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Session 09

Internationale trade

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Asela Gayashan
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6 views

Session 09

Internationale trade

Uploaded by

Asela Gayashan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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By : M.M.L.C.

Gunathilake
Foreign Investment:
Political Risk
Session 09
“Political Risk Can't Be Avoided,
But It Can Be Managed”

3
CHAPTER OBJECTIVES
This chapter will:

 Look at the forces and opportunities that support foreign


investment by multinational corporations.
 Discuss the role political risk plays in counterbalancing
the benefits or opportunities of investing abroad.
 Describe the various ways host governments control
foreign investment.
 Present management techniques that can be used to
reduce political risk when investing abroad.

4
ASSESSING POLITICAL RISK
 Political risk for multinational corporations includes
adverse actions that may be taken by host-country
governments against the firms.

 Factors responsible for political risk can be grouped into


two categories
 Inherent factors (Inherent factors are conditions that are
present constantly around the world that generate a certain
danger of adverse action by host governments from the point
of view of the multinational corporation (such as terrorism)

 Circumstantial factors (Circumstantial factors are those


conditions that can arise out of particular events in different
countries)
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Inherent Causes of Political Risk
 Different Economic Objectives
Conflicting Objectives between Developing Countries and Multinational
Corporations
Developing Countries Multinational Corporations

Promote local ownership Maintain global controls and efficiency

Increase local ownership and control Minimize costs of technology and capital

Develop suitable products for host Gain global economies of scale to lower
country costs of products
Encourage technology and R & D transfer Maintain control of technology and R & D
to host country paid for by the company

6
INHERENT CAUSES OF POLITICAL RISK
 Monetary and Fiscal Policies

 A host country that is faced with impending inflationary conditions might


want to raise the interest rates on bank lending, which may be detrimental
to the interests of an MNC, whose costs of funds, and therefore of
production, would go up correspondingly.
 The interest of the host government is always to maximize revenues, while
that of the MNC is to minimize its tax liability.

 Economic Development and Industrial Policies

 Countries may want to promote certain backward geographical regions


where infrastructural facilities are low and might therefore require the
expansion of MNCs to such regions even though investment there may not
be economically feasible.
 In many host countries, especially less-developed countries, the
government is the largest buyer of goods and services. Exclusion from
government contracts, therefore, affects the sales of an MNC’s products
significantly.
7
Circumstantial causes of political risk
 Change of Government
 Political Difficulties of Host Governments
 In many countries where economic and social
conditions are fairly unstable, it is often difficult for a
government to manage the resulting public discontent.
 Political Action Brought on by Other Groups
 Nationalist feelings from opposition parties
 Bilateral Relations Between the Host and Home
Governments
 If the MNC’s home government comes into conflict with
the host government, it is likely that the latter will take
direct or indirect action against the MNC
 Social Unrest and Disorder 8
TYPES OF HOST-NATION CONTROL
 Host governments impose different types of controls
on the activities of MNCs,
 Limits on Return of Profits
 Many host governments place limits and conditions on the
repatriation of profits, dividends, royalties, technical know-
how fees, and other such revenue.
 Price controls
 MNC may be forced to sell its goods at the controlled prices,
even though they may be well below the planned prices.
 Ownership restrictions
 Many governments restrict foreign ownership of MNCs to a
certain percentage, which means that the remaining portion
must be owned by local partners or offered as a public issue
in the local stock market.
9
TYPES OF HOST-NATION CONTROL…Cont..
 Joint ventures
 Some countries require that MNCs come into their country
only as a partner in a joint venture with a local company.
 Personnel restrictions
 Some host governments require that local nationals be
placed on the board of directors of an MNC’s local
subsidiary.
 Labor controls
 The host governments also sometimes require additional
benefits for local employees, such as health insurance,
various allowances , Some host governments order that the
wage rates of local employees be higher than the rates paid
by domestic corporations
10
ASSESSING THE RISK
 Assessing political risk is a two-stage process
1. ASSESSING COUNTRY RISK
 Country risk is a very broad measure that focuses on the
riskiness of the country as a whole as a place for MNCs to
conduct business.
 One prime consideration is the level of current and future
political stability of the country.

2. ASSESSING INVESTMENT RISK


 Tax structures, industry standards, government
discrimination, ownership and management ,requirement,
export obligations, and location constraints should also be
considered.
11
MANAGING RISK
 Long-term agreements
 Many MNCs find that one way to reduce political risk is to negotiate
long-term commitments from the host government on the regulation
of the firm.
 Lobbying
 The act of attempting to influence business and government leaders
to create legislation or conduct an activity that will help a particular
organization.
 Legal action
 If threatened, MNCs can resort to legal action, but this approach is
useful only in countries where there is an efficient legal system and
independent judiciary.
 Rejecting investment
 Many MNCs find that the risks in potential countries are too great in
comparison to the expected returns. Therefore, they Reject the
potential investment.
12
The End

13

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