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RISKS IN IB --- POLITICAL AND ECONOMIC RISKS: NOT ALWAYS DISTINGUISHABLE Many of these risks also exist for domestic businesses in respective foreign countries.

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Presentation on theme: "RISKS IN IB --- POLITICAL AND ECONOMIC RISKS: NOT ALWAYS DISTINGUISHABLE Many of these risks also exist for domestic businesses in respective foreign countries."— Presentation transcript:

1 RISKS IN IB --- POLITICAL AND ECONOMIC RISKS: NOT ALWAYS DISTINGUISHABLE Many of these risks also exist for domestic businesses in respective foreign countries Problem: “Foreigners” are less informed about the sources of these risks Political risks adversely affect the environment for your IB in that country SOURCES OF P. RISKS: Social unrest & disorder (sometimes reflected in strikes, demonstrations, terrorism, violent crimes) Multi-ethnic / racial / tribal / ideological societies (e.G. Yugoslavia, former soviet union, some African countries, Iraq) Economic mismanagement --> High inflation, lowering std. of living; unequal income distribution

2 POSSIBLE CONSEQUENCES OF P. RISK FOR IB: 1. Confiscation (nationalization) of your properties, lost lives, 2. Change in rules of business and government regulations, 3. Change in the economic circumstances of the consumers (lost purchasing power), 4. New rulers to deal with Caution: these sources alone do not lead to p. risks; how many of these exist in the U.S.?; if not, why not? SOURCES OF ECONOMIC RISKS: economic mismanagement, political risks which in turn may cause economic risks

3 POSSIBLE CONSEQUENCES OF ECOOMIC RISKS: high inflation, unemployment ---> loss of purchasing power unfavourable exchange rate (i.e. local currency (e.g. Rubles) becomes worthless against $) ---> loss of $revenue and $profit Caution: exchange rate risks in IB can be substantial Japanese firms lost $100 billions or more in the U.S. and Canada as a result of the Yen-$ exchange rate change in the 1980s and 1990s (more than many $losses due to confiscation ! ) 260 yen / us $ in 1985, 150/$ in 1986, 100 / $ in 1991, 78 in 1995, 120 now. Areas of damage for J-firms: North American securities, properties and the operating firms they own Matsushita Electric Industries lost more than a $billion when it sold MCA to Seagram in 1996. Current issue: the movement of Chinese currency

4 IDEAL LOCATION FOR IB?? -no p. risk, no e. risk -everything is predictable Can you expect a high return from IB under such circumstances ? Dilemma: risk taking necessary for high return EXAMPLES -FORMER SOVIET UNION CHEVRON poured $millions into a joint venture (JV) to extract oil in Kazakhstan in 1989. The deal guaranteed by then President Mikhail Gorbachev. After the collapse of the USSR, Gorbachev's guarantee became worthless and Kazakstan nationalized the Chevron operation, demanding a much better deal for them. What could Chevron have done to avoid the situation?

5 Pass the investment? Could they have predicted the collapse of the Soviet regime? Any other solution ? -POLAROID'S WAY TO KEEP ITS IB IN RUSSIA ---> BARTER TRADE Polaroid brings in camera parts, assembles them and sells them in Russia.-- Polaroid, however, does not want to be paid in worthless Rubles. Instead Polaroid gets paid by “printed circuit boards.” Problems with this (called countertrade arrangement): -amount of c. boards available limits the Polaroid export -quality of c.Boards at issue -who decides the worth (market price) of c.b.? -why does Polaroid want to remain in the Russian market ? Barter arrangements easier with goods for which well-defined world market prices exist: oil, coal, lumber, iron ore, other minerals, certain farm products

6 INDIA - CHANGE IN RULES FOR INWARD FDI -In the late 1970s India introduced the regulation that required all foreign firms' operations to be owned jointly with local firms (i.e. joint ventures) -this was against the corporate policy of IBM and Coca-Cola, for example. Both left India entirely then. Why do they have such a corporate policy to insist on fully-owned subsidiaries? ISSUES OF IPR (Intellectual Property Rights) -INDIA relaxed this restriction on foreign ownership in the late 1980s. IBM AND COCA-COLA ARE BOTH BACK IN INDIA WITH THEIR 100% OWNED SUBSIDIARIES.

7 Tuesday, August 21, 2007 Vancouver-based Western Prospector Group Ltd. was dealt a sharp blow Friday when it learned the Mongolian government has cancelled one of its key uranium licences. The company's shares, which trade on the TSX Venture Exchange, slumped by 62 cents to $2.79 in early trading Friday before the company asked Market Regulation Services Ltd. to halt trading. The stock remained halted Monday while the company tried to determine the status of its other claims in the area. John Brock, the company's president and chief executive officer, said the cancelled licence covers about half the Gurvanbulag deposit, which is the principal deposit within the company's Saddle Hills project in Mongolia. "We understand there may be more claims cancelled," he said. Brock said he was shocked by the Mongolian government's action, which he said represents an abrupt turnaround from its earlier open-for-business posture. "There was certainly an expectation the Mongolian government would have some interest in the project that would have to be negotiated, but there was no indication [the exploration licence] would be cancelled.“ In June, the company completed a private placement of 8.05 million shares at $4.30 each for gross proceeds of $34.6 million, to be used for the Saddle Hills project. The deal was brokered by National Bank Financial and Haywood Securities. On July 20, the stock peaked at $6, for a total stock market value of more than $300 million, then rapidly descended due to weakening uranium prices and an overall slump in equity markets. Friday's announcement accelerated the decline. What might have prompted Mongolian government to take this action?

8 August 15, 2007 Mattel Recalls 19 Million Toys Sent From China Mattel, the world’s largest toy company, yesterday announced the biggest recall in its history. In a double-barreled announcement, the company said it was recalling 436,000 Chinese-made die-cast toy cars depicting the character Sarge from the animated film “Cars” because they are covered with lead paint. At the same time, the toy maker said it was recalling 18.2 million other toys because their small, powerful magnets could harm children if swallowed. The magnetized toys were also made in China, but they followed a Mattel design specification. About half of the toys in each recall were distributed in the United States. Amid a wave of increasing safety concerns about products made in China, the recall threatened to set the toy industry on its heels — just as companies are beginning to ship toys to stores for the holiday shopping season, when half of all toy purchases are made.

9 ETHICAL ISSUES IN IB arise because of different ethical standards in different countries Should IB be encouraged in (with) a particular country in view of: human rights violation animal rights violation environmental concern worker safety standards working conditions, etc. ????? DOES IB HELP IMPROVE OR WORSEN THE SITUATION?

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