Managing Political Risk, Government Relations, and Alliances

1. Managing Political Risk, Government Relations, and Alliances EXAMINE how MNCs evaluate political risk. PRESENT some common methods used for managing and reducing political risk. DISCUSS strategies to mitigate political risk and develop productive relations with governments. DESCRIBE challenges to and strategies for effectively managing alliances. The specific objectives of this chapter are:

2. The Nature and Analysis of Political Risk • Political risk • The likelihood that a business’s foreign investment will be constrained by a host government’s policy • Macro political risk analysis • Analysis that reviews major political decisions likely to affect all enterprises in the country • Micro political risk analysis • Analysis directed toward government policies and actions that influence selected sectors of the economy or specific foreign businesses in the country

3. Maximum 100 80 60 40 20 Iran Iraq India Chile Israel Brazil Egypt China Kenya Turkey Poland Angola Nigeria Mexico Taiwan Minimum 0 Ukraine Hungary Thailand Pakistan Malaysia Colombia Argentina Indonesia Singapore Venezuela Hong Kong South Africa Cote d’Ivoire Saudi Arabia Country Risk Risk Adapted from Figure 10–1: Country Risk

4. Macro Risk Factors • Freezing the movement of assets out of the host country • Placing limits on the remittance of profits or capital • Devaluing the currency • Refusing to abide by the contractual terms of agreements previously signed with the MNC • Industrial piracy (counterfeiters) • Political turmoil • Government corruptionHow does the US look to investors from Australia or Dubai?

5. Perceptions of International Corruption Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

6. Perceptions of International Corruption Adapted from Table 10–1: The 2003 Transparency International Corruption Perceptions Index

7. Micro Risk Factors • “Some MNCs are treated differently than others” • Industry regulation • Taxes on specific types of business activity • Restrictive local laws • Impact of WTO and EU regulations on American MNCs • Government policies that promote exports and discourage imports

8. Expropriation Risk • Expropriation • The seizure of businesses by a host country with little, if any, compensation to the owners • Indigenization laws • Laws that require nationals to hold a majority interest in an operation

9. Evaluation of Political Risk Adapted from Table 10–2: A Guide to Evaluation of Political Risk

10. Operational Profitability • Most MNCs are more concerned with operational profitability than expropriation • Will they be able to make the desired return on investment? • Requiring MNCs to use domestic suppliers vs. using supplies from other company-owned facilities or purchasing them in the world market • Restricting the amount of profit that can be taken out of the country • Wages and salaries that must be paid to the employees

11. Managing Political Risk and Government Relations Political risks • Transfer risks • Government policies that limit the transfer of capital, payments, production, people, and technology in and out of the country • Tariffs on exports and imports • Restrictions on exports • Dividend remittance • Capital repatriation Transfer risks

12. Managing Political Risk and Government Relations Political risks • Operational risks • Government policies and procedures that directly constrain management and performance of local operations • Price controls • Financing restrictions • Export commitments • Taxes • Local sourcing requirements Transfer risks Operational risks

13. Managing Political Risk and Government Relations Political risks • Ownership control risks • Government policies or actions that inhibit ownership or control of local operations • Foreign-ownership limitations • Pressure for local participation • Confiscation • Expropriation • Abrogation of proprietary rights Transfer risks Operational risks Ownership control risks

14. Conglomerate Vertical Horizontal Transfer Operational Ownership control Assessing Political Risk Special Investments General Investments Political Risks Adapted from Figure 10–2: A Three-Dimensional Framework for Assessing Political Risk

15. General Nature of Investment • Conglomerate investment • A type of high-risk investment in which goods or services produced are not similar to those produced at home • Vertical investment • The production of raw materials or intermediate goods that are to be processed into final products • Horizontal investment • An MNC investment in foreign operations to produce the same goods or services as those produced at home Click here to see slide 15

16. Special Nature of Investment • Three sectors of economic activity • Primary sector, which consists of agriculture, forestry, and mineral exploration and extraction • Industrial sector, consisting of manufacturing operations • Service sector, which includes transportation, finance, insurance, and related industries

17. Special Nature of Investment • Special nature of foreign direct investments can be categorized as one of five types (see slide 15) • Type I is the highest-risk venture; type V is the lowest-risk • Risk factor is assigned based on sector, technology, and ownership • Primary sector industries usually have the highest risk factor, service sector industries have the next highest, and industrial sector industries have the lowest • Firms with technology that is not available to the government should the firm be taken over have lower risk than those with technology that is easily acquired • Wholly owned subsidiaries have higher risk than partially owned subsidiaries Click here to see slide 15

18. Quantifying Variables in Political Risk • Factors that are typically quantified • Political and economic environment • Domestic economic conditions • External economic conditions • Each factor is given a minimum or maximum score, and the scores are tallied to provide an overall evaluation of the risk • Slide 20 provides an example of a quantitative list of political risk criteria Click here to see slide 15 Click here to see slide 20

19. Criteria for Quantifying Political Risk Adapted from Table 10–3: Criteria for Quantifying Political Risk

20. Formulating and Implementing Responses to Political Risk • Three related corporate political strategies • Relative bargaining power analysis • The MNC works to maintain a bargaining power position stronger than that of the host country • Integrative, protective, and defensive techniques • Integrative techniques help the overseas operation become a part of the host country’s infrastructure • Developing good relations with the host government and other local political groups • Producing as much of the product locally as possible with the use of in-country suppliers and subcontractors • Creating joint ventures and hiring local people to manage and run the operation

21. Formulating and Implementing Responses to Political Risk • Doing as much local research and development as possible • Developing effective labor–management relations • Protective and defensive techniques discourage the host government from interfering in operations • Doing as little local manufacturing as possible and conducting all research and development outside the country • Limiting the responsibility of local personnel and hiring only those who are vital to the operation • Raising capital from local banks and the host government as well as outside sources • Diversifying production of the product among a number of countries

22. Formulating and Implementing Responses to Political Risk • Proactive political strategies • Lobbying, campaign financing, advocacy and other political interventions designed to shape and influence the political decisions prior to their impact on the firm • Formal lobbying • Campaign financing • Seeking advocacy through the embassy and consulates of the home country • Formal public relations and public affairs activities such as grassroots campaigning and advertising

23. High 20 Moderate 10 Low 1 1 Low 10 Moderate 20 High Use of Integrative, Protective and Defensive Techniques (11, 14) Low or stable technology Integrative techniques Unified logistic, labor transmission (16,6) ((7, 10) Advanced management skill (14, 3) Dynamic high technology Protective/defensive techniques Adapted from Figure 10–4: Use of Integrative and Protective and Defensive Techniques by Firms in Select Industries

24. Managing Alliances • Alliances and joint ventures can significantly improve the success of MNC entry and operation, especially in emerging economies • Motivating factors • faster entry and payback, economies of scale and rationalization, complementary technologies and patents, and co-opting or blocking competition • Preparation for the likely eventual termination of the alliance • Legal issues (conditions of termination, disposition of assets and liabilities, dispute resolution, distributorship arrangements, protection of proprietary information and property, rights over sales territories and obligations to customers) • Business issues (basic decision to exit, people-related issues, relations with the host government)

25. Role of Host Governments in Alliances • Alliance or joint-venture partners may be advantageous to MNC entry and expansion • Highly regulated industries such as banking, telecommunications, and health care • Cope with emerging-markets environments characterized by arbitrary and unpredictable corruption • May be required by host government • Host government may be unwilling to permit the alliance to terminate

26. Case • HP-Compaq