...Political Risk Political risk is a type of risk faced by investors, corporations, and governments. It is a risk that can be understood and managed with reasoned foresight and investment. Broadly, political risk refers to the complications businesses and governments may face as a result of what are commonly referred to as political decisions—or “any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives.”.[1] Political risk faced by firms can be defined as “the risk of a strategic, financial, or personnel loss for a firm because of such nonmarket factors as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labour, and developmental), or events related to political instability (terrorism, riots, coups, civil war, and insurrection).”[2] Portfolio investors may face similar financial losses. Moreover, governments may face complications in their ability to execute diplomatic, military or other initiatives as a result of political risk. A low level of political risk in a given country does not necessarily correspond to a high degree of political freedom. Indeed, some of the more stable states are also the most authoritarian. Long-term assessments of political risk must account for the danger that a politically oppressive environment is only stable as long as top-down control is maintained and citizens prevented from a free exchange of ideas and goods...
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...Political Risk Emerging markets are becoming increasingly important as businesses look to alternative areas for growth. However, in these often less mature economies your assets, contracts and loans can be adversely affected by the actions of the incumbent or new governments in the country concerned or your own domestic government, or third party government. The range of possible actions that can be taken by foreign governments is very broad and often leads to increased costs, penalties, forced shutdowns, loss of profit or liquidated damages. Government actions often lead to increased costs, loss of profit or liquidation damages Unforeseen political events can lead to: Confiscation, expropriation or nationalisation of assets Imposition of export/import embargoes or cancellation of export/import licenses Physical damage to assets from political violence Termination of or default on contracts Non payment or moratorium due to exchange transfer and currency inconvertibility Non delivery/shipment of goods Calling of on-demand bid or contract bonds and guarantees for unfair or political reasons Forced abandonment or divestiture Non payment by government and/or government owned entities of trade related debt to financial institutions Non payment by private entities of trade related debt to financial institutions Flexible, tailored cover Aon’s political risk experts ensure that risk transfer and management programmes respond in the event of adverse...
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...With Political Risk? By Dr Tazeeb Rajwani The Genie is out of the bottle My research shows that a large number of multinational firms don’t fully understand or appreciate how to deal with political risk. This is significant since political risk can have a substantial impact on firms, as current world events are showing in the Middle East and North Africa (MENA). Before I discuss this, firstly we need to understand what exactly is political risk. Essentially political risk is defined as the risk of losing money as a result of unstable governments or regulatory environments. Acts of terrorism, wars, and military coups are all extreme examples of political risk. Expropriation of assets by the government – or merely the threat – can also have a devastating effect on share prices as seen from the events in Syria, Libya, Egypt, Bahrain and Tunisia. All these countries highlight that the MENA nations have over the past few months witnessed unprecedented civil disturbances, along with mass demonstrations and disruptions to businesses. Egypt has over the years moved to become a manufacturing hub for many firms in the MENA region, while Tunisia has been a tourism sanctuary. However, these recent political problems and uncertainty around the old and new incoming governments have implications for company profits. The next part will untangle political risk and help develop some strategic options for firms to deal with future political risk. What caused this Political Risk? ...
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...TOOLS FOR CONFLICT ANALYSIS The Iceberg Model [pic] One of the classical ideas in conflict resolution is to distinguish between the positions (i.e. concrete demands) held by the parties to the conflict and their underlying interests and needs. Interests are often easier to reconcile than concrete positions, since there are usually several positions that might satisfy them. For example, two neighbours quarrel over a tree. Each neighbour takes the position that the tree is on her land (positions: "The tree is on my land." "No, the tree is on my land.") No compromise is possible, since the tree cannot be sawn in half. It turns out, however, that the interest of one neighbour is in using the fruit of the tree (Interest: "I want the fruit of the tree."), and the interest of the other is in having the shade (Interest: "I want to sit in the shade."). The positions may be irreconcilable at first, but the interests might be. New positions can be found to satisfy the interests of both parties. For more reading refer to: Burton, John. (ed.) 1990: Conflict: Human Needs Theory (vol. 2 of the Conflict Series). London: Macmillan. Fisher, Roger and Ury, William. 1981: Getting to Yes. Boston: Houghton Mifflin. [pic] The Conflict Triangle [pic] This Conflict Triangle analyses certain basic elements often present in conflict. One way of conceptualising the relationship between these elements is a triangle with Attitudes, Behaviours and structures at the tops of the...
