GM - Chapter 10 - Managing Political Risk, Government Relations, and Alliances Flashcards

1
Q

Political risk

A

The likelihood that a business foreign investment will be constrained by a host government’s policy.

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2
Q

Macro political risk analysis

A

Analysis that reviews major political decisions likely to affect all enterprises in the country

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3
Q

Micro political risk analysis

A

Analysis directed toward government politics and actions that influence selected sectors of the economy or specific foreign businesses in the country

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4
Q

Macro Risk Factors

A
  • 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 MNC
  • Industrial piracy (counterfeiters)
  • Political turmoil
  • Government corruption
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5
Q

Micro Risk Factors

A
  • 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
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6
Q

Terrorism and Its Overseas Expansion

A
  • Terrorism: the use of force or violence against others to promote political or social views
  • Three types of terrorism: amateur, religiously motivated, and classic
  • MNCs disinclined to set up operations in countries with high terrorism risk
  • MNCs must assess political risk, install modern security, compile crisis plans, and prepare employees for possible situations
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7
Q

Expropriation Risk

A

the seizure of businesses by a host country with little, if any, compensation to owners
- Indigenization laws- Require nations to hold a majority interest in an operation

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8
Q

Operational Profitability in Risk Analysis

A
  • Most MNCs are more concerned with operational profitability than expropriation
  • They are concerned with ability to make desired return on investment
  • – Require MNCs to use domestic suppliers vs. those from other company-owned facilities or purchase in world market
  • – Restrict the amount of profit taken out of country
  • – Wages and salary that must be paid to employees
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9
Q

Political Risks: Transfer Risks

A

Government policies that limit transfer of capital, payments, production, people, and technology in and out of country

  • Tariffs on exports and imports
  • Restrictions on exports
  • Dividend remittance
  • Capital rapatriation
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10
Q

Political Risks: Operational Risks

A

Government policies and procedures that directly constrain management and performance of local operations

  • Price controls
  • Financing restrictions
  • Export commitments
  • Taxes
  • Local sourcing requirements
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11
Q

Political Risks: Ownership Control Risks

A

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
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12
Q

Conglomerate investment

A

type of high-risk investment in which goods or services produced are not similar to those produced at home

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13
Q

Vertical investment

A

Production of raw materials or intermediate goods that are to be processed into final products

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14
Q

Horizontal investment

A

MNC investment in foreign operations to produce the same goods or services as those produced at home

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15
Q

Three sectors of economic activity

A
  • Primary sector: agriculture, forestry, mineral exploration and extraction
  • Industrial sector: manufacturing
  • Service sector: transportation, finance, insurance, and related industries
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16
Q

Special nature of foreign direct investment can be categorized as one of five types:

A
  • Type I: highest-risk venture (type V is lowest)
  • Risk factor is assigned based on sector, technology, and ownership
  • Primary sector industries usually have highest risk factor, service sector industries have next highest; industrial sector industries have lowest
  • Firms with technology not available to government should 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
17
Q

Quantifying Variables in Managing Political Risk

A
  • Each factor is given minimum or maximum score; scores tallied for overall evaluation of risk
  • Slide 22 gives an example of a quantitative list of political risk criteria
  • Factors typically quantified
  • –Political and economic environment
  • –Domestic economic conditions
  • –External economic conditions
18
Q

Techniques for Responding to Political Risk - Three related corporate political strategies

A

1) Relative bargaining power analysis
- The MNC works to maintain a bargaining power position stronger than that of host country
2) Integrative, protective, and defensive techniques
- Integrative techniques help overseas operation become part of host country’s infrastructure
- Developing good relations with host government and other local political groups
- Producing as much of product locally as possible with use of in-country suppliers and subcontractors
- Creating joint ventures and hiring local people to manage and run operation
- Doing as much local R&D 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 country
- Limiting responsibility of local personnel and hiring only those who are vital to operation
- Raising capital from local banks and host government as well as outside sources
- Diversifying production of product among number of countries

19
Q

Proactive political strategies

A

Lobbying, campaign financing, advocacy and other political interventions designed to shape and influence political decisions prior to impact on firm

  • Formal lobbying
  • Campaign financing
  • Seeking advocacy through embassy and consulates of home country
  • Formal public relations and public affairs activities such as grassroots campaigning and advertising
20
Q

Alliance and joint ventures can significantly improve the success of MNC entry and operation, especially in emerging economies

A

Preparation for likely eventual termination of alliance
- Faster entry and payback, economies of scale and rationalization, complementary technologies and patents, and co-opting or blocking competition
- Business issues (basic decision to exit, people-related issues, relations with the host government)
Motivating factors
- Faster entry and payback, economies of scale and rationalization, complementary technologies and patents, and co-opting or blocking competition

21
Q

Alliance or joint-venture partners may be advantageous to MNC entry and expansion

A
  • 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 alliance to terminate