is imperative that multinational companies be willing and
able to adjust their strategies and practices to accommodate new perspectives.
D. A majority of geographic areas and regions carry less political risk than they did in the past
because governments are more stable.
Answer: C
Feedback: As government policies change, multinational companies must be willing and able to
adjust their strategies and practices to accommodate the new perspectives and actual
requirements. Moreover, in a growing number of geographic regions and countries, governments
appear to be less stable; therefore, these areas carry more risk than they did in the past.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 2 Medium
Topic: The Nature and Analysis of Political Risk

22. Which of the following is not an example of risk factors for a multinational company?
A. Freezing the movement of assets out of the host country
B. Limiting the remittance of profits or capital
C. Devaluing the currency
D. Complying with contractual terms of agreements
Answer: D

10-7
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Feedback: Examples of risk factors include freezing the movement of assets out of the host
country, placing limits on the remittance of profits or capital, devaluing the currency,
appropriating assets, and refusing to abide by the contractual terms of agreements previously
signed with a multinational company.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

23. All of the following actions raise the political risk of doing business in China except _____.
A. interpreting rules and regulations by officials
B. industrial piracy
C. restrictions on foreign exchange transactions
D. concerns on safety and reliability of product quality
Answer: D
Feedback: One analyst noted "…Today, China's central bank announced new restrictions on
foreign exchange transactions, an attempt to control the flow of convertible currency out of the
country. Officially described as a crackdown on illegal transactions, the moves will effectively
make it more difficult for both domestic and international companies to move money in and out
of China." Industrial piracy continues to be a big problem, and the Chinese government has yet
to take effective action against it. Another common complaint is the way rules and regulations
are interpreted in China.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

24. _____ reviews major political decisions that are likely to affect all business conducted in a
particular country.
A. Macro political risk analysis
B. Micro political risk analysis
C. Standard political risk analysis
D. Multidimensional political risk analysis
Answer: A
Feedback: One is through macro political risk analysis, which reviews major political decisions
that are likely to affect all business conducted in the country.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
10-8
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Topic: The Nature and Analysis of Political Risk

25. China's decision regarding restrictions on foreign exchange transactions is a _____ political
risk because it affects all multinational companies.
A. micro
B. standard
C. macro
D. multidimensional
Answer: C
Feedback: Macro political risk analysis reviews major political decisions that are likely to affect
all business conducted in a country. For example, China's decision regarding restrictions on
foreign exchange transactions represents a macro political risk because it affects all multinational
companies.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

26. In recent years, _____ risk analysis has become of increasing concern to multinational
companies because of the growing number of countries that are finding their economies in
trouble as in Southeast Asia or, even worse, unable to make the transition to a market-driven
economy.
A. micro
B. basic
C. macro
D. complex
Answer: C
Feedback: In recent years, macro risk analysis has become of increasing concern to multinational
companies because of the growing number of countries that are finding their economies in
trouble, as in Southeast Asia, or, even worse, that are unable to make the transition to a market-
driven economy.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

27. China's government policies regarding investment in the telecommunications industry fall
into the _____ political risk category.
A. macro
10-9
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

B. micro
C. integrative
D. relative
Answer: B
Feedback: China's government policies regarding investment in the telecommunications industry
fall into the micro political risk category.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

28. The economies of China, Russia, India, and Vietnam present _____ political risk for
multinational companies.
A. macro
B. micro
C. proactive
D. relative
Answer: A
Feedback: Many other newly emerging economies, besides the big countries China, Russia, and
India, also present macro political risks for multinational companies. In Vietnam, the communist
government earned a bad name among foreign investors because of all the pitfalls they have to
face.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

29. _____ risk issues often take forms such as industry regulation, taxes on specific types of
business activity, and various restrictive local laws.
A. Macro
B. Standard
C. Direct
D. Micro
Answer: D
Feedback: Micro risk issues often take such forms as industry regulation, taxes on specific types
of business activity, and restrictive local laws. The essence of these micro risk issues is that some
multinational companies are treated differently from others, thus increasing the cost of doing
business for some.
AACSB: Analytic
Bloom's: Remember
10-10
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.

Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

30. According to the 2012 Transparency International Corruption Perceptions Index, which of
the following nations is the least corrupt?
A. India
B. The United States
C. Spain
D. New Zealand
Answer: D
Feedback: According to the 2012 Transparency International Corruption Perceptions Index, New
Zealand is the least corrupt nation.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

31. According to the 2012 Transparency International Corruption Perceptions Index, which of
the following nations is the most corrupt?
A. El Salvador
B. Columbia
C. Lebanon
D. Somalia
Answer: D
Feedback: According to the 2012 Transparency International Corruption Perceptions Index,
Somalia is the most corrupt nation.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

32. Multinational companies can minimize their chances of expropriation by _____.

A. investing in non-Western countries that are poor and relatively unstable
B. acquiring an affiliate that depends on the parent company for key areas of operation
C. encouraging the use of high technology
D. imposing an embargo on the participation of local partners
Answer: B
Feedback: Multinational companies can minimize their chances of expropriation by acquiring an
affiliate that depends on the parent company for key areas of the operation, such as financing,
10-11
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

research, and technology transfer, so that no practical value exists in seizing the affiliate. They
can also limit the use of high technology so that if the firm is expropriated, the country cannot
duplicate the technology.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 2 Medium
Topic: The Nature and Analysis of Political Risk

33. Laws that require that nations hold a majority interest in the operation are known as _____.
A. commercial laws
B. appropriation laws
C. indigenization laws
D. expropriation laws
Answer: C
Feedback: In addition, some takeovers were caused by indigenization laws, which required that
nationals hold a majority interest in the operation.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

34. The seizure of businesses by a host country with little, if any, compensation to the owners is
referred to as _____.
A. nationalization
B. expropriation
C. dispossession
D. removal
Answer: B
Feedback: Expropriation is the seizure of businesses with little, if any, compensation to the
owners.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

35. Which of the following statements is true about expropriation?

A. Firms at the greatest risk of expropriation are in extractive, agricultural, or infrastructural
industries such as utilities and transportation.

10-12
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

B. Small firms are more likely targets of expropriation than large firms because more is to be
gained by expropriating small firms.
C. Expropriation is least likely to occur in non-Western countries that are poor, relatively
unstable, and suspicious of foreign multinationals.
D. Expropriation of foreign enterprises by developing countries were rare in the old days.
Answer: A
Feedback: Often, those at greatest risk of expropriation are in extractive, agricultural, or
infrastructural industries such as utilities and transportation because of their importance to the
country. In addition, large firms often are more likely targets of expropriation than small firms
because more is to be gained by expropriating large firms.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 2 Medium
Topic: The Nature and Analysis of Political Risk

36. _____ tends to occur once and often has poorly defined objectives, and therefore members
are not as committed.
A. Classic terrorism
B. Amateur terrorism
C. Religiously-motivated terrorism
D. Political terrorism
Answer: B
Feedback: Amateur terrorism tends to occur once and often has poorly defined objectives, and
therefore members are not as committed. Religiously motivated terrorism is carried out by
individuals holding very strong core beliefs, regardless of how well defined their objectives are.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 1 Easy
Topic: The Nature and Analysis of Political Risk

37. Identify a true statement about classic terrorism.

A. It is carried out by individuals holding very strong core beliefs, regardless of how well
defined their objectives are.
B. It tends to occur once and has poorly defined objectives, and therefore members are less
committed.
C. It tends to be more chaotic and scattered because the individuals involved are extremely
passionate about the cause, despite the lack of unified goals.
D. It entails a specific, well-defined objective pursued by well-trained, professional, underground
members.
Answer: D
10-13
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Feedback: Classic terrorism entails a specific, well-defined objective pursued by well-trained,

professional, underground members. Terrorism is the use of force or violence against others to
promote political or social views.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 2 Medium
Topic: The Nature and Analysis of Political Risk

38. In their attempts to forestall harm in risky venues, multinational companies must thoroughly
evaluate the political environment, install modern security systems, compile a crisis handbook,
and _____.
A. go on the offensive
B. appeal to the religious leaders in the country
C. establish an effective bargaining position
D. prepare employees for situations that may arise
Answer: D
Feedback: There is no way to guarantee that companies can fully avoid harm, but political risk
analysis and preparation may forestall it. Multinational companies must thoroughly evaluate the
political environment, install modern security systems, compile a crisis handbook, and prepare
employees for situations that may arise.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 2 Medium
Topic: The Nature and Analysis of Political Risk

39. Which of the following statements is true of the impact of terrorism within a country on
multinational companies in the macro sense?
A. Typically, terrorists target business areas or businesses that have low status or those that have
little influence on initiating change.
B. It is extremely difficult to guarantee that companies can fully avoid harm from terrorism, but
political risk analysis and preparation may forestall it.
C. Companies are usually proactive and confident about setting up operations even if a country
has a high incidence of terrorist attacks against commercial businesses.
D. Most attacks on private businesses are driven by well-trained, professional, underground
members who pursue a specific, well-defined objective.
Answer: B
Feedback: There is no way to guarantee that companies can fully avoid harm, but political risk
analysis and preparation may forestall it. Multinational companies must thoroughly evaluate the
political environment, install modern security systems, compile a crisis handbook, and prepare
employees for situations that may arise.
10-14
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 2 Medium
Topic: The Nature and Analysis of Political Risk

40. Which of the following is an external economic relations factor that multinational companies
may use to evaluate political risk?
A. Per capita income
B. Inflation during the previous two years
C. Traffic system and communication
D. Freedom to set up or engage in partnerships
Answer: D
Feedback: The external economic relations factors that multinational companies may use to
evaluate political risk are: restrictions imposed on imports/exports, restrictions imposed on
foreign investments in the country, freedom to set up or engage in partnerships, legal protection
for brands and products, restrictions imposed on monetary transfers, revaluations against the
home market currency during previous five years, development of balance of payments, drain on
foreign funds through oil and other energy imports, international financial standing, and
restrictions imposed on the exchange of local money into foreign currencies.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

41. Political risks can be broken down into three basic categories. These are:
A. transfer risks, ownership risks, and labor risks.
B. ownership risks, operational risks, and economic risks.
C. operational risks, bureaucratic risks, and transfer risks.
D. transfer risks, operational risks, and ownership-control risks.
Answer: D
Feedback: Political risks can be broken down into three basic categories: transfer risks,
operational risks, and ownership-control risks.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

10-15
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

42. Over the past two decades, political risk has become:
A. an area closely watched by developing countries, but virtually ignored by developed
countries.
B. a vital area for multinational companies (MNCs) to manage.
C. a less pervasive, minor threat faced by international management.
D. virtually obsolete for international firms as a result of controls imposed by the United
Nations.
Answer: B
Feedback: For many decades, businesses have been looking for ways to manage their political
risk.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

43. _____ risks stem from government policies that limit the transfer of capital, payments,
production, people, and technology in or out of a country.
A. Operational
B. Bureaucratic
C. Transfer
D. Expropriation
Answer: C
Feedback: Transfer risks stem from government policies that limit the transfer of capital,
payments, production, people, and technology in or out of the country.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

44. Which of the following is an example of transfer risks?

A. Dividend remittance
B. Export commitments
C. Pressure for local participation
D. Abrogation of proprietary rights
Answer: A
Feedback: Examples of transfer risks include tariffs on exports and imports as well as restrictions
on exports, dividend remittance, and capital repatriation. Transfer risks stem from government

10-16
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

policies that limit the transfer of capital, payments, production, people, and technology in or out
of the country.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

45. Price controls, financing restrictions, export commitments, taxes, and local-sourcing
requirements are examples of _____.
A. ownership-control risks
B. operational risks
C. transfer risks
D. functional risks
Answer: B
Feedback: Operational risks result from government policies and procedures that directly
constrain the management and performance of local operations. Examples include price controls,
financing restrictions, export commitments, taxes, and local sourcing requirements.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 2 Medium
Topic: Managing Political Risk and Government Relations

46. _____ risks are brought about by government policies or actions that inhibit ownership or
control of local operations.
A. Transfer
B. Functional
C. Operational
D. Ownership-control
Answer: D
Feedback: Ownership-control risks are embodied in government policies or actions that inhibit
ownership or control of local operations.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

10-17
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

47. Foreign ownership limitations, pressure for local participation, confiscation, expropriation,
and abrogation of property rights are examples of _____.
A. transfer risks
B. functional risks
C. ownership-control risks
D. tactical risks
Answer: C
Feedback: Ownership-control risks are embodied in government policies or actions that inhibit
ownership or control of local operations. Examples include foreign-ownership limitations,
pressure for local participation, confiscation, expropriation, and abrogation of proprietary rights.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 2 Medium
Topic: Managing Political Risk and Government Relations

48. Which of the following statements is true of a conglomerate investment?

A. It runs the risk of being taken over by the government because it is export-oriented.
B. It is typically made with an eye toward satisfying the host country's market demands.
C. It includes the production of raw materials or intermediate goods that are to be processed into
final products.
D. It is a type of high-risk investment in which goods or services produced are different from
those produced at home.
Answer: D
Feedback: A conglomerate investment is a type of high-risk investment in which the goods or
services produced are not similar to those produced at home. This type of investment is usually
rated as high risk because foreign governments see them as providing fewer benefits to the
country and greater benefits to the MNC than other investments.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 2 Medium
Topic: Managing Political Risk and Government Relations

49. A salient feature of vertical investments is that they:

A. include the production of raw materials or intermediate goods that are to be processed into
final products.
B. are unlikely to be taken over by the government because they are import-oriented.
C. provide fewer benefits to the country and greater benefits to a multinational company (MNC)
than other investments.
10-18
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

D. involve the production of goods or services that are the same as those produced at home.
Answer: A
Feedback: Vertical investments include the production of raw materials or intermediate goods
that are to be processed into final products. These investments run the risk of being taken over by
the government because they are export-oriented, and governments like a business that helps
them generate foreign capital.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 2 Medium
Topic: Managing Political Risk and Government Relations

50. The primary sector of economic activity includes:

A. manufacturing operations.
B. agriculture, forestry, and mineral exploration and extraction.
C. industry and service.
D. transportation, finance, insurance, and related industries.
Answer: B
Feedback: The primary sector consists of agriculture, forestry, and mineral exploration and
extraction.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

51. Which of the following is a salient feature of horizontal investments?

A. They are export-oriented investments which are unlikely to be takeover targets.
B. They are designed with an eye toward satisfying the home country's market demands.
C. They involve the production of goods or services that are the same as those produced at home.
D. They are high-risk investments in which goods or services produced are dissimilar to those
produced at home.
Answer: C
Feedback: Horizontal investments involve the production of goods or services that are the same
as those produced at home. These investments typically are made with an eye toward satisfying
the host country's market demands.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
10-19
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Level of Difficulty: 2 Medium

Topic: Managing Political Risk and Government Relations

52. A true statement about horizontal investments is that:

A. they run the risk of being taken over by the government because they are export-oriented, and
governments like a business that helps them generate foreign capital.
B. they are unlikely to be takeover targets because these investments typically are made with an
eye toward satisfying the host country's market demands.
C. they are rated as high risk because foreign governments see them as providing fewer benefits
to the country and greater benefits to a multinational company than other investments.
D. they are high-risk investments in which goods or services produced are dissimilar to those
produced at home.
Answer: B
Feedback: Horizontal investments are unlikely to be takeover targets because these investments
typically are made with an eye toward satisfying the host country's market demands. Horizontal
investments involve the production of goods or services that are the same as those produced at
home.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 2 Medium
Topic: Managing Political Risk and Government Relations

53. The industrial sector of economic activity includes _____.

A. transportation
B. agriculture
C. mineral exploration and extraction
D. manufacturing operations
Answer: D
Feedback: The industrial sector of economic activity consists of manufacturing operations. The
primary sector of economic activity consists of agriculture, forestry, and mineral exploration and
extraction.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

10-20
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

54. Some multinational corporations attempt to manage political risk by simultaneously

analyzing a range of variables to derive an overall rating of the degree of political risk in a given
jurisdiction. This is referred to as a _____.
A. quantification process
B. quantification circle
C. quantity risk analysis
D. quantity management
Answer: A
Feedback: Some multinational companies attempt to manage political risk through a
quantification process in which a range of variables are simultaneously analyzed to derive an
overall rating of the degree of political risk in a given jurisdiction.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

55. The ratings factors that are quantified for multinational companies to manage political risk
reflect all of the following except _____.
A. political conditions
B. domestic economic conditions
C. social conditions
D. external economic conditions
Answer: C
Feedback: Factors that are typically quantified reflect the political and economic environment,
domestic economic conditions, and external economic conditions.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

56. Which of the following criteria involves maximum political risk?

A. International financial standing
B. Economic growth during previous 5 years
C. Restrictions imposed on imports
D. Effectiveness of public administration
Answer: D
Feedback: The effectiveness of public administration involves maximum political risk.
AACSB: Analytic
10-21
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

57. The following are listed as techniques for responding to political risks except _____.
A. relative bargaining power analysis
B. realistic bargaining power analysis
C. integrative techniques
D. defensive techniques
Answer: B
Feedback: A multinational company can proactively improve its relationship with governments
by means of preemptive political strategies to mitigate risk before it appears. Three related
strategies should be considered: (1) relative bargaining power analysis; (2) integrative,
protective, and defensive techniques; and (3) proactive political strategies.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

58. The theory behind _____ is quite simple. A multinational company works to maintain a
stronger bargaining power position than that of the host country.
A. analogous negotiating power
B. pertinent bargaining power
C. proportionate negotiating power
D. relative bargaining power
Answer: D
Feedback: The theory behind relative bargaining power is quite simple. A multinational
company works to maintain a bargaining power position stronger than that of the host country.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

59. Not all MNCs are confident about international investment in countries with _____.
A. low labor costs
B. political unrest
10-22
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

C. emerging economies
D. cultural differences
Answer: B
Feedback: Multinational companies (MNCs) that are concerned with currency convertibility
issues, political unrest, or exporting matters may want to take a closer look. Insurance terms
range anywhere from 3 to 15 years or more and can cover up to $80 million per risk.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

60. Broadly, _____ strategies may include leveraging bilateral, regional, and international trade
and investment agreements, drawing on bilateral and multilateral financial support, and using
project finance structures to separate project exposure from overall firm risk.
A. protective and defensive
B. vertical investment
C. integrative
D. proactive political
Answer: D
Feedback: Broadly, [proactive political] strategies may include leveraging bilateral, regional, and
international trade and investment agreements, drawing on bilateral and multilateral financial
support, and using project finance structures to separate project exposure from overall firm risk.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

61. _____ techniques are designed to help the overseas operation become part of the host
country's infrastructure.
A. Protective
B. Defensive
C. Integrative
D. Statutory
Answer: C
Feedback: Integrative techniques are designed to help the overseas operation become part of the
host country's infrastructure. The objective is to be perceived as "less foreign" and thus unlikely
to be the target of government action.
AACSB: Analytic
10-23
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Bloom's: Remember
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