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...Business Ethics - Rosia Montana: Political and Social Risk Management in the Land of Dracula What might opponents have done to raise the profile of their concerns and slow or stop the mine's redevelopment? A group of politicians and non-governmental organizations were trying to block the redevelopment of the gold mine at Rosia Montana. At first, these seemed to be the only opponent groups fighting against the revival of this project, nevertheless new associations and recently formed group of citizens began to protest because of the negative impact and threats that this project represented. Gabriel Resources’ initial offer seemed to be attractive in terms of job creation (2000 additional jobs), industry development (gold production) and lodging (improved installments), nevertheless the detrimental effects on the environment, the loss of its cultural richness, the relocation of its people, as well as the lack of transparency as to what the scope of the project could be, were some of the reasons which could’ve delayed the process from being accepted. Romania’s historical, cultural and political contexts could not be left aside dimmed by the so-promised potential returns that the company expected in detrimental of the local’s welfare. “Gold gave Rosia Montana life, but it also brought premature death” (Page 3), and the latter explains the irreversibility of the side effects derived from this initiative. TAX SHIELDS/ TRANSPARENCY AND SCOPE OF THE PROJECT – The government...
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...“Critically evaluate how international and geo-political risk to business might impact upon a person’s overall lifestyle”. Introduction My lifestyle keeps me busy but I enjoy the ability to catch up with friends and relax at a café or the beach. I am able to do the things I enjoy through working two jobs, on a regular roster. I enjoy cultural activities with friends in Sydney and regularly getting to the beach for a swim. Australia is a beautiful country which allows me to enjoy the sun and beach on a regular basis. A combination of flexibility and structure allows me to financially support myself while studying full-time; work is enjoyable and adds to my social and physical well-being. The flexibility in university and work allows me to catch up with friends regularly, while maintaining my financial independence. The political environment enhances my wellbeing by provide an avenue to defer my university fees until I graduate and get a job. Risk is considered the probability of a specific loss of worth, against the prospect of gaining value through the intentional interaction with uncertainty (Slovic, 2000). Risk is associated with a given action and/or inaction, of a foreseen/unforeseen nature that can result in a loss or gain in regards to financial wealth or physical health. Slovic (2000) expresses that all human interactions carry some risk, but the degree of risk depends on the situation and the perception of its severity. ...
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............................................. 4 Disadvantages .......................................................................................................................... 4 Project Financing -‐ A solution for Mozal ............................................................................. 5 “Hujambo Mozambique!” .......................................................................................................... 5 Risk assessment ........................................................................................................................... 6 Sovereign risk........................................................................................................................... 6 Political Risk ............................................................................................................................. 6 Currency Risk ........................................................................................................................... 7 Economic structure risk...
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...* Question 1 0 out of 1 points | | | Which of the following is considered the most important resource for an MNC's political risk assessment?Answer | | | | | Selected Answer: | c. outside experts | | | | | * Question 2 1 out of 1 points | | | Under ________, past court decisions serve as precedents to the interpretation of the law.Answer | | | | | Selected Answer: | b. common law | | | | | * Question 3 1 out of 1 points | | | Representatives of a MNC seek an interview with local government leaders in the Department of Commerce in India with a view to assess the types of policies likely to be implemented. According to Mathis, this is an example of ________.Answer | | | | | Selected Answer: | a. qualitative approach | | | | | * Question 4 1 out of 1 points | | | For autonomous international subsidiaries, most of the impact from political risks will be in which of the following areas?Answer | | | | | Selected Answer: | b. ownership and control | | | | | * Question 5 1 out of 1 points | | | Which of the following is NOT a generally accepted method of assessing the credit worthiness of a country?Answer | | | | | Selected Answer: | b. survey approach | | | | | * Question 6 0 out of 1 points | | | Most of today's world trade takes place in which three trade blocs?Answer | | | | | Selected Answer: | a. Middle East, China,...
