Question

1. Discuss, with examples, two risks in each of the following categories: political, legal, economic. For each category of risk, make a recommendation on what a global firm can do to alleviate or overcome that risk.

2. Discuss THREE types of trade barriers that a country can implement. For each barrier, explain how it works, provide an example, and state one advantage and disadvantage of this type of barrier.

Answer 1

Answer to 1.

Political: Impact of the current or future political conditions on the economy as a whole, industry of the project and hence the project itself. Example:

• Potential regulatory impacts or trade controls such as use of local raw materials for productions up to a certain extent or regulated pricing
• Political instability leading to economic instability such as terrorism, war, elections

Actions a global firm can take: Usually firms have little control over the political aspects, so its better to refrain from a country if there is a likely impact to the feasibility of the project. Otherwise, the firm can consider creating a lobbying body to effectively maneuver the potential impacts.

Legal: Impact of laws on the industry of the project or the project itself in terms of threats or opportunities. Example:

• Restriction on percentage of foreign direct investment for licensing
• Consumer laws, health and safety laws, environmental laws which can have an impact on feasibility or economics of the business

Actions a global firm can take: Build in any potential risks that can manifest themselves in the product economics through a scenario in the business plan and seek legal advice to mitigate risks

Economic: Factors related to local and international economics which can impact the project. Example:

• Changes in inflation, interest rate or exchange rate making import of raw material more expensive and thus making the product incompetitive in the market
• Changes in level of income levels in the local market, reducing the demand of the product

Actions a global firm can take: Hedging the risk can be an effective measure for firms who have substantial cross-border trade