Final Study Guide 12 Flashcards
International Risk
Risk of unexpected changes in the business environment of foreign countries in which the company operates
- such as unexpected changes in the government’s stability, attitude toward foreign companies, and tariffs
Risks in an International Environment
- Political Risks
- Economic Risks
International Business – General Risk Factors
- cost of coordination
- Institutional and cultural barriers
- new competitors
- Foreign Corrupt Practices Act
Risks & Mitigation in International Business
Political risk - Lobbying, partnering with government
Liability of foreignness - Pre-entry learning
Cultural - sensitivity training
The Liability of Foreignness (LOF)
Additional costs that a firm operating overseas incurs, which a local firm would not
Mitigating the Liability of Foreignness
Offensive Strategy or Defensive Strategy
Offensive Strategy
Enhancing local adaptation & localization
- Local networking (guanxi)
- Resource Commitment
- Legitimacy improvement
- Input localization
Defensive Strategy
Reducing dependence & vulnerability to the local environment
- Contract protection
- Parental control
- Parental service
- Output standardization
Contract Protection
Safeguard MNEs rights and benefits. Protect resources. Contracts operate as a (partial) counterforce to threats of environmental hostility
Parental Control
Reduce dependence on host country environment through HQ control. High-control entry modes (Sub, Majority JV). Vertical integration. Limit local manager autonomy.
Parental Service
Reduces a subsidiary’s economic and transaction exposure to host country environments. Parental financing: ForEx hedging, cash flow management, transfer pricing.
- Parental Operational services: staffing, global distribution, sourcing & provisioning
Output Standardization
Standardize the Products or Services made or offered in Host country. Typical in export-oriented firms.
- Reduces dependence on local market requirements, but also limits opportunities
Local Networking
Interpersonal connections with senior managers or officials in local business community such as governments, partners, suppliers, buyers, competitors, wholesalers, distributors, and promoters.
Resource Commitment
MNE contributes resources to host country operations that can solidify its competitive position or strengthen its bargaining power in a local setting.
- Reduces resource dependency on the host country.
Input Localization
Use of local raw materials, supplies, facilities, workers, engineers, and managers. Improves MNEs image as committed to host economy & society. Decreases ForEx risk and dependence on imports. Management localization increases local knowledge
Legitimacy Improvement
Enhance acceptance by the host country. Social accommodation: education, pollution control, healthcare, infrastructure.
- Organizational credibility: improve trustworthiness with host country public
Why A Multinational Company Needs A Foreign Policy
Because of geopolitical risks
What Is Corporate Foreign Policy?
A “privatized” foreign policy employed by companies to navigate the geopolitical complexities of the modern world.
- In other words, a policy that uses the same tools traditionally used in statecraft by countries.
Geopolitical due diligence
It involves the assessment of local, regional, and transnational risks facing the company
Corporate Diplomacy
It aims to enhance a company’s ability to operate internationally and to ensure its success in every country in which it operates.
New Principles of Geopolitical Due Diligence
- Assess transnational (broad regional) risk
- Pay attention to regional political trends
- Assess local in-country risk
- Don’t neglect home and near-abroad risk
Management of political risk involves mitigation strategies and tactics such as:
- Partnerships with local entities
- Project Financing
- Political risk insurance (ex: G-7 Governments)
The Solution to Managing 21st Century Political Risk
- An Enterprise Risk Management Framework for Political Risk
- Use a checklist/survey involving a series of questions to identify exposures that need to be addressed and managed
The 10 Types of Political Risk (Political risk
taxonomy)
- Geopolitics (in Post-Cold War period)
- Internal Conflicts
- Laws, regulations, policies
- Breaches of contract
- Corruption
- Extraterritorial reach
- Natural resource manipulation
- Social activism
- Terrorism
- Cyber-threats
Three megatrends drive Political Risk
- Post-Cold War Geopolitics
- Supply Chain Innovations
- Technology
FIVE GLOBAL SHOCKS [Exogenous events that have system-wide and global effects]
- 9/11/2001 Terrorist Attack
- 2008 Global Financial Crisis
- The Arab Spring 2011
- “Great powers behaving badly”
- Rise of nationalism, populism, nativism, isolationism, as a reaction to Globalization created many winners but also some losers
