Week 6: The Political Environment

Question 1

What are the 3 host country benefits of FDI?

Answer 1

• resource transfers - capital, technology and management

• employment effects - mergers and acquisitions, increased spending on local suppliers - spillover benefits
• balance of payments effects - positive capital inflow v. income outflow; import replacement and export promotion

Question 2

What is the key question surrounding the political environment?

Answer 2

What is the appropriate role and level of intervention of the government in business and the economy?

Question 3

What are the 3 features of the political environment?

Answer 3

* ideology: the systemic and integrated body of constructs, theories and aims that constitute a socio-political program. MNCs are generally more comfortable operating in a political environment similar to their home country. 
 Two extremes (theoretically)
democracy, which allows for the involvement of citizens in the decision making process; and totalitarianism, where a single party, individual or group monopolises political power and neither recognises nor permits opposition

• political-economic systems
• regulations

Question 4

What is political risk?

Answer 4

The likelihood that the foreign investment of a business will be constrained by a host govs policies.

• adverse actions that affect MNCs include war, insurrection or political violence
• also include subtle changes e.g. changes in gov attitudes and policies that affect the behaviour, ownership, physical assets, personnel or operations of the firm
• two categories: inherent risk (constantly present around the world; and circumstantial risk (that arises out of particular events in different countries)

Question 5

What are the policy impacts on IB and FDI?

Answer 5

• Host country regulations - impose for reasons of “national interest, national security and public order” - exercising national sovereignty
• Methods of influence - investment restrictions e.g. entry and establishment, ownership and control, operational restrictions, authorisation and reporting processes
  investment incentives e.g. competitive bidding amount nations
  standards of treatment e.g. national treatment and transparency
  other policies e.g. intellectual property law, double taxation, exchange control
• investment incentives e.g. competitive bidding amount nations
• standards of treatment e.g. national treatment and transparency
• other policies e.g. intellectual property law, double taxation, exchange control

Question 6

What are some host nation responses (strategies) to attract MNCs?

Answer 6

• incentives for foreign investment
• favourable tax treatment
• tariff protection
• foreign exchange privileges
  controls imposed on MNCs may include:
  
  • limits on the repatriation of profits, dividends and royalties
  • ownership restrictions
  • controls on raising capital
  • curbs on transfer pricing
  • price controls that force MNCs to sell its goods and services at set prices

Question 7

What are some defensive host nation responses to MNCs?

Answer 7

• personnel restrictions
• imposition of comprehensive labour and social controls on MNCs
• restrictions on the amount of imports used for manufacturing products locally
• discrimination in government business
• requirements that investment is not in technologically stagnant industries
• policies insisting on continually increasing local content requirements and vigorous development of export markets

Question 8

What does a macro political risk analysis?

Answer 8

Reviews major political decisions and circumstances that are likely to affect all enterprises in the country and not just the MNC

Question 9

What does a micro political risk analysis?

Answer 9

Directed toward gov policies and actions that influence selected sectors of the economy or specific foreign businesses in the country

Question 10

What is political risk forecasting?

Answer 10

• Detailed analysis of the political situation in the country concerned
• An analysis of the MNC’s own product and operations in order to determine the kinds of political risk likely to be encountered in particular areas
• The sources of the above risks should be identified and evaluated
• A projection should be made into the future possibility of political risks in terms of probabilities and time horizons

Question 11

How can political risk be managed?

Answer 11

• A MNC can negotiate long term commitments from the host gov on the regulation of the firm
  The firm may be able to use its relative bargaining power
• A MNC can resort to lobbying politicians and officials of host govs
• Home country govs may be prepared to exert pressures through diplomatic channels
• By opting to join with a local partner in a joint venture (e.g. Macca’s in Moscow)

Question 12

What are two strategies to manage political risk?

Answer 12

• Integrative strategies - appease pressure groups e.g. socially responsible corporate citizen, training
• Defensive strategies - diversification. Strengthen negotiating position - technological upgrades, new products, vertical integration, multi-sourcing, multi-markets

Question 13

What is ownership risk?

Answer 13

Policies and actions that inhibit ownership or control of local operations

Question 14

What is operations risk?

Answer 14

Policies and actions that constrain the management and performance of local operations

Question 15

What is transfer risk?

Answer 15

Policies and actions that limit the transfer of money, capital, people and product in and out of a country.