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...In my perspective before any country decides to do business internationally, they must access the political risk in that country. Political stability is the biggest reason to attract foreign investment. Here are some common questions they should be asking themselves: 1. Is the government stable? 2. Is the government a democracy or a dictatorship? 3. Is power concentrated in the hands of a few? 4. What is the extent of government’s involvement in the private sector? Etc. Before foreign investment it is important to assess if a country believes in free markets or government control in industry. The country’s view on capitalism is also a factor for business consideration. I think that stable political system builds a strong economic environment. With proper legal policies in place, a country’s economy is bound to benefit. Bribery is an important issue in international business and unfortunately a living reality. Even though the FCPA was structured to help the U.S. companies understand what is and what is not considered bribery in a foreign land, it is not always clear what is considered a bribe. I guess perception also plays a big role. What is considered bribery by the U.S. may be considered as a gift by other countries. Countries with severe bribery conditions are known to be the ones where poverty and weak economic conditions exist. Today many companies have written and provided formal set of procedures to their employees to help them stay away from bribing anyone intentionally...
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...Political, legal, and regulatory risks The Rules on the Regulation of Franchise (Italian Senate) in articles 2-3 under the Scope of Law demands that any third party business relations must be in writing or will be considered null in void. A distinct plan of organization will be key in handling all written documentation as well as third party witnessing. The Rules on the Regulation of Franchise also states that all documentation must by law, must coincide with the original agreement made by franchisor and cannot be changed without further consent. Any misleading or false information can be due to lack of accurate translation and is punishable by annulment of agreement. To avoid this risk any form of communication, as well as product journalism and financial documents, should be translated into Italian by a professional, and preferably followed with an e-mail or telephone call. Also, there are business schools that can offer placements to aid with the subject of translation. Furthermore, using the Italian language in documents, such as invoices, will aid in the clarification of all intentions and eliminate confusion or misunderstanding. Market Risks (four Ps) PRICE The average cost of a cup of coffee in Italy (4.92 EU or $7 USD) is doubled the price of an average sized breakfast (2.35 EU or $3 USD). The subject of price must be paid close attention as to not be deemed as “overpriced” in a country filled with locals who know the value of a good cup of coffee. The price must...
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...Political, legal, and regulatory risks The Rules on the Regulation of Franchise (Italian Senate) in articles 2-3 under the Scope of Law demands that any third party business relations must be in writing or will be considered null in void. A distinct plan of organization will be key in handling all written documentation as well as third party witnessing. The Rules on the Regulation of Franchise also states that all documentation must by law, must coincide with the original agreement made by franchisor and cannot be changed without further consent. Any misleading or false information can be due to lack of accurate translation and is punishable by annulment of agreement. To avoid this risk any form of communication, as well as product journalism and financial documents, should be translated into Italian by a professional, and preferably followed with an e-mail or telephone call. Also, there are business schools that can offer placements to aid with the subject of translation. Furthermore, using the Italian language in documents, such as invoices, will aid in the clarification of all intentions and eliminate confusion or misunderstanding. Market Risks (four Ps) PRICE The average cost of a cup of coffee in Italy (4.92 EU or $7 USD) is doubled the price of an average sized breakfast (2.35 EU or $3 USD). The subject of price must be paid close attention as to not be deemed as “overpriced” in a country filled with locals who know the value of a good cup of coffee. The price must...
