Question

1.Describe the type of political risk a firm in a specific industry would face in any one of today’s emerging markets you are familiar with or have some knowledge of. Select a country and make an assumption that may help in you answering this question, based on the firm’s size or products, among others. (5 sentences max)

2.Identify and describe briefly two host-country sources of political risk a firm would face as it expands abroad.(5 sentences max)

Answer 1

Political risk refers to the risk faced by multinational corporations to their business due to policy changes made by host country which will result in adverse outcomes for the business.

Country Chosen : Bangladesh

Bangladesh is a small country in South Asia. In recent times, Bangladesh has emerged as a major textile hub and a major exporter of garments. Hence there is a lot of interest in investing in Bangladesh . The government is also encouraging businesses to set up business in multiple areas to boost infrastructure and other enablers for the export of garments.

Let us consider the case of AB Oil - a lubricant manufacturer. Lubricants are required for running of machines in industries as well as for cars , buses and all forms of transport. AB Oil appointed a consultant and studied the market for sizing and compliances and decided to enter the market with a local Partner. It formed a JV with a large business house owned by 2 brothers who are bangladesh nationals . The Bangladesh business house Fahad Impex, is a diversified business house with interests in auto , auto ancillaries, consumer goods etc.

Political Risk issues that could be faced by AB Oil

1. Recurrent political instability and violence : Bangladesh has a checkered political history and there have been coups in the past which overthrew the government. This threat continues though currently , the situation is fairly stable.

2. Bangaldesh is a Muslim majority country and most of the populace is moderate and values democracy. However there is growing radicalisation. The party in power is Awami League which is secular , The main opposition is BNP , which is Islamic. There is a danger of Islamic forces coming into power and moving the country towards islamisation which would result in severe disruption to business.

Both these risks basically mean that if there are changes to laws, protocols and operating procedures due to overthrow of government through democratic or undemocratic means , the AB Oil will have to rethink its strategy.The only mitigating factor for AB Oil is its association with Fahad Impex which is very influential in Bangladesh.

2 host country political risks : Normally these kinds of risks are applicable when the host country does not have political stability or has a history of political unrest .

1. Lack of democracy : In countries like Bangladesh/Pakistan there is a risk of overthrow of the elected government by the military. This will result in considerable unrest and paralysis of economic activity.

2. Changes in policies due to internal/popular pressure : Ad hoc changes in policies due to pressure to appease setions of society may make it difficult for an entity to operate . This can also lead to protectionism .

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