1. 1 PowerPoint slides by R. Dennis Middlemist, Professor of Management, Colorado State University

2. 2 Nature of International “Risk” Three main categories of risk which effect international business managers Unstable ethnic, religious and military conflicts Including the types of threats within Political Risk Climatic extremes that threaten the health and safety of nonresident travelers Topographical extremes that endanger personal safety, communications and transportation. Significant volume of information is available Requirements of “due dilligence” http://www.stern.nyu.edu/globalmacro/Geopolitics/PolRisk.htm

3. 3 Additional Internet Sites http://www.imf.org/ http://www.transparency.org http://www.duke.edu/~charvey/Country_risk/couindex.htm http://lcweb2.loc.gov/frd/cs/cshome.html http://www.economist.com/displayStory.cfm?Story_ID=383472 http://www.intracen.org http://www.itools.com/research-it/research-it.html http://www.access.gpo.gov/su_docs/ http://www.prsgroup.com/yearbook/yearbook.cfm http://www.grai.com/ http://www.ntu.edu.sg/library/stat/statdata.htm http://www.duke.edu/~charvey/Country_risk/pol/pol.htm

4. 4 The Nature and Analysis of Political Risk Political risk The likelihood that a business’s foreign investment will be constrained by a host government’s policy Macro political risk analysis Analysis that reviews major political decisions likely to affect all enterprises in the country Micro political risk analysis Analysis directed toward government policies and actions that influence selected sectors of the economy or specific foreign businesses in the country

5. 5 Country Risk 100 80 60 40 20 0 Risk Minimum Maximum Singapore Hong Kong Chile Taiwan Malaysia Thailand Poland Israel Hungary India Saudi Arabia China South Africa Mexico Brazil Egypt Iran Colombia Ukraine Pakistan Turkey Nigeria Indonesia Cote d’Ivoire Kenya Venezuela Angola Argentina Iraq Adapted from Figure 10–1: Country Risk

6. 6 Macro Risk Factors Freezing the movement of assets out of the host country Placing limits on the remittance of profits or capital Devaluing the currency Refusing to abide by the contractual terms of agreements previously signed with the MNC Industrial piracy (counterfeiters) Political turmoil Government corruption

7. 7 Conditions Favorable for Corruption Concentration of decision-making power: non- democratic regimes Lack of government transparency in decision-making Large amounts of public capital involved in a project Self-interested closed cliques and "old-boy" networks Weak rule of law Poorly-paid government officials An apathetic and uninterested, or gullible and easily led demos that does not scrutinize the political process sufficiently From: http://www.answers.com/topic/political-corruptionhttp://www.answers.com/topic/political-corruption

8. © McGraw-Hill Companies, Inc., 20008 Government Corruption 5 Most Corrupt Countries (1998 Data) 1. Cameroon 2. Paraguay 3. Honduras 4. Nigeria 5. Indonesia

9. 9 Corruption (2001 Data from Transparency International) Most Corrupt 1. Azerbaijan 2. Bangladesh 3. Bolivia 4. Cameroon 5. Indonesia 6. Kenya 7. Nigeria 8. Pakistan 9. Russia 10. Tanzania 11. Uganda 12. Ukraine Least Corrupt 1. Australia 2. Canada 3. Denmark 4. Finland 5. Iceland 6. Luxembourg 7. Netherlands 8. New Zealand 9. Norway 10. Singapore 11. Sweden 12. Switzerland

10. 10 Perceptions of International Corruption Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

11. 11 Perceptions of International Corruption Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

12. 12 Micro Risk Factors “Some MNCs are treated differently than others” Industry regulation Taxes on specific types of business activity Restrictive local laws Impact of WTO and EU regulations on American MNCs Government policies that promote exports and discourage imports

13. 13 Expropriation Risk Expropriation The seizure of businesses by a host country with little, if any, compensation to the owners Indigenization laws Laws that require nationals to hold a majority interest in an operation

14. 14 Evaluation of Political Risk Adapted from Table 10–2: A Guide to Evaluation of Political Risk

15. 15 Political Risk (From Perc Library) http://www.asiarisk.com/library5.html Importance of Degree of difficulty Country political risk of doing business 1. China 68.55 6.33 2. Hong Kong 62.32 3.61 3. Vietnam 56.54 5.75 4. Philippines 56.32 5.83 5. Taiwan 54.20 4.78 6. South Korea 50.24 5.62 7. Thailand 48.70 5.59 8. Indonesia 48.41 6.27 9. Malaysia 42.00 5.35 10. US 32.19 2.89 11. Japan 31.79 4.97 12. Singapore 27.07 3.50 1 Measured as a percentage of total country risk. (Balance of Economic and Political) 2 Graded on a zero to 10 scale, with zero being the best grade possible, or an extremely hospitable business environment, and a 10 the worst grade possible, or a very difficult business environment

16. 16 Operational Profitability Most MNCs are more concerned with operational profitability than expropriation Will they be able to make the desired return on investment? Requiring MNCs to use domestic suppliers vs. using supplies from other company-owned facilities or purchasing them in the world market Restricting the amount of profit that can be taken out of the country Wages and salaries that must be paid to the employees

17. 17 Managing Political Risk and Government Relations Transfer risks Government policies that limit the transfer of capital, payments, production, people, and technology in and out of the country Tariffs on exports and imports Restrictions on exports Dividend remittance Capital repatriation Transfer risks Political risks

18. 18 Managing Political Risk and Government Relations Operational risks Government policies and procedures that directly constrain management and performance of local operations Price controls Financing restrictions Export commitments Taxes Local sourcing requirements Transfer risks Operational risks Political risks

19. 19 Managing Political Risk and Government Relations Ownership control risks Government policies or actions that inhibit ownership or control of local operations Foreign-ownership limitations Pressure for local participation Confiscation Expropriation Abrogation of proprietary rights Transfer risks Operational risks Ownership control risks Political risks

20. 20 Assessing Political Risk TransferOperationalOwnership control Political Risks Conglomerate Vertical Horizontal General Investments Special Investments Adapted from Figure 10–2: A Three-Dimensional Framework for Assessing Political Risk

21. 21 General Nature of Investment Conglomerate investment A type of high-risk investment in which goods or services produced are not similar to those produced at home Vertical investment The production of raw materials or intermediate goods that are to be processed into final products Horizontal investment An MNC investment in foreign operations to produce the same goods or services as those produced at home Click here to see slide 15

22. 22 Special Nature of Investment Three sectors of economic activity Primary sector, which consists of agriculture, forestry, and mineral exploration and extraction Industrial sector, consisting of manufacturing operations Service sector, which includes transportation, finance, insurance, and related industries

23. © McGraw-Hill Companies, Inc., 200023  Technological Sophistication consists of: – Science-based industries  High risk factor – Non-science-based industries  Lower risk factor

24. © McGraw-Hill Companies, Inc., 200024  Patterns of ownership consist of: –Wholly owned businesses  High risk factor –Partially owned businesses  Lower risk factor

25. 25 Special Nature of Investment Special nature of foreign direct investments can be categorized as one of five types (see slide 15) Type I is the highest-risk venture; type V is the lowest-risk 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 Click here to see slide 15

26. 26 Quantifying Variables in Political Risk Factors that are typically quantified Political and economic environment Domestic economic conditions External economic conditions Each factor is given a minimum or maximum score, and the scores are tallied to provide an overall evaluation of the risk Table 10-3 provides an example of a quantitative list of political risk criteria Click here to see slide 15Click here to see slide 20

27. 27 Adapted from Table 10–3: Criteria for Quantifying Political Risk

28. 28 Formulating and Implementing Responses to Political Risk Three related corporate political strategies Relative bargaining power analysis The MNC works to maintain a bargaining power position stronger than that of the host country

29. 29 Relative Bargaining Power Over Time Bargaining Power Low High Initial investment Time Host nation’s bargaining power Intervention occurs Subsidiary’s bargaining power A B C D E Fig. 10.3

30. 30 Formulating and Implementing Responses to Political Risk Three related corporate political strategies Integrative, protective, and defensive techniques Integrative techniques help the overseas operation become a part of the host country’s infrastructure  Developing good relations with the host government and other local political groups  Producing as much of the product locally as possible with the use of in-country suppliers and subcontractors  Creating joint ventures and hiring local people to manage and run the operation  Doing as much local research and development as possible  Developing effective labor–management relations

31. 31 Formulating and Implementing Responses to Political Risk Protective and defensive techniques discourage the host government from interfering in operations Doing as little local manufacturing as possible and conducting all research and development outside the country Limiting the responsibility of local personnel and hiring only those who are vital to the operation Raising capital from local banks and the host government as well as outside sources Diversifying production of the product among a number of countries

32. 32 Formulating and Implementing Responses to Political Risk Proactive political strategies Lobbying, campaign financing, a oraxy and other political interventions designed to shape and influence the political decisions prior to their impact on the firm  Formal lobbying  Campaign financing  Seeking advocacy through the embassy and consulates of the home country  Formal public relations and public affairs activities such as grassroots campaigning and advertising

33. 33 Use of Integrative, Protective and Defensive Techniques Protective/defensive techniques Integrative techniques High 20 Moderate 10 Low 1 1 Low 10 Moderate 20 High (11, 14) Low or stable technology ((7, 10) Advanced management skill Unified logistic, labor transmission (16,6) (14, 3) Dynamic high technology Adapted from Figure 10–4: Use of Integrative and Protective and Defensive Techniques by Firms in Select Industries

34. 34 Managing Alliances Alliances and joint ventures can significantly improve the success of MNC entry and operation, especially in emerging economies Motivating factors faster entry and payback, economies of scale and rationalization, complementary technologies and patents, and co-opting or blocking competition Preparation for the likely eventual termination of the alliance Legal issues (conditions of termination, disposition of assets and liabilities, dispute resolution, distributorship arrangements, protection of proprietary information and property, rights over sales territories and obligations to customers) Business issues (basic decision to exit, people-related issues, relations with the host government)

35. 35 Role of Host Governments in Alliances Alliance or joint-venture partners may be advantageous to MNC entry and expansion Highly regulated industries such as banking, telecommunications, and health care Cope with emerging-markets environments characterized by arbitrary and unpredictable corruption May be required by host government Host government may be unwilling to permit the alliance to terminate