Question

Please define globalization and political risk and how multinational firms are affected by each.

Answer 1

Globalisation and Multinational corporations (MNCs)
Globalisation refers to interdependence and cooperation among countries around the globe in matters of trade and commerce. It is basically an economic procedure of growing international association among the economies of the world which give rise to flow of investments, capital, people and culture etc.
In this atmosphere of global connection, Multinational corporations are the ones that are considered to thrive most. These are big corporations that explore and extend their production and sale to many countries.
1.Globalisation provides them the ample amount of space and opportunity to increase their consumer base and extend their markets. Moreover by doing so Globalisation helps them to increase their profitability.
2. By setting up production in other countries, Globalisation helps the multi nationals to look for opportunities to lower their cost of production by looking for cheap labor.
3. In the era of Globalisation, Multinational corporations may even get tax concessions in the host countries and sometimes there is open availability of resources of host countries that helps in decreasing cost of production and increasing profits.

Political risk and Multinational corporations
Although multinational corporations are major agents and beneficiaries of Globalisation, but sometimes some factors can hinder the development and expansion of MNCs. One of such factors is political risk posed by the host country.
Political risk refers to the risk that multinational firms face due to the political stance taken by host countries that have the capacity to affect MNCs profits and interests. Social instability and unfavourable political decisions are among the most serious political risk faced by MNCs when they decide to invest in foreign countries.
For this reason, MNCs draw and research about the political and social stability of the countries before deciding to invest. Hence major developing nations try their hard to tackle and minimise political risk and clear the air for multinational firms so that new foreign investment would help in boosting their economies.