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...Saudi Arabia is a medium political risk country. Saudi Arabia is the No. 1 oil exporter, underpins U.S. security policy in the Middle East and holds great sway over the world's 1.6 billion Muslims through its guardianship of Islam's two holiest sites. The first political risk facing is the succession. King Abdullah turns 90 this year and his heir, half-brother Crown Prince Salman, turns 77. In February he named his youngest half-brother, Prince Muqrin, 70, as second deputy premier, a role often seen as making its holder second-in-line to rule. However, it is not certain that Muqrin will one day become king and the ruling al-Saud family is preparing for the moment when the line of brothers born to its founder Ibn Saud is exhausted and power must move to the next generation. By appointing Ibn Saud's grandsons to new roles, including interior minister and governor of Riyadh province, in recent months, Abdullah has already started the gradual transfer of power to younger princes. The second political risk is the domestic strains. King Abdullah has advanced some economic and social reforms to address youth unemployment, corruption and a lack of housing but offered no big political reforms. Riyadh plans to spend a record $219 billion on welfare and infrastructure in 2013. Tensions smoulder between those who want more social change, such as bringing more women into the workplace, and powerful conservatives who condemn such reforms as un-Islamic. Clerics have protested against the...
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...Political Risks Worsening Drug Related Violence There is constant fighting among the Mexico’s various drug cartels to establish supremacy, which has led to an increase in the number of murders over the last few years. The cartels have attacked the government and each other, demonstrating vicious acts of violence such as hanging victims from bridges, dumping bodies in piles and displaying severed heads on stakes (Trotta & Hughes, 2012). These displays generally seek to establish pre-eminence in their area of operation and influence. Drug related violence has spread from cities along the U.S. border to Monterrey and various other regions around the country. Gunmen have increased attacks on public officials and armored car sales are spiraling. Many cartels are cross-border criminal organizations also involved in kidnapping, extortion, cargo robbery, smuggling, and piracy (Marketline, 2012). Moreover, drug trafficking and other criminal activities launder billions of dollars into the Mexican economy through a fine network of bankers and business figures. With many cartels branching into other crimes, the problem has compounded, expanding into US territory. For instance, North Carolina-based Wachovia Wells Fargo Bank recently had to pay USD160 million to settle federal investigations on allegations of laundering Mexican drug money (Marketline, 2012). Table 1 Mexican Drug Cartels Main Areas of Influence, 2010-2011 Source: Nieto, 2012 Mexico’s Industrial Chambers Federation informed...
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...crisis to establish more control over industries that it had long coveted, such as energy. 2- Discuss examples of recent macro political risk events and the effect they have or might have on a foreign subsidiary. What are micro political risk events? Give some examples and explain how they affect international business. Answer: An event that affects all foreign firms doing business in a country or region is called a macro political risk event. In many regions, terrorism poses a severe and random political risk to company personnel and assets and can obviously interrupt the conduct of business. The increasing incidence of terrorism around the world concerns MNCs. In particular, the kidnapping of business executives has become quite common. In addition, the random acts of violence around the world have a downward effect on global expansion, not the least because of the difficulty in attracting and retaining good managers in high-risk areas, as well as the expense of maintaining security to protect people and assets and the cost of insurance to cover them. Companies that go ahead and invest in those high-risk areas do so with the expectation of a higher profit premium to offset risk. An event that affects one industry or company or only a few companies is called a micro political risk event. Such events have become more common than macro political risk...
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...vulnerable to political risk such as unstable, volatile governments, civil unrest, and foreign exchange restrictions that are beyond the control of investors. In other words, companies and investors can face an unpredictable and changeable business environment. For these reasons, it is important to identify, assess and manage political risk for companies that operate in emerging markets. According to the textbook, there are two approaches to measure political risk: qualitative and quantitative. Qualitative analysis is based on expert analysis whereas quantitative analysis which begins with the identification of quantifiable factors that affect political risk (Alon, Jaffe, & Vianelli, 2013). Then an average of the factors’ numerical scores given by the formula would be score for the country. However, measuring the factors of political risk is methodically difficult. Because no direct metrics of political risk exist (Eurasia Group, 2015). It all depends on the reliability and validity of the models and the databases used to measure. Recently, Eurasia Group has developed a systematic methodology for measuring political risk. The important parts of this model includes: country scores that capture current levels of political stability (the Global Political Risk Index); formal assessments of the future outlook of political stability and its impact on the business environment (political trajectories); asset pricing models that estimate the interaction between political risk and market...
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