SEU_MGT672_Module10_PPT_Ch10.pptx

International Management

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International Managemnt

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Chapter 10

Managing Political Risk, Government Relations, and Alliances

Learning Objectives

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

Russian Roulette: Risks and Political Uncertainty

Political uncertainty has long been a part of doing business in Russia

Russia's unpredictable foreign policy actions have indirectly resulted in financial difficulties for MNCs

Russian Roulette: Risks and Political Uncertainty (continued)

Many foreign companies have found themselves incurring huge losses due to lost business and frozen assets

Internal rule-changing by the Russian government poses the potential to lead to major losses and frustration

Political Risk

Unanticipated likelihood that a business’s foreign investment will be constrained by a host government’s policies

Evaluation of the inherent risk of doing business in emerging economies involves:

Policy and control mechanisms

Awareness of the historical treatment of MNCs within certain nations

Macro and Micro Analysis of Political Risk

Macro political risk analysis

Reviews major political decisions that are likely to affect all enterprises in the country

Micro political risk analysis

Directed toward government policies and actions that influence selected sectors of the economy or specific foreign businesses in the country

Overseas Expansion

MNCs need to be wary of the combative political environment that may exist

MNCs must:

Assess political risk

Install modern security

Compile crisis plans

Prepare employees for possible situations

Expropriation

Seizure of businesses by a host country with little, if any, compensation to owners

Greatest risk – Extractive, agricultural, infrastructural industries

Tend to occur in non-Western countries that are poor, unstable, and suspicious of foreign multinationals

Expropriation (continued)

Strategies to minimize the chances of expropriation

Bringing in local partners

Limiting the use of high technology so that if the firm is expropriated, the country cannot duplicate the technology

Acquiring an affiliate that depends on the parent company for key areas of the operation

Comprehensive Framework

Identifies the various risks and then assigns a quantitative risk or rating factor to them

Should consider all political risks and identify those that are most important

Categories of political risks

Transfer risks

Operational risks

Ownership-control risks

Figure 10.1 – Three-Dimensional Framework for Assessing Political Risk

Transfer Risk

Government policies that limit the transfer of capital, payments, production, people, and technology in and out of country

Tariffs on exports and imports

Restrictions on exports

Dividend remittance

Capital repatriation

Operational Risks

Government policies and procedures that directly constrain the management and performance of local operations

Price controls

Financing restrictions

Export commitments

Taxes

Local sourcing requirements

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

Nature of Investment

Conglomerate investment

Type of high-risk investment in which goods or services produced are not similar to those produced at home

Vertical investments

Production of raw materials or intermediate goods that are to be processed into final products

Run the risk of being taken over by the government

Nature of Investment (continued)

Horizontal investments

MNC investment in foreign operations to produce the same goods or services as those produced at home

Not likely to be takeover targets

Special Nature of Foreign Direct Investment (FDI)

Relates to the sector of economic activity, technological sophistication, and pattern of ownership

Sectors of economic activity

Primary sector – Agriculture, forestry, mineral exploration and extraction

Industrial sector – Manufacturing operations

Service sector – Transportation, finance, insurance, and related industries

Special Nature of Foreign Direct Investment (FDI) (continued)

Can be categorized as one of five types

Type I – Highest-risk venture

Type V – Lowest-risk venture

Risk factor is assigned based on sector, technology, and ownership

Primary sector industries have highest risk factor, service sector industries have next highest, and industrial sector industries have lowest

Special Nature of Foreign Direct Investment (FDI) (continued)

Firms with technology that is not available to the government have lower risk than those with technology that is easily acquired if taken over

Wholly owned subsidiaries have higher risk than partially owned subsidiaries

Managing Political Risk

Some firms attempt to manage political risk through a quantification process

Factors that are quantified reflect:

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

Techniques for Responding to Political Risk

Relative bargaining power analysis

Integrative, protective, and defensive techniques

Proactive political strategies

Relative Bargaining Power Analysis

MNC works to maintain a bargaining power position stronger than that of host country

Gaining bargaining power depends on:

Host country’s perception of the MNC’s size

Experience

Legitimacy

Integrative Techniques

Help overseas operations become part of host country’s infrastructure

Developing good relations with host government and other local political groups

Producing as much of the product locally as possible with use of in-country suppliers and subcontractors

Integrative Techniques (continued)

Creating joint ventures and hiring local people to manage and run operations

Doing as much local research and development as possible

Developing effective labor-management relations

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 responsibility of local personnel and hiring only those who are vital to operations

Protective and Defensive Techniques (continued)

Raising capital from local banks, host government, and outside sources

Diversifying production of the product among a number of countries

Proactive Political Strategies

Leveraging bilateral, regional, and international trade and investment agreements

Drawing on bilateral and multilateral financial support

Using project finance structures to separate project exposure from overall firm risk

Specific Proactive Political Strategies

Formal lobbying

Campaign financing

Seeking advocacy through the embassy and consulates of home country

Formal public relations and public affairs activities

Such as grassroots campaigning and advertising

Managing Alliances

Partners may be:

Current or former state-owned enterprises

Controlled or influenced by government agencies

Alliance and joint ventures can significantly improve the success of MNC entry and operation

Managing the relationships inherent in alliances can be challenging

Alliance

Arena where both value-claiming and value-creating activities take place

Value-claiming – Competitive, distributive negotiation

Value-creating – Collaborative, integrative negotiation

Alliance (continued)

Motivating factors to enter into alliances

Faster entry and payback

Economies of scale and rationalization

Complementary technologies and patents

Co-opting or blocking competition

Challenge – Managing operations with partners from different national cultures

Cultural differences may create uncertainties and misunderstandings in the relationship

Successful Management of Alliances

Depends on situational conditions, management instruments, and performance criteria

Success factors

Partner selection, cooperation agreement, management structure, acculturation process, and knowledge management

Important aspect – Preparation for the likely eventual termination of the alliance

Legal Issues Critical to Termination of Alliance

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 Critical to Termination of Alliance

Basic decision to exit

People-related issues

Relations with the host government

Role of Host Governments in Alliances

Host governments

Are active in mandating that investors take on partners

Require investors to share ownership of their subsidiaries with local partners

Play a substantial role in the terms of formation and dissolution of alliances

Role of Host Governments in Alliances (continued)

Having alliance or joint-venture partners may be advantageous to MNC entry and expansion

Seen in highly regulated industries such as banking, telecommunications, and health care

Be the Management Consultant

As an international management consultant, what advice would you give to a foreign company looking to move operations into Brazil?

Be the Management Consultant (continued)

Do you think Brazil still holds the potential for future growth?

As an investor, do you think that the "buy low" mindset applies to Brazil?

If not, what changes would you like to see before making any investment in the country?

Review and Discuss

What types of political risk would a company entering Russia and France face?

Identify and describe three

How are these risks similar? How are they different?

Review and Discuss (continued 1)

Most firms attempt to quantify their political risk, although without specific weights

Why is this approach so popular?

Would the companies be better off assigning weights to each of the risks being assumed?

Defend your answer

Review and Discuss (continued 2)

How has terrorism impacted foreign interest in Iran and Saudi Arabia, considering the vast oil reserves that are there?

How have terrorist attacks affected political relationships between countries such as the United States and Russia?

Review and Discuss (continued 3)

If a high-tech firm wanted to set up operations in Iran, what steps might it take to ensure that the subsidiary would not be expropriated?

Identify and describe three strategies that would be particularly helpful

How might proactive political strategies help protect firms from future changes in the political environment?

Review and Discuss (continued 4)

What are some of the challenges associated with managing alliances? How do host governments affect these?