Discuss how political risk can arise for international businesses and critically evaluate different mechanisms that can be used to manage this risk.

Discuss how political risk can arise for international businesses and critically evaluate different mechanisms that can be used to manage this risk.

The course work topic : Discuss how political risk can arise for international businesses and critically evaluate different mechanisms that can be used to manage this risk.

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This block represents four weeks of personal study. The block focuses on the important aspect of political risk that adds a unique dimension to the activities of the MNC. Political risk in also referred to as ‘country risk’ albeit in a narrow sense. We proceed by trying to establish the links between political, economic and legal systems, considering definitions of political risk, through to discussing the intricacies of identifying, measuring and managing such risk that presents a challenge to the MNC seeking international investment.

Political risk is a subject in its own right and, as part of a wider module, we can only touch upon some of the key issues associated with it. You will be directed to essential reading in the set text, the reader and online. For students who have a particular interest in the topic, further reading can be found at the end of this block.

Prior to starting on this block, please look at the following on-line articles:
http://www.newstatesman.com/blogs/economics/2012/04/argentina-allowed-seize-ypf
http://www.newstatesman.com/blogs/economics/2012/04/repsol-may-never-get-paid-ypf

Both of these relate to the seizure, or expropriation, by Argentina of the shares owned by Spanish oil company Repsol in the Argentinean company YPF. Expropriation is the most extreme form of political risk and, in general, it has significantly declined in recent years. However, the Repsol case illustrates that the risk has not ‘gone away’ and, if it does come to pass, there are significant difficulties for the MNC in satisfactorily resolving the situation.

Learning Outcomes:

After completing the course of study required for this module, you will be able to:

• Explain the link between political, economic and legal systems and the risk implications of this link
• Define political risk and be able to discuss its implications for the operations of a MNC.
• Evaluate key factors used in the identification, measurement and management of this risk.
• Compare and contrast the effectiveness of various methods of political risk management
• Critically discuss practical application of political risk management principles by MNCs after studying cases in the textbook and selected web sites.

1.1 Introduction: The link between political, economic and legal systems

Read:
Hill et al (2014), chapters 3 & 7

Like the majority of risks facing the majority of organisations, political risk is not a ‘stand-alone’ problem. By that we mean that a number of different aspects contribute to political risk to a greater or lesser extent. Two of the main contributors to levels of political risk facing MNCs in a particular country are the prevailing economic and legal systems. Hill et al (2014) discuss this in detail, but it is worthwhile summarising the main points associated with this.

6.1.1 Economic systems
In the vast majority of countries, but especially developing and transitional economies, there is a very strong link between political ideology and economic systems. Very often, particularly in the face of pressure from organisations such as the World Bank, governments require to be pragmatic and temper their ideological beliefs, however as a general rule:
• In countries where individual goals are given primacy, free market economic systems are fostered, i.e. there is little government interference in business. The USA being an example of this.
• In countries where collective goals are given primacy there is marked state control of markets. An example of this is Venezuela under President Hugo Chavez.

Over the past ten years a feature of the economic landscape for MNCs has been the move in many countries from collectivist economic systems to more free-market systems. This was substantially driven by the fall of the Soviet Union. Although we must be cautious of generalisations, these transitional economies can often be characterised by:
• Deregulation
– Removal of legal restriction to the free play of market systems
– Allowing establishment and operations of private enterprises
• Privatisation
– Transfer of ownership of state owned enterprise to private individuals
• Legal systems
– Laws that support a market economy

6.1.2 Legal systems
Any legal system is the means by which laws, rules and regulations are handled and enforced. Clearly this has a significant impact on MNCs in terms of business practice, business transactions and the independence and impartiality of the legal environment.
There are three main types of legal systems in use around the world, which Hill explains in detail:
1. Common law
2. Civil law
3. Theocratic law

6.1.3 Managerial implications
In the context of this block on political risk and its management, the fine detail of the economic and legal systems is less important than on understanding their implications for MNCs. In general there are two broad implications that you should consider:
1. Political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business
2. The political, economic, and legal environment of a country clearly influences the attractiveness of that country as a market and/or investment site

We will now look at the specifics of political risk in more depth

6.2 Political Risk

Reader:

Hood J & Nawaz M (2004), Political Risk Exposure and Management in Multi-national Companies: Is There a Role for the Corporate Risk Manager, Risk Management: An International Journal, Vol. 6(1), pp7-18

van Wyk J (2010), Political Sources of International Business Risk: an Interdisciplinary Framework, Journal of International Business Research, Vol 9(1), pp 103-119

Suggested additional reading

At the time of writing, June 2014, the web links shown below were all active and all contained useful information on various aspects of operating in countries across the world.

As always with web content, you need to be careful about any potential bias associated with the site, but in the main these sources provide you with useful information on a range of risk and reward factors.

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