Chapter 1:Assessing the Environment: Political, Economic, Legal, Technological

Instructor: Tran Nam Giang

© 2008 Pearson Prentice Hall 1-1

Research the environment in which a company operates or will operate in order to assess: 1. the political risks2. the economic risks3. the regulatory risks4. technological risks

© 2008 Pearson Prentice Hall 1-2

Learning Objectives

Any governmental action or politically motivated event that could adversely affect the long-run profitability or value of a firm

Example:“… Bolivia nationalized its natural-gas industry, ordering foreign companies to give up control of fields and accept much tougher operating terms within six months or leave the country”

Wall Street Journal 2006 Why do governments do that?

© 2008 Pearson Prentice Hall 1-3

Political Risk

Expropriation of corporate assets Forced sale of equity to host-country nationals

Legal discrimination Barriers to repatriation of funds Loss of technology or other IP Interference in managerial decision making

Dishonesty by government officials regarding contracts

© 2008 Pearson Prentice Hall 1-4

Common Political Risk Events

© 2008 Pearson Prentice Hall 1-5

Expropriation of corporate assets

© 2008 Pearson Prentice Hall 1-6

Forced sale of equity to host-country nationals

© 2008 Pearson Prentice Hall 1-7

Legal discrimination

© 2008 Pearson Prentice Hall 1-8

Barriers to repatriation of funds

© 2008 Pearson Prentice Hall 1-9

Loss of technology or other IP

© 2008 Pearson Prentice Hall 1-10

Interference in managerial decision making

© 2008 Pearson Prentice Hall 1-11

Dishonesty by government officials regarding contracts

Helps companies manage exposure to risk and minimize financial loss

Two forms:◦Consultation with experts◦Development of internal staff capabilities

© 2008 Pearson Prentice Hall 1-12

Political Risk Assessment

Avoidance Adaptation: equity sharing, localization, development assistance

Dependency: keep subsidiary & host nation dependent on parent firm

Hedging: insurance, local debt financing

© 2008 Pearson Prentice Hall 1-13

Options for Managing Political Risk

Is closely related to political risk Types of economic risks

◦Loss of profitability due to abrupt changes in monetary and fiscal policies

◦Loss of profitability due to changes in foreign investment policies.

E.g. barriers in profit repatriation, changes in interest rate, exchange rate

© 2008 Pearson Prentice Hall 1-14

Economic Risk

Quantitative: assess economic variables (GDP, income, unemployment rate, inflation, budget, imports, exports, debts)

Qualitative: assess the competence of leaders

Checklist: easily measurable and timely criteria

A combination of these methods

© 2008 Pearson Prentice Hall 1-15

Four Approaches to Assessing Economic Risk

Protectionist policies, such as tariffs or quotas

The attractiveness of the tax system The level of government involvement in the economic and regulatory environment

© 2008 Pearson Prentice Hall 1-16

Regulatory Risks

The appropriability of technology: ability to profit from innovating technology maybe restricted

Inappropriate use of technology by others

Appropriateness of technology for the local environment

© 2008 Pearson Prentice Hall 1-17

Technological Risks