Examining The Impact And Types Of Political Risk Economics Essay

Political risk is of two types, Macro and Micro. Macro-risk refers to unanticipated and politically motivated environmental changes directed to all foreign businesses. Micro-risk, on the other hands, can be involved with environmental changes that only affect selected industries or companies in a country (Robock, 1971).

Examples: Micro Political Risk: Anti-American protesters in Pakistan burnt a McDonald's restaurant, Shell gas station and a KFC restaurant anticipated to US bombing in Afghanistan in October 2001.

Macro Politics risk: Because of second world conflict communist government authorities expropriated private organizations in Eastern European countries and China and the same did by fidel castro during 1958-1959 in Cuba. Due to this move the international businesses were strike hard.

Rather than initiating exclusively from local politics actions, political risk has been found to get both external and internal resources (Haner, 1979). The origination of external factors, are outside the host country and could include cooperative work between the other countries and the host country or tries of conflicts/ affects. International factors are from inside the country and could include power challenges among sociable factions or local spiritual, government procedures or activities, or economical/social conