Political and Country Risks in International Business

Political and Country Risks in International Business mental homePolitical and outlandish encountersFinancial institutions and worry organizations conk out its moving in activities abroad in order to diversify and expand their sources of revenue and profitability. Organizations that make investment in a remote market each in the form of equity or assets argon put outd to insecuritys that may arise either from an act of the force judicature or from other external governmental events taking place in that country, these risks include social, semipolitical and economic conditions and events that imposes negative impact on the fiscal performance and profitability of immaterial organizations.Types of political and country risksThe following are the main types of political and country risks that may affect the profession performance of an external organization operating in foreign countries.Nationalization or deprivationNationalization is a process whereby a government takeov er privately possess industries, corporations and resources with or without compensation.Nationalization is a political risk which makes it very difficult or impossible for transnational 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 ownership of its valuable resources for considerably example in 2006 the Bolivian government nationalized the countrys oil and natural gas industries. Similarly in January 2007 the Government of Venezuela announced to nationalize firms in two study sectors of the countrys thriftiness i.e. telecommunications and electricity. In November 2009 the president of Venezuela announced that he will nationalize banks in the country.Forced divestitureforced divestiture another type of country risk in which an international firm 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 smaller rival Alfa Retailindo in January 2008.Gradual expropriationExpropriation means a quick action of government to seize the assets of foreign entity, but in gradual expropriation a single international caller-up is targeted by the military government. Gradual or creeping expropriation involves slow and gradual removal of property sets by way of tax increase on profits to make a foreign business less profitable, increase in property tax, instituting increasing barriers, changing the proportion of ownership which must be held locally. In gradual expropriation the ownership title of business remains in the name of foreign investor but the honorable to use the business is diminished as a result of the government hobble.An example of gradual expropriation is when China announced a policy restricting the property rights of domestic and foreign automakers to tr ansfer their ownership or enter into strategic alliance in China, by banning the sale or transfer of manufacturing licenses by bankrupt or failing automakers.Similarly in Tecinicas Medioambientales Tecmed S.A. V. The United Mexi female genital organ States it was declared that the Mexican government has committed expropriation because of non-renewal of a license necessary to operate the landfill.Currency inconvertibility and exchangeCurrency inconvertibility means a situation where one cash 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 due to straits new legislation or administrative delays. In administrative delays the bureaucracy in a foreign country takes more time in currenc y conversion and creates a financial burden upon foreign companies.Some countries issues inconvertible currency for instance Cuban peso in order to protect its citizens from sensed capitalist infiltration, similarly domestic regulators may consider foreign currency inconvertible in order to protect local investors from bad investment finding i.e. hyperinflation of currency.Termination of fuel supply agreementsTermination of fuel supply agreement is another political risk for an international organization functioning in a foreign country. A foreign company whose business activities are solely dependent upon fuel supply under an agreement with the host government, or with the host company and when such agreement is terminated than in such circumstances the company will face major problem in continuing its business in such foreign country.ConfiscationConfiscation of international business is a severe form of political risks where host government seizes the assets of a foreign company 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 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 depressing about the current political or social situation can resort to terrorist tactics to fulfill their demands. 9/11 tragedy is a swelled example. These groups may target the executives of large international companies for kidnapping and taking of hostages in order to fund their terrorist activities.The current political instability, terrorist activities and internal 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 op erate business effectively and increase its profitability.Policy changesmoreover good relationship between the host government and international companies is of vital importance for operating a successful and profitable business and any political change that modify the anticipated effect and worth of a given 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 contract means healthy 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 se rvices either with government or private entities in foreign countries are often exposed to underlying political risks. Such contract may be foiled at any time for a number of political reasons that are beyond the control of the parties.TransferTransfer risks take place when host government policies imposes limitation 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 remission of sin of dividend etc.Trade disruptionsDevaluationScreening for political risksIn order to operate successful business activities overseas it is very important for international companies to identify, analyze, measure and get it on those political and country risks that are encountered by such company.Analysis of political risksIn order to analyze political risks, these are categorizes in two levels concord to their nature, severity and intensity i.e. Macro political risk anal ysis 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 movement of assets out of the host country, limiting the remitment 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 activity, restrictive local laws and host government policies that promote exports and discourage import.Management 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 strategy 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 commencement and making any final commitment.Reduction 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, insurrection 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 mar ket. This kind of strategy takes respective(a) forms i.e. modification of employment or the ownership of the business, minority interest, designing operational structure, diversification and taking policy 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 useful 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 establishing 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 best 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 expensive and can minimize the profitability of such firm.conclusionCatherine Rampell, When Government Takes Over Industries in Trouble, The New York Times, January 21, 2009 uncommitted 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/09/20070109-122511-8759rVenezuelan President Hugo Chavez threatens to nationalize banks, The Times of India, International Business, 30 November 2009 Available http//timesofindia.indiatimes.com/biz/international-busin ess/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/302304John OConnell., Creeping Expropriation, The Blackwell Encyclopedia of Management. Blackwell Publishing,. Blackwell fictional character Online. 22 December 2009 Available http//www.blackwellreference.com/public/tocnode?id=g9780631233176_chunk_g97806312349376_ss1-156citationLeon. P (2009) Creeping Expropriation of Mining Investments an African Perspective, Journal of Energy 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 apprise, June 7, 2004, Creeping Expropriation, Threats to Property Rights, And Rising Economic Risk Remember Communism? AON Trade Credit Inc Available http//www.offshoregroup.co m/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. ARB (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 wing 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, Prentice Hall, New tee shirt 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/definition/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