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Managing Political Risk, Government Relations, and Alliances. 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. - PowerPoint PPT Presentation
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Managing Political Risk, Government Relations, and Alliances
1. EXAMINE how MNCs evaluate political risk.
2. PRESENT some common methods used for managing and reducing political risk.
3. DISCUSS strategies to mitigate political risk and develop productive relations with governments.
4. DESCRIBE challenges to and strategies for effectively managing alliances.
The specific objectives of this chapter are:
2
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
3
Country Risk
100
80
60
40
20
0
Ris
k
Minimum
MaximumS
inga
pore
Hon
g K
ong
Chi
leTa
iwan
Mal
aysi
aTh
aila
ndP
olan
dIs
rael
Hun
gary
Indi
aS
audi
Ara
bia
Chi
naS
outh
Afri
caM
exic
oB
razi
lE
gypt
Iran
Col
ombi
aU
krai
neP
akis
tan
Turk
eyN
iger
iaIn
done
sia
Cot
e d’
Ivoi
reK
enya
Ven
ezue
laA
ngol
aA
rgen
tina
Iraq
Adapted from Figure 10–1: Country Risk
4
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
How does the US look to investors from Australia or Dubai?
5
Perceptions of International Corruption
Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index
6
Perceptions of International Corruption
Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index
7
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
8
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
9
Evaluation of Political Risk
Adapted from Table 10–2: A Guide to Evaluation of Political Risk
10
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
11
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 risksTransfer risks
Political risks
12
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 risksTransfer risks
Operational risks
Operational risks
Political risks
13
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 risksTransfer risks
Operational risks
Operational risks
Ownership control risks
Ownership control risks
Political risks
14
Assessing Political Risk
Transfer Operational Ownership control
Political Risks
Conglomerate
Vertical
Horizontal
Gen
eral
Inve
stm
ents
Special Investm
ents
Adapted from Figure 10–2: A Three-Dimensional Framework for Assessing Political Risk
15
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
16
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
17
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
18
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
Slide 20 provides an example of a quantitative list of political risk criteria
Click here to see slide 15 Click here to see slide 20
19
Criteria for Quantifying Political Risk
Adapted from Table 10–3: Criteria for Quantifying Political Risk
20
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
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
21
Formulating and Implementing Responses to Political Risk 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 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
22
Formulating and Implementing Responses to Political Risk
Proactive political strategies Lobbying, campaign financing, advocacy 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
23
Use of Integrative, Protective and Defensive Techniques
Protective/defensive techniques
Inte
gra
tive
tec
hn
iqu
es
High 20
Moderate 10
Low 11
Low10
Moderate20
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
24
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)
25
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
26
Case
HP-Compaq