W4 - LECTURE Flashcards
What is political risk?
The probability that political decisions, events, or conditions at the geopolitical, country, regulatory, or societal level will impact the performance of a company, market and economy
Source: EY, 2021
List the categories of political risk.
- Geopolitical
- Country
- Regulatory
- Societal
Source: World Economic Forum, 2024
What percentage of CEOs expect geopolitical disruptions as a top source of business challenges?
More than 1/3
Source: EY, 2021, 2024
What is the level of confidence among CEOs regarding their understanding of political risk exposure?
Only 30% are confident
Source: EY, 2021, 2024
Define likelihood in the context of political risk analysis.
Probability of occurrence
None
Define impact in the context of political risk analysis.
Level of influence over businesses
None
What does CPA stand for?
Corporate Political Activity
None
What is the role of governments and politicians in developing countries regarding resource dependency?
They are a significant source of dependency and regulatory power
None
What are the characteristics of weak institutional environments?
- Political connections as a substitute for weak market institutions
- Severe constraints in labour and capital market
- More restrictive regulatory environment
- Governments have a more prominent role in resource allocation
What is the main approach to CPA in weak institutional environments?
A relational strategy based on personal relationships between managers and politicians
This approach is less transparent and more susceptible to corruption.
What types of political strategies are often employed in weak institutional environments?
- Affective
- Financial
- Pseudo- attribution
- Kinship
Many strategies in these environments are highly unethical.
True or False: CPA in emerging countries is similar to CPA in developed countries.
False
Western CPA is mostly inapplicable in emerging countries.
Fill in the blank: CPA is context _______.
dependent
This means that CPA strategies vary based on the institutional environment.
What is a common outcome of developing political ties in weak institutional environments?
- Obtain information and reduce asymmetries
- Protection from bankruptcy through bailouts
- Ensure lenient regulatory enforcement
- Overcome red tape and bureaucracy
None
What is the ‘DARK side’ of CPA in weak institutional environments?
Corruption, bribery, favoritism, and clientelism
These practices arise from less transparent relational strategies.
What is a significant challenge in managing political risk in emerging countries?
General lack of understanding of CPS in weak institutional environments
This leads to incorrect assumptions about CPA functioning everywhere.
What does CPS stand for?
Corporate Political Strategies
What is the significance of transparency in CPA?
Transparency is crucial to avoid unethical practices and corruption
In weak institutional environments, transparency is often compromised.
What role does CEO activism play in business and politics?
It involves corporate leaders taking public stances on political issues
This can influence company reputation and stakeholder relationships.
What is CEO activism?
CEO activism refers to the engagement of CEOs in social and political issues, influencing public opinion and policy.
What do institutions serve to stabilize?
Institutions serve to stabilize risk and reduce uncertainty.
Why is political risk difficult to assess in weak institutional environments?
Because governments have volatile control over regulation, resources, and information.
What is the traditional advice for MNEs regarding weak institutional contexts?
MNEs are traditionally advised to avoid these contexts due to high political risk.
How do MNEs manage risk in unstable contexts?
Through political ties, which are boundary spanning personal and institutional linkages.
What are the potential liabilities of close political ties?
They can become a liability if the regime weakens, leading to lost benefits and unpredictability.
What is the twin problem faced by MNEs when building close ties?
Building ties with the ruling regime while preparing for potential regime change.
What does ‘foreign firm legitimacy’ refer to?
It refers to the acceptance or approval of a foreign firm’s presence by local communities.
What are the three types of firm legitimacy?
- Cognitive
- Moral
- Pragmatic
What is cognitive legitimacy?
Cognitive legitimacy is when a firm’s existence is taken for granted within the local context.
What does moral legitimacy depend on?
On the evaluation of a firm’s benefits to society vis-à-vis regulatory, social, and cultural norms.
What is pragmatic legitimacy?
Pragmatic legitimacy meets stakeholder needs and aligns with stakeholders’ self-interest and expectations.
True or False: In weak institutional contexts, cognitive legitimacy remains the most important.
False. In weak institutional contexts, cognitive legitimacy dissipates, making moral and pragmatic legitimacy more important.
What are the strategies MNEs can use to improve legitimacy directly?
- Invest in more desirable products or services
- Lobby the government
What are indirect strategies for improving legitimacy?
- Mobilize sociopolitical actors to influence market demand
- Influence government choices
What is the societal license to operate (SLTO)?
A form of social legitimacy derived from local community acceptance or approval of a company’s presence.
What is the risk associated with ‘guilt by association’?
The risk of suffering from being related to an unpopular government.
What is structural lock-in in the context of political risk management?
Over-reliance on the existing regime, limiting a company’s ability to adapt to changes.
What are the potential consequences of regime change for MNEs?
- Exposure to punitive actions by the new ruling authority
- Sanctions or exclusion
What is essential for securing approval from stakeholders?
Securing approval from both the government and broader society, including global stakeholders.
What do companies need to prioritize in political risk management?
- Identify and collect global political risk indicators
- Develop the ability to assess the business impact of political risk
Fill in the blank: Most companies’ approach to risk identification is ______.
[reactive]
What percentage of global executives reported being affected by unexpected political risk?
More than 90%.
What is an essential step for integrating political risk into strategic planning?
Set-up a cross-functional geostrategic committee.
