Political and Country Risks in International Business

Political and Country gambles in world(prenominal) BusinessIntroductionPolitical and ground lay on the linesFinancial institutions and short letter brass sections go away its short letter sector activities abroad in order to diversify and expand their sources of tax revenue and gainfulness. Organizations that make investment in a alien market either in the form of equity or assets argon exposed to essays that whitethorn arise either from an act of the army presidency or from opposite external insurance- do events taking place in that outlandish, these pretends include social, semi semipolitical and economic conditions and events that imposes negative impact on the fiscal performance and profitability of extraneous organizations.Types of political and country trysThe following are the main typewrites of political and country risks that may affect the business performance of an multinational organization operating in distant countries. communization or depriva tionNationalization is a process whereby a presidential term takeover hole-and-corner(a)ly possess industries, corporations and resources with or without compensation.Nationalization is a political risk which makes it very trying or impossible for international organizations to invest in a country where businesses are exposed to such(prenominal) risk.In past governments have nationalized highly profitable industries on the ground that it does not want foreign bequeath power of its valuable resources for instance in 2006 the Bolivian government nationalized the countrys oil and vivid gas industries. Similarly in January 2007 the Government of Venezuela announced to nationalize plastereds in two major sectors of the countrys economy i.e. telecommunications and electricity. In November 2009 the president of Venezuela announced that he will nationalize banks in the country.Forced rifleitureforced divestiture different type of country risk in which an international soused is forced to divest its business operation, an example of forced divestiture is the Indonesian subsidiary of French retail giant carrefour which has been ordered to sell the 75% stake it acquired in sm wholeer rival Alfa Retailindo in January 2008. deliberate expropriationExpropriation means a alert follow through of government to seize the assets of foreign entity, but in delaying expropriation a single international attach to is targeted by the host government. Gradual or creeping expropriation involves slow and sluggish removal of attribute proficients by way of tax increase on pay to make a foreign business less(prenominal) profitable, increase in property tax, instituting change magnitude barriers, changing the proportion of willpower which must be held locally. In gradual expropriation the will power title of business remains in the name of foreign investor but the right to use the business is diminished as a result of the government interference.An example of gradual expropriation is when China announced a policy restricting the property rights of domestic and foreign automakers to transfer their ownership or enter into strategic alliance in China, by proscription the sale or transfer of manufacturing licenses by bankrupt or helplessness automakers.Similarly in Tecinicas Medioambientales Tecmed S.A. V. The United Mexi house States it was declared that the Mexi drive out government has committed expropriation because of non-renewal of a license necessary to interlace the landfill.Currency inconvertibility and deputizeCurrency inconvertibility means a situation where one capital can not be converted or exchanged into foreign currency. This is another political risk for an organization operating its business activities abroad. In such case a foreign government may restrict the right of foreign firms to repatriate profits to their home country and all profits remain in the foreign country. Inconvertibility of currency may arise collect to pas sing new legislation or administrative delays. In administrative delays the bureaucracy in a foreign country takes more time in currency conversion and creates a financial burden upon foreign companies.Some countries issues inconvertible currency for instance Cuban peso in order to foster its citizens from perceived capitalist infiltration, similarly domestic regulators may consider foreign currency inconvertible in order to protect local investors from bad investment decision i.e. hyperinflation of currency.Termination of raise go forth agreementsTermination of fuel supply agreement is another political risk for an international organization functioning in a foreign country. A foreign follow whose business activities are solely dependent upon fuel supply under an agreement with the host government, or with the host comp either and when such agreement is terminated than in such batch the comp any(prenominal) will face major problem in continuing its business in such foreign co untry.ConfiscationConfiscation of international business is a severe form of political risks where host government seizes the assets of a foreign political party without compensation. The U.S. 1996 Helms-Burton Law entitles the U.S. companies to sue companies from other countries that use property confiscated from U.S. companies following Cubas communist revolution in 1959. But the U.S. government waived this law of nature repeatedly in order to maintain good relations with other countries.Terrorism and kidnappingKidnapping and other terrorist activities are means of making political statements. Small groups unhappy about the menstruation political or social situation can resort to terrorist tactics to fulfill their demands. 9/11 tragedy is a prominent example. These groups may target the executives of queen-sized international companies for kidnapping and taking of hostages in order to fund their terrorist activities.The current political instability, terrorist activities and i nternal conflicts in Pakistan is a good example, where an international firm is exposed to a verity of threats arising from such activities and makes it impossible for such firm to operate business effectively and increase its profitability.Policy changesFurthermore good relationship between the host government and international companies is of vital wideness for operating a successful and profitable business and any political change that modify the anticipated effect and worth of a granted economic action by changing the likelihood of achieving business objectives than it affects international businesses to a greater extent and the governments hard and fast new policies can create huge problems for international companies.Contractual frustrationFrustration of flummox means legal termination of contract between the parties because of unforeseen circumstances which makes the performance of such contract practically impossible. These circumstances include, accident, change in law, sickness of one of the parties and interference from third party etc.In international business perspective companies that enter into trade agreements for export or import of goods or services either with government or private entities in foreign countries are often exposed to underlying political risks. Such contract may be frustrated at any time for a number of political reasons that are beyond the halt of the parties.TransferTransfer risks take place when host government policies imposes point of accumulation on the transfer of capital, payments, production, people and technology in and out of country i.e. imposing tariffs or restrictions on import and export, repatriation of capital or remittance of dividend etc.Trade ruckussDevaluationScreening for political risksIn order to operate successful business activities overseas it is very important for international companies to identify, analyze, stones throw and manage those political and country risks that are encountered by su ch company. analytic thinking of political risksIn order to analyze political risks, these are categorizes in two levels according to their nature, severity and intensity i.e. Macro political risk synopsis and micro political risk analysis.Macro political risk analysisThis is an analysis that observes major political decisions likely to affect all businesses in a country. Macro risk factors include freezing the lawsuit of assets out of the host country, limiting the remittance of profits or capital, currency devaluation, refusing to perform contractual obligations previously signed with the MNCs, industrial piracy (counterfeiters), political disorder and government corruption.Micro political risk analysisThis is an analysis that is directed towards government policies and decisions that influence selected sectors of the economy or specific foreign businesses in the country. The examples are selective discrimination, industry regulation, imposition of taxes on specific types of ac tivity, restrictive local laws and host government policies that promote exports and discourage import. focusing of political risksPolitical risks can be managed through applying different strategies i.e. avoidance, decrement or shifting of risk and post commitment practices.AvoidanceIf any enterprise realizes that making investment in a country will expose such enterprise to political risks the most simple system to keep away from such political risks is not to invest in such country and to go somewhere else, this is pre-commitment strategy that can be used before the first gear and making any final commitment. decline or shifting of riskAnother way of managing political risk is that a foreign company can implement a financial structure that shifts risks to local creditors and shareholders.Similarly contracts can be designed whereby a force majeure clause is included to revise and free contractual parties from their contractual obligations in case of any violence, coup, insurrec tion and long-term trade disruption etc.Post-commitment practicesPost-commitment practices mean adoption of strategies after making investment and commencement of business activities in overseas market. This kind of strategy takes various forms i.e. variety of employment or the ownership of the business, minority interest, designing operational structure, diversification and taking insurance policy.Modification of employment or the ownership of the businessIf a foreign firms top management is controlled by local nationals or their ownership is significant or establishing of a joint venture of 50-50 ownership with a local firm than the host government would have less incentive to nationalize such business.Minority interestAnother helpful strategy of managing political risks is to adopt minority interest in the business. designing operational structureDesigning the operational structure of business in a way that attracts the inflow of foreign exchange in the host country and establ ishing good relations and close cooperation of management with the host government will also safeguard such firm from any threat from the host government.DiversificationIf any political risk is encountered by a foreign firm while operating business activities overseas the trump out way is to diversify and expand its business operation into other countries that are not exposed to such type of risks.Taking insurance policyMoreover to avoid any kind of loss that can be inflicted due to any political or country risk the company can go for insurance policy but it is very pricy and can minimize the profitability of such firm.conclusionCatherine Rampell, When Government Takes everywhere Industries in Trouble, The New York times, January 21, 2009 open http//www.nytimes.com/2009/01/22/business/worldbusiness/22poundbox.htmlCaracas, Chavez to nationalize strategic sectors, The Washington Times, Tuesday, January 9, 2007 Available http//washingtontimes.com/news/2007/jan/09/20070109-122511-8 759rVenezuelan President Hugo Chavez threatens to nationalize banks, The Times of India, International Business, 30 November 2009 Available http//timesofindia.indiatimes.com/biz/international-business/Venezuelan-President-Hugo-Chavez-threatens-to-nationalize-banks/articleshow/5282995.cmsBusiness Monitor International, Carrefour forced to divest Alfa Retailindo Stake, Indonesia- Mass Srocery Retail, Nov 5 2009 Available http//store.businessmonitor.com/article/302304 potty OConnell., Creeping Expropriation, The Blackwell Encyclopedia of Management. Blackwell Publishing,. Blackwell Reference Online. 22 December 2009 Available http//www.blackwellreference.com/ human beings/tocnode?id=g9780631233176_chunk_g97806312349376_ss1-156citationLeon. P (2009) Creeping Expropriation of Mining Investments an African Perspective, Journal of zip Natural Resources Law, Vol 27 No 4 2009, p 598 Available http//www.webberwentzel.com/wwb/action/media/downloadFile?media_fileid=5879Dr. Leonard. M (2004), China, Country Briefing, June 7, 2004, Creeping Expropriation, Threats to Property Rights, And Rising Economic Risk Remember Communism? AON Trade Credit Inc Available http//www.offshoregroup.com/newsfiles/chinabriefing.pdfTecinicas Medioambientales Tecmed S.A. V. The United Mexican States, International Centre for Settlement of Investment of Disputes (May 29, 2003) Case No. arbitrageur (AF)/00/2 Available http//icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRHactionVal=showDocdocId=DC602_EncaseId=C186John OConnell., Currency Inconvertibility, The Blackwell Encyclopedia of Management. Blackwell Publishing,. Blackwell Reference Online. 22 December 2009 Available http//www.blackwellreference.com/public/tocnode?id=g9780631233176_chunk_g97806312349376_ss1-191citationInconvertibility, Financial Dictionary Available http//financial-dictionary.thefreedictionary.com/InconvertibilityWild. J. J. et al (2008) International business the challenges of globalization, 4th edition, appren tice Hall, New island of Jersey p 97Wild. J. J. et al (2008) International business the challenges of globalization, 4th edition, Prentice Hall, New Jersey p96.Frustration of contract, Business Dictionary Available http//www.businessdictionary.com/ exposition/frustration-of-contract.htmlolitical Risks Briefing for Contract Frustration, Marsh an MMC company, July 2001, p 1 Available http//www.global.marsh.com/documents/contractFrustration.pdf