62. Which of the following is an example of an integrative technique for responding to political
risk?
A. Diversifying production of a product among a number of countries
B. Creating joint ventures and hiring local people to manage and run operations
C. Raising capital from local banks and the host government as well as outside sources
D. Limiting the responsibility of local personnel and hiring only those who are vital to the
operation
Answer: B
Feedback: Creating joint ventures and hiring local people to manage and run the operation is an
example of an integrative technique. Integrative techniques are designed to help the overseas
operation become part of the host country's infrastructure.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

63. Identify a true statement about protective strategies for responding to political risks.
A. These strategies are designed to help overseas operation become part of a host country's
infrastructure.
B. These strategies are designed with the objective that a multinational company is perceived as
less foreign and thus unlikely to be the target of government action.
C. Protective strategies for responding to political risks include developing good relations with
the host government and other local political groups.
D. Organizations with an emphasis on innovative technology prefer a protective technique as a
way to safeguard against actions such as counterfeiting.
Answer: D
Feedback: Organizations with an emphasis on innovative technology, such as Microsoft, prefer a
protective technique as a way to safeguard against actions such as counterfeiting. Multinational
companies that have products that are labor-intensive and have a high value to weight ratio also
prefer protective methods, though there exists some integration.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
10-24
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Level of Difficulty: 2 Medium

Topic: Managing Political Risk and Government Relations

64. Which of the following is an example of a protective and defensive technique for responding
to a political risk?
A. Creating joint ventures and hiring local people to manage and run the operation
B. Producing as much of a product locally as possible with the use of in-country suppliers and
subcontractors, thus making it a "domestic" product
C. Developing good relations with the host government and other local political groups
D. Doing as little local manufacturing as possible and conducting all research and development
outside the country
Answer: D
Feedback: Doing as little local manufacturing as possible and conducting all research and
development outside the country is an example of a protective and defensive technique for
responding to a political risk. Protective and defensive techniques are designed to discourage the
host government from interfering in operations, mainly by avoiding complex ties to the host
country's economy.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

65. Benefits of proactive political strategies include all of the following except _____.
A. enhancing government relations in unstable and transitional policy environments
B. mitigating risk before it becomes unmanageable
C. providing support for national and sub-central governments in transitional economies
D. counteracting competitors' efforts to influence government policy
Answer: C
Feedback: Because government policies can have a significant impact on business activities and
many governments face competing pressures from a range of stakeholders, corporations must
adopt various proactive political strategies both to affect government policy and to respond to
competitors' efforts to influence that policy. Comprehensive strategies are especially important in
unstable and transitional policy environments. These strategies are designed, in part, to develop
and maintain ongoing favorable relationships with government policy makers as a tool to
mitigate risk before it becomes unmanageable.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 1 Easy
10-25
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Topic: Managing Political Risk and Government Relations

66. Examples of proactive political strategies include all of the following except _____.
A. formal lobbying
B. campaign financing
C. seeking advocacy through embassies and consulates of the home country
D. downsizing and transferring business elsewhere
Answer: D
Feedback: More specific proactive political strategies include formal lobbying, campaign
financing, seeking advocacy through the embassy and consulates of the home country, and more
formal public relations and public affairs activities such as grassroots campaigning and
advertising.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations

67. Which of the following cultural differences tends to be more disruptive for international joint
ventures than the others?
A. Power distance
B. Uncertainty avoidance
C. Individualism
D. Masculinity
Answer: B
Feedback: Differences in the cultural backgrounds of partners can potentially cause problems in
alliances. One study tried to determine whether some differences are more disruptive than others.
The researchers found that differences in uncertainty avoidance and in long-term orientation, in
particular, cause problems.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-04 DESCRIBE challenges to and strategies for effectively managing
alliances.
Level of Difficulty: 1 Easy
Topic: Managing Alliances

68. Which of the following is not a critical legal issue for successful termination of international
alliances?
A. Conditions of termination
B. Disposition of assets and liabilities
C. Distributorship arrangements
10-26
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

D. People-related issues
Answer: D
Feedback: After studying two dozen successful alliance "divorces," a group of researchers
identified a number of legal and business issues that were critical to successful divorces. Legal
issues include the conditions of termination, the disposition of assets and liabilities, dispute
resolution, distributorship arrangements, protection of proprietary information and property, and
rights over sales territories and obligations to customers. Business issues include the basic
decision to exit, people-related issues, and relations with the host government.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-04 DESCRIBE challenges to and strategies for effectively managing
alliances.
Level of Difficulty: 1 Easy
Topic: Managing Alliances

69. Which of the following is not a critical business issue for successful termination of
international alliances?
A. The basic decision to exit
B. People-related issues
C. Rights over sales territories and obligations to customers
D. Relations with the host government
Answer: C
Feedback: After studying two dozen successful alliance "divorces," a group of researchers
identified a number of legal and business issues that were critical to successful divorces. Legal
issues include the conditions of termination, the disposition of assets and liabilities, dispute
resolution, distributorship arrangements, protection of proprietary information and property, and
rights over sales territories and obligations to customers. Business issues include the basic
decision to exit, people-related issues, and relations with the host government.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-04 DESCRIBE challenges to and strategies for effectively managing
alliances.
Level of Difficulty: 1 Easy
Topic: Managing Alliances

70. When host governments do not require alliances as a condition for entry, many multinational
companies:
A. are advised not to voluntarily pursue alliances, as they tend to be problematic.
B. are usually indifferent about establishing alliances.
C. find that having an alliance is advantageous to their entry and expansion.
D. are likely to consider alliances, except in emerging markets and highly regulated industries.
Answer: C
10-27
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

Feedback: Even when host governments do not require alliances or joint ventures as a condition
for entry, many multinational companies find that having alliance or joint venture partners is
advantageous to their entry and expansion.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-04 DESCRIBE challenges to and strategies for effectively managing
alliances.
Level of Difficulty: 2 Medium
Topic: Managing Alliances

Essay Questions

71. What is terrorism? Explain the various types of terrorism.

Answer: Terrorism is the use of force or violence against others to promote political or social
views. The ultimate goal of the violence is for government and citizens to change policies and
ultimately yield to the beliefs of the terrorist group. Three types of terrorism exist: classic,
amateur, and religiously motivated. Classic terrorism entails a specific, well-defined objective
pursued by well-trained, professional, underground members. Amateur terrorism tends to occur
once and often has poorly defined objectives, and therefore members are not as committed.
Religiously motivated terrorism is carried out by individuals holding very strong core beliefs,
regardless of how well defined their objectives are. The latter tends to be more chaotic and
scattered because the individuals involved are extremely passionate about the cause, despite the
lack of unified goals.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-01 EXAMINE how MNCs evaluate political risk.
Level of Difficulty: 2 Medium
Topic: The Nature and Analysis of Political Risk

72. Explain and give examples of the three basic categories of political risks.
Answer: Political risks can be broken down into three basic categories: transfer risks, operational
risks, and ownership-control risks. Transfer risks stem from government policies that limit the
transfer of capital, payments, production, people, and technology in or out of the country.
Examples include tariffs on exports and imports as well as restrictions on exports, dividend
remittance, and capital repatriation. Operational risks result from government policies and
procedures that directly constrain the management and performance of local operations.
Examples include price controls, financing restrictions, export commitments, taxes, and local
sourcing requirements. Ownership-control risks are embodied in government policies or actions
that inhibit ownership or control of local operations. Examples include foreign-ownership
limitations, pressure for local participation, confiscation, expropriation, and abrogation of
proprietary rights.
10-28
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 2 Medium
Topic: Managing Political Risk and Government Relations

73. Explain the special nature of foreign direct investment (FDI).

Answer: The special nature of foreign direct investment (FDI) relates to the sector of economic
activity, technological sophistication, and pattern of ownership. There are three sectors of
economic activity: (1) the primary sector, which consists of agriculture, forestry, and mineral
exploration and extraction; (2) the industrial sector, consisting of manufacturing operations; and
(3) the service sector, which includes transportation, finance, insurance, and related industries.
Levels of technological sophistication characterize science-based industry and non-science-based
industry. The difference between them is that science-based industry requires the continuous
introduction of new products or processes. Patterns of ownership relate to whether businesses are
wholly or partially owned. The special nature of FDI can be categorized as one of five types.
Type I is the highest-risk venture; type V is the lowest-risk venture. This 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.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-02 PRESENT some common methods used for managing and reducing
political risk.
Level of Difficulty: 2 Medium
Topic: Managing Political Risk and Government Relations

74. Explain relative bargaining power analysis.

Answer: The theory behind relative bargaining power is quite simple. A multinational company
(MNC) works to maintain a bargaining power position stronger than that of the host country. A
good example arises when the MNC has proprietary technology that will be unavailable to the
host country if the operation is expropriated or the firm is forced to abide by government
decisions that are unacceptable to it. Over time, of course, this technology may become common,
and the firm will lose its bargaining power. To prevent this from happening, the firm will work
to develop new technology that again establishes the balance of power in its favor. As long as the
host country stands to lose more than it will gain by taking action against the company, the firm
has successfully minimized its political risk by establishing an effective bargaining position.
Gaining bargaining power depends on many factors, such as the host country's perception of the
MNC's size, experience, and legitimacy. Furthermore, the ability to bargain and achieve security
10-29
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

does not necessarily mean that the MNC must be aggressive or engage in a "power play."
Enticing the host country with products or services that could benefit it in the short run could
result in retaliatory actions if the MNC is not able to innovate or the host country grows weary of
a lack of power.
AACSB: Analytic
Bloom's: Understand
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 3 Hard
Topic: Managing Political Risk and Government Relations

75. What are proactive political strategies? How do they help multinational companies (MNCs)
to respond to political risks?
Answer: Because government policies can have a significant impact on business activities and
many governments face competing pressures from a range of stakeholders, corporations must
adopt various proactive political strategies both to affect government policy and to respond to
competitors' efforts to influence that policy. Comprehensive strategies are especially important in
unstable and transitional policy environments. These strategies are designed, in part, to develop
and maintain ongoing favorable relationships with government policy makers as a tool to
mitigate risk before it becomes unmanageable. Broadly, strategies may include leveraging
bilateral, regional, and international trade and investment agreements, drawing on bilateral and
multilateral financial support, and using project finance structures to separate project exposure
from overall firm risk. They also can include entering markets early in the privatization-
liberalization cycle, establishing a local presence and partnering with local firms, and pursuing
preemptive stakeholder management strategies to secure relationships with all relevant actors.
More specific proactive political strategies include formal lobbying, campaign financing, seeking
advocacy through the embassy and consulates of the home country, and more formal public
relations and public affairs activities such as grassroots campaigning and advertising. Strategies
must vary based on the particular political system (parliamentary vs. nonparliamentary),
distribution of power (highly centralized vs. decentralized), and other variations in political
systems. However, multinational companies (MNCs) have the option of purchasing political risk
insurance, which could be used across cultures and systems and protect the company from
inherent uncertainty. This option has been available for decades, but many have not utilized it
because risk assessment is so subjective and unpredictable that most companies choose to forgo
coverage. MNCs that are concerned with currency convertibility issues, political unrest, or
exporting matters may want to take a closer look.
AACSB: Analytic
Bloom's: Remember
Learning Objective: 10-03 DISCUSS strategies to mitigate political risk and develop productive
relations with governments.
Level of Difficulty: 1 Easy
Topic: Managing Political Risk and Government Relations
10-30
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written consent of McGraw-Hill Education.
Chapter 10 - Managing Political Risk, Government Relations, and Alliances

10-31
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written consent of McGraw-Hill Education.