Question

International Management Question

1.      In the context of international business, what is meant by the term "political risk"? In general, how do MNCs analyze this risk? Which countries are considered the most and least risky and why? How are the integrative, protective and defensive techniques MNCs used to respond to political risks?   Give examples of how business might use these techniques.

Answer 1

Political risk is the likelihood that the foreign investment of a business will be constrained by a host government's policies. Examples of risk factors include freezing the movement of assets out of the host country, placing limits on the remittance of profits or capital, devaluing the currency, appropriating assets and refusing to abide by the contractual terms of agreements previously signed with the MNC.

In dealing with such risk, companies conduct both macro and micro political risk analysis. While macro political risk analysis reviews major political decisions that are likely to affect all business conducted in the country, micropolitical risk analysis is directed toward government policies and actions that influenceselected sectors of the economy or specific foreign businesses. Specific consideration is givento changing host government policies, expropriation and operational profitability risk.

Venezuela is the most risky as they are exposed to natural hazards,wind zone and an earthquake zone,high level of corruption. In terms of moving goods and the poor infrastructure.

Singapore is the least risky country.norway is a creditor country,because pf good and sustainable growth in an unpredictable world and GNP (gross national product) is strong, with national livelihood high,banking sector is also the most stable in the region and among the strongest in the world,Monetary stability,employment high,political stability,transparent and corruption free and efficient economy.

MNCs attempt to protect themselves from expropriation or minimize government interference in their operations is to use integration and the implementation of protective and defensive techniques. Integrative techniques are designed to help the overseas operation become part of the host country's infrastructure.The objective was to be less foreign and more to local culture needs and wants.by this MNCs develop a strong bond with the operating country.Foreign companies manufacture products locally to meet the local standards and regulations and also create joint ventures with the country to avoid political risk and they make strong and effective relationships with the labor unions to avoid strikes or business closure.

Protective and defensive techniques encourage the companies to avoid integration with the local government and they protect themselves from the political risks by avoiding establishing the manufacturing facilities in the host country.A foreign company doesn't let the host country manager to manage all business operations.More responsibilities are controlled by the Home office.Moreover,it diversifies the manufacturing among different countries.This strategy splits and minimizes the risk.

example: An Apple iphone mobile manufacturer:

Although the parts of all iphones are manufactured at different places and assembled in china and shipped to US and where the distribution done to all the other countries.this operations are overtaken by Home office in U.S.This example for all the techniques as it maintains joint ventures and distributed its manufacturing bases and maintained by Home office and good relation with workers associations.

and other examples like Facebook and Google:Their political ties and workers associations,diversified manufacturing base,local and global CEOs,and manufacturing according local wants and needs.these are the best examples for usage of this techniques.