Question

See if you can find a foreign firm that operates in a politically unstable/volatile country (i.e.Syria, Yemen, North Africa, D.R. of Congo, South Sudan, Ethiopia, Somalia, Nigeria, Russia, Venezuela or other). Based on how they operate in the market(s), what techniques does it appear the MNCs uses in response to the political risk? Provide a brief explanation.

Answer 1

Proctor & Gamble is one of the MNCs which operates in some of tthe above mentioned countries.

The Political risks for MNCs typically would be to make political decisions that prove to have adverse effects on corporate goals. The risks can be from revolution or the creation of laws that would have a financial impact (i.e., movement of the capital). There can be instability in investment returns due to changes in goverment, legislative bodies, foreign policy makers or military control.

There are mainly two types of risks- Macro risks as well as Micro risks

The adverse actions affecting all foreign firms are termed as Macro Risks. The actions affecting particularly a sector or industry is termed as Micro risks.

Some research will be conducted on the riskiness of the country and sometimes, the prospect will be so lucrative that it would be worth taking a calculated risk. Companies prefer to negotiate terms of compensation with the host country so that there would be a legal basis if something happens to disrupt the company's operations. Another smart way is to buy a political risk insurance policy that would compensate the organisation if an adverse event is occurred. The cost of doing business in one country may vary compared to other as the premium rates depend on the country, the industry, the no of risks insured.