Class 11 (ch.17) Flashcards
What components of a multinational firm may be impacted by political change
1) earnings
2) operating cash flow
3) asset ownership
Etc
How may a political change for a multinational impact how they operate?
May change their willingness to continue to invest or invest at all
What is Category 1 of potential financial losses and political risks?
Losses in operating profitability
What are some of the most common political risks that a multinational firm faces in Category 1?
1) changes in various regulations
2) changes in restrictions
3) changes in the requirements needed to operate in a certain country
What sort of financial harm may a multinational firm feel from category 1?
-Lost business and sales opportunities
-Discriminatory treatment
What is adverse regulatory change or regulatory risk?
Refers to changes in host country regulations that alter operating conditions of investments
What does breach of contract mean in Category 1
Refers to losses arising from a government or state-owned-enterprise breaking or breaching of a business contract with foreign private investor
What may be a reason for breach of contract
Change in host country law or failure to comply with principles of the rule of law
What are local content requirements in Category 1
The host government may require the foreign firms to purchase raw material and components locally as a way to maximize value-added benefits and to increase local employment
What does local sourcing do for the foreign firm?
Lowers their political risk but increases financial and commercial risk because strikes and other problems may occur
What is Category 2 risk? Explain it
Transfer and convertibility risk.
It is the risk that the host country will restrict the ability of the multinational firm to move money in or out of the country (transfer risk) and maybe even restricting the ability to exchange local currency into foreign currency (convertibility risk)
What impacts could transfer and convertibility risk have?
Can be extremely costly to multinational firms if they need to pay their suppliers in a different currency
What is Category 3 political risk? Explain it
Expropriation and nationalization
It is the seizure of the multinational company’s business, assets or license to operate in the country by the government, essentially taking their assets
Does the state have the right to take control of a business?
Yes, under international law they have the right to take property held by private entities, domestic or foreign, through expropriation for economic, political or social reasons.
What 4 criterias need to be met for the “lawful” order to take over a multinational firm?
1) Property has to be taken for a public purpose
2) On a non-discriminatory basis
3) In accordance with due process of law
4) Accompanied by compensation
