POLITICALRISKASSESSMENTANDMANAGEMENT.docVIP

Political Risk Assessment and Management MNE’s face business risks, foreign exchange risks, and political risks. Q: According to your text, what are the three levels of risk that political risk encompasses? A: 1. Firm-specific risks 2. Country-specific risks 3. Global-specific risks Firm-specific risks (micro risks) Business Risk (Chapters 8, 9 10) Foreign Exchange Risks (Chapters 8, 9 10) Governance Risks – the risk that governments will impose constraints on the activities of private firms. Arises from the conflicting goals of governments (goal: create value for citizens – state socialism – nationalism – religious views) and firms (goal: create shareholder value – free enterprise - internationalism). Potential Conflicts: Firm’s impact on economic development Perceived infringement on national sovereignty Foreign control of key industries Sharing (or not sharing) ownership and control with locals Impact on the balance-of-payments Influence on the exchange rate for the country’s currency Control over export markets Use of foreign versus domestic top management and employees Exploitation of national resources Honoring contracts Q: How can a government protect its goals? A: Monetary policies Fiscal policies Balance of Payments Exchange rate policies Economic protectionism Economic development policies Overseas Private Investment Corporation (OPIC) Insurance Coverage for political risks: Inconvertibility – the risk that profits, royalties, fees, other income, or original capital will not be convertible back to dollars. Expropriation – the risk that the host government will take control of the property. War, revolution, insurrection, and civil strife – the risk that property will be damaged by these activities. Business income – the risk that political violence will damage the assets of the foreign enterprise. Questions to Ask: What are the risks that affect the MNE at the corporate level? Governance risk - How do the goals of the MNE