Identify the main types of political risk encountered by
multinational corporations and discuss how these risks can be
minimized.
Introduction
The controversy between the Kazak government and the Italian oil
company ENI about the exploitation of Kashagan´s oil fields is only one out of many cases, in which political violence acts or governmental decisions threatened foreign investments of a multinational enterprise (MNE). In April 2006, the Dacion and Jusepin oil fields, operated by ENI and the French company Total, were taken over by the Venezuelan government, because they rejected to change their business operations into joint ventures with the state-owned oil company PDVSA (Ferrari and Rolfini 2008).
Stated by Kesternich and Schnitzer (2009) some recent empirical studies identified that for MNEs political risk is one of the most important factors when considering a foreign investment. Foreign investments nowadays seem to be even more risky in terms of pollution that result in natural catastrophes such as caused by BP (Heller 2011), cultural conflicts or political disturbances for which Lybia (Yang 2011) represents a recent example and an increasing social disparity (Bloch, Koepplinger and Wolfrum 2007)
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Table of Contents
- Introduction
- Definition of the term "political risk"
- Outline of the main types of political risk encountered by multinational corporations
- Expropriation Risk
- Political Violence Risk
- Transfer Risk
Objectives and Key Themes
This paper aims to define political risk and outline the main types encountered by multinational corporations (MNCs). It then explores methods for minimizing these risks. The paper uses case studies to illustrate the impact of political risk on MNC operations.
- Definition and categorization of political risk.
- Analysis of expropriation risk, including creeping expropriation.
- Examination of political violence risk and its impact on business operations.
- Discussion of transfer risk and its implications for capital and payments.
- Strategies for minimizing political risks faced by MNCs.
Chapter Summaries
Introduction: This introductory section sets the stage by highlighting the significant challenges multinational enterprises (MNEs) face due to political risks in foreign investments. It cites examples such as the disputes between the Kazakh government and ENI, and the Venezuelan government's takeover of oil fields operated by ENI and Total, emphasizing the substantial impact of political actions on foreign investments. The introduction also acknowledges the paradoxical situation where globalization offers new opportunities but simultaneously increases political risks, citing studies emphasizing the importance of political risk assessment for MNEs. The section then outlines the paper's structure, promising a definition of political risk, an analysis of key risks, strategies for mitigation, and concluding remarks.
Definition of the term "political risk": This section formally defines political risk as the range of governmental or political conditions, decisions, or events that negatively impact foreign business transactions. This can include interference with contracts, or even complete or partial expropriation. The definition differentiates between macro-political risks (affecting all businesses in a country, such as terrorism or civil war) and micro-political risks (targeting specific industries, companies, or projects). The section then introduces a three-category classification of political risk (expropriation, political violence, and transfer risk) which forms the basis for the subsequent analysis.
Outline of the main types of political risk encountered by multinational corporations: This section details the three main types of political risk: expropriation, political violence, and transfer risk. Each subtype is elaborated with real-world examples and relevant academic references, showcasing their diverse implications for MNCs. It lays the foundation for a deeper understanding of these risks and their potential consequences, preparing the reader for the subsequent discussion on risk mitigation strategies.
Expropriation Risk: This section focuses on expropriation risk, which encompasses government actions that deprive MNEs of control or ownership of their investments. It differentiates between direct expropriation (physical seizure or legal title transfer) and creeping expropriation (gradual erosion of control through additional fees, taxes, and policy changes). The section uses the examples of IBM and Coca-Cola leaving India due to government regulations as illustrative cases of creeping expropriation, showcasing how seemingly minor actions can collectively lead to significant losses for MNEs.
Political Violence Risk: This section defines political violence risk as the potential for losses due to politically motivated actions causing damage or destruction of assets. It encompasses events such as civil unrest, war, terrorism, and coups, emphasizing their devastating impact on business operations and financial viability. The example of the Libyan civil war forcing Chinese companies to withdraw their employees demonstrates the severity of this risk and its ability to disrupt even politically neutral operations.
Transfer Risk: This section describes transfer risk, defined as the risk arising from government policies restricting the movement of capital, payments, products, technology, and people into or out of the host country. The example of Argentina's 2001/2 financial crisis illustrates how rapid changes in exchange rates and devaluation can severely impact MNE operations and profitability, highlighting the unpredictable nature of this type of political risk.
Keywords
Political risk, multinational corporations (MNCs), foreign direct investment (FDI), expropriation, creeping expropriation, political violence, transfer risk, risk mitigation, globalization, case studies, governmental policies, business operations.
FAQ: Comprehensive Language Preview on Political Risk for Multinational Corporations
What is the overall topic of this document?
This document provides a comprehensive overview of political risk for multinational corporations (MNCs). It defines political risk, outlines its main types, explores methods for minimizing these risks, and uses case studies to illustrate the impact of political risk on MNC operations.
What are the main sections of the document?
The document is structured into several key sections: an introduction, a definition of "political risk," an outline of the main types of political risk, chapter summaries for each risk type (expropriation, political violence, and transfer risk), and a list of keywords.
How is political risk defined in this document?
Political risk is defined as the range of governmental or political conditions, decisions, or events that negatively impact foreign business transactions. This includes interference with contracts or even complete or partial expropriation. The definition distinguishes between macro-political risks (affecting all businesses) and micro-political risks (targeting specific entities).
What are the main types of political risk discussed?
The document outlines three main types of political risk:
- Expropriation Risk: Government actions that deprive MNEs of control or ownership, including direct expropriation and creeping expropriation (gradual erosion of control).
- Political Violence Risk: Potential for losses due to politically motivated actions causing damage or destruction of assets (e.g., civil unrest, war, terrorism).
- Transfer Risk: Risk from government policies restricting the movement of capital, payments, products, technology, and people.
What are some examples used to illustrate these risks?
Several real-world examples are provided:
- Expropriation: IBM and Coca-Cola leaving India due to government regulations (creeping expropriation); disputes between the Kazakh government and ENI, and Venezuela's takeover of oil fields operated by ENI and Total.
- Political Violence: The Libyan civil war forcing Chinese companies to withdraw employees.
- Transfer Risk: Argentina's 2001/2 financial crisis and its impact on exchange rates and MNE profitability.
What is the purpose of this document?
The document aims to provide a clear understanding of political risk for MNCs, enabling better risk assessment and mitigation strategies. It serves as an informative resource for academic study and analysis of the subject.
What are the key takeaways from this document?
MNCs face significant challenges from political risks in foreign investments. Understanding the different types of political risk (expropriation, political violence, and transfer risk) and developing appropriate mitigation strategies is crucial for successful international operations. Globalization increases both opportunities and exposure to political risks.
What keywords are associated with this document?
Political risk, multinational corporations (MNCs), foreign direct investment (FDI), expropriation, creeping expropriation, political violence, transfer risk, risk mitigation, globalization, case studies, governmental policies, business operations.
- Quote paper
- Svenja Martina Gnosa (Author), 2011, Main types of political risks experienced by MNEs, Munich, GRIN Verlag, https://www.grin.com/document/175298
