Political risk is one of the major areas of concern with MNCs. Explain the various types of political risk and describe the various ways that political risk can be assessed. Finally, explain the various ways of managing political risk.
Political Risks are any governmental action or politically motivated event that could adversely affect the long-run profitability or value of a firm.
Macropolitical risk event - an event that affects all foreign firms doing business in a country or region.
Micropolitical risk event - an event that affects one industry or company or only a few companies.
Examples of political risk events:
Expropriation of corporate assets without prompt and adequate compensation
Forced sale of equity to host-country nationals, usually at or below depreciated book value
Discriminatory treatment against foreign firms in the application of regulations or laws
Barriers to repatriation of funds (profits or equity)
Loss of technology or other intellectual property (such as patents, trademarks, or trade names)
Interference in managerial decision making
Dishonesty by government officials, including canceling or altering contractual agreements, extortion demands, and so forth.
Ways of Managing Political Risk:
Localization of the operation
Staged contribution strategies
Political risk insurance
Local debt financing