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
1. Introduction
2. Definition of the term "political risk"
3. Outline of the main types of political risk encountered by multinational corporations.
3.1 Expropriation Risk
3.2 Polticial Violence Risk
3.3 Transfer Risk
4. How to minimize political risks
5. Conclusion
Objectives and Core Topics
The primary objective of this assignment is to identify the various forms of political risk that multinational enterprises (MNEs) face when operating in foreign markets and to discuss effective strategic management approaches to mitigate these risks. The research explores how political instability and government actions impact international business performance and examines how firms can transform these environmental challenges into competitive advantages.
- Categorization of political risks into expropriation, political violence, and transfer risks.
- Evaluation of proactive management strategies such as dependency development and voluntary action.
- Analysis of the role of political action, lobbying, and strategic alliances in risk mitigation.
- The function of political risk insurance as a tool for asset protection.
- Examination of real-world case studies involving MNEs like IBM, Coca-Cola, and the impact of the Argentine financial crisis.
Excerpt from the Book
Outline of the main types of political risk encountered by multinational corporations.
Expropriation or nationalization risk relates to losses caused by actions approved or taken by the host government in an arbitrary or even discriminatory way, which deprive the MNE of its control or even ownership of its investment. Expropriation without any compensation might result, in case of debt, bankruptcy if the MNE might not able to fulfil the obligations of its lenders (Yannaca-Small 2004). One type of statutory interference could be direct expropriation by entirely physical seizure or formal assignment of the legal title or patent rights (Ferrari and Rolfini 2008). The most threatening type of expropriation for MNEs according to Hoffman (2007, p.48) “…takes place over time in a series of so called creeping acts that collectively result in an expropriatory act.”. Creeping expropriation is the type of risk, by which the host government deploys a combination of additional fees or taxes and other devices and charges to increase its share of the companies or projects profits after the company has made its investment (Hoffman 2007). Furthermore, host governments also try to renegotiate contractual agreements with MNEs or even change policies once the investment has been made (Gatignon and Anderson 1998, Williamson 1996). In the 1970s for example, IBM and Coca-Cola both left India because of the statutory restrictions that came up after they already made initial investments. IBM left India because the government demanded it to share its technological innovations with local competitors and Coca-Cola was required 1. to transfer 60% of its equity to an Indian company 2. to unveil its secret formula and 3. to use twofold trademarks for the Indian consumers so that they would acquaint themselves with a local emblem. All of the governmental demands were utterly rejected by Coca-Cola. The company feared expropriation by unveiling its secret formula once the new trademark would become accepted and left the country as well (Minor 2011).
Summary of Chapters
1. Introduction: This chapter contextualizes the challenges of international investment by highlighting recent cases of political interference and defining the increasing complexity MNEs face in global markets.
2. Definition of the term "political risk": This section establishes the academic framework for political risk, distinguishing between macro and micro risks and setting the stage for specific risk categorization.
3. Outline of the main types of political risk encountered by multinational corporations.: This chapter provides a detailed analysis of the three primary categories of political risk: expropriation, political violence, and transfer risks, using historical and contemporary examples.
4. How to minimize political risks: This section discusses strategic measures for MNEs, including dependency creation, public relations, political action, strategic alliances, and the use of insurance to mitigate potential losses.
5. Conclusion: The concluding chapter summarizes the necessity of establishing monitoring systems and contingency planning to adapt to turbulent political environments, transforming risks into strategic opportunities.
Keywords
Political Risk, Multinational Enterprises, Expropriation, Political Violence, Transfer Risk, Foreign Direct Investment, Risk Mitigation, Global Competitiveness, Dependency Development, Strategic Alliances, Political Insurance, Macro Risk, Micro Risk, Lobbying, Corporate Citizenship.
Frequently Asked Questions
What is the core focus of this assignment?
The work examines the political risks inherent in international business and analyzes strategies that multinational enterprises can employ to minimize these risks and ensure business survival in foreign markets.
What are the primary political risk categories discussed?
The paper categorizes these into three main types: Expropriation (including creeping expropriation), Political Violence (such as war, terrorism, or civil unrest), and Transfer Risk (related to capital and currency restrictions).
What is the main research objective?
The objective is to explain the nature of political risk and identify specific managerial strategies to effectively manage and mitigate these risks when operating abroad.
Which scientific methods are applied?
The study utilizes a review of existing literature and empirical evidence to analyze political risk trends and applies case study analysis of corporations like IBM and Coca-Cola to demonstrate theoretical concepts.
What topics are covered in the main section?
The main section covers the definitions of political risk, detailed types of risks, and various defensive strategies such as dependency development, voluntary action, public relations, lobbying, and the use of political risk insurance.
Which keywords best characterize this work?
Key terms include political risk, MNEs, expropriation, creeping expropriation, political violence, transfer risk, foreign direct investment, and risk management.
How does "creeping expropriation" differ from direct seizure?
Unlike direct physical seizure, creeping expropriation occurs gradually through a series of government actions, such as increased taxes, fees, or renegotiated contracts, designed to capture a larger share of project profits.
Can political risks be completely eliminated?
The author argues that while political risk cannot be totally eliminated, it can be significantly minimized through appropriate managerial actions, monitoring systems, and adaptive strategic planning.
What role do joint ventures play in risk mitigation?
Joint ventures can serve as a "transnational coalition," potentially increasing political leverage and sharing risks, though the author notes their effectiveness as a hedge against expropriation is a subject of debate.
- Quote paper
- Svenja Martina Gnosa (Author), 2011, Main types of political risks experienced by MNEs, Munich, GRIN Verlag, https://www.grin.com/document/175298
