1. Managing Political Risk, Government Relations, and Alliances
chapter ten
Managing Political Risk, Government Relations, and Alliances
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

2. Chapter Outline Political risk Types of political risk
Macro risk factors
Micro risk factors
Evaluating political risk
Types of political risk
Terrorism
Nationalization and expropriation
Operational risks

3. Chapter Outline (2) Techniques for responding to political risks
Maximizing the company’s bargaining power
Integrative techniques
Protective and defensive techniques
Proactive political strategies

4. Chapter Outline (3) Managing alliances and joint ventures
Why companies use alliances
The alliance challenge
Preparing for the termination of an alliance
The role of host governments in alliances

5. Chapter Objectives The four specific objectives of this chapter are:
EXAMINE how MNCs evaluate political risk.
PRESENT some common methods used for managing and reducing political risk.
DISCUSS strategies to mitigate political risk and develop productive relations with governments.
DESCRIBE challenges to and strategies for effectively managing alliances.

6. Political Risk Definitions of political risk
The likelihood that a business’s foreign investment will be constrained by a host government’s policy
The likelihood that political forces will cause major changes in a country’s business environment that adversely affect the profits and strategic goals of one or more businesses

7. Analyzing Macro and Micro Political Risk
Macro political risks
Major political decisions that are likely to affect all enterprises in the country
Micro political risks
Government policies and actions that influence selected industries or specific foreign businesses in the country
Analysis of political risks should consider whether a major change in control of the government is possible and what the effects of such a change might be

8. 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 MNC
Industrial piracy (counterfeiters)
Political turmoil
Government corruption

9. Micro Risk Factors Some MNCs are treated differently than others
Industry-specific regulations
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

10. Evaluation of Political Risk

11. Terrorism and Its Overseas Expansion
Terrorism: the use of force or violence against others to promote political or social views
Three types of terrorism: amateur, religiously motivated, and classic
MNCs are hesitant to set up operations in countries with high terrorism risk
MNCs must assess political risk, install modern security, compile crisis plans, and prepare employees for possible situations

12. Nationalization
Nationalization is the conversion of a private enterprise to government ownership.
The government may or may not pay the company's stockholders or investors for the enterprise.
When the companies are paid for the property, the price is usually set by the government and is usually far below the market value of the property.
Nationalization is more likely in countries that are poor, politically unstable, and suspicious of foreign companies

13. Nationalization (2)
Large companies are more likely to be nationalized than small ones
Wholly owned subsidiaries are more likely to be nationalized than joint ventures.
Nationalization is more likely in some industries than others
Extractive industries, such as oil, gas, and mining
Agriculture
Utilities and transportation

14. Operational Profitability in Risk Analysis
Most MNCs are more concerned with operational profitability than expropriation
They are concerned with ability to make desired return on investment
Require MNCs to use domestic suppliers vs. those from other company-owned facilities or purchase in world market
Restrict the amount of profit taken out of the country
Wages and salary that must be paid to employees

15. Techniques for Managing Political Risk
The company attempts to maximize its bargaining power with the government.
Integrative techniques are designed to help the company’s operations become part of the host country’s economy or infrastructure.
Protective and defensive techniques are designed to limit the ability of the host country’s government to interfere with the company’s business
Proactive political strategies attempt to influence political decisions before they can affect the company

16. Maximizing the Company’s Bargaining Power
A company is more likely to have high bargaining power with the host government if:
The company offers something that is important to the government (jobs, exports, etc.)
The company has credible alternative locations elsewhere
The government has few or no other alternatives for getting what the company is offering.
The company is willing to make a long-term commitment to the country.
Over time, the company may offer new things to keep bargaining power.

17. Integrative Techniques for Managing Political Risk
Develop good relationships with the host government and other groups that have political influence.
Make the product as “local” as possible, by using host country labor, suppliers, and subcontractors
Create a joint venture and hire host country people as managers
Develop good labor-management relations.
Do as much local research and development as possible.
Be a good corporate citizen.
Some of these techniques will not apply in all situations.

18. Protective and Defensive Techniques
Do as little local manufacturing as possible.
Do all research and development outside the host country.
Limit the responsibility of local employees.
Use home country managers.
Raise capital from local banks, the host government, and outside sources
Produce the product in several countries.
If expropriation or a non-convertible currency is a risk, get risk insurance from the Overseas Private Investment Corporation (U. S. firms only) or the Multilateral Investment Guarantee Agency

19. Proactive Political Strategies
Lobbying, campaign financing, advocacy and other political interventions designed to shape and influence political decisions prior to impact on firm
Formal lobbying
Campaign financing when that is legal
Seeking advocacy through embassy and consulates of home country
Formal public relations and public affairs activities such as grassroots campaigning and advertising

20. Why Companies Use Alliances and Joint Ventures
Alliances can improve a company’s chances for success, especially in an emerging market
Alliances permit faster market entry and a shorter payback period for foreign direct investment
Partners can share complementary knowledge and skills
Some companies form an alliance with a potential competitor

21. The Alliance Challenge
Structuring the alliance
What does each partner contribute?
What does each partner get?
Can redundant activities be eliminated?
Key success factors
Choosing the right partner
Determining the scope and limits of the alliance at the beginning

22. The Alliance Challenge
Managing cultural issues
Differences in uncertainty avoidance and time orientation (long-term vs. short-term) are the hardest to manage

23. Preparing for the Termination of an Alliance
Business issues
The decision to exit
What happens to employees?
Relationship with the host government

24. Preparing for the Termination of an Alliance (2)
Legal issues
Disposition of assets and liabilities
Distributorship arrangements
Protection of proprietary information and property
Rights to sales territories
Dispute resolution

25. Role of Host Governments in Alliances
In highly regulated industries -- such as banking, telecommunications, and health care – a local partner can help with market access and deal with regulations
A local partner can help the company deal with emerging markets environments characterized by arbitrary and unpredictable corruption
A local partner may be required by the host government
The host government may block termination of the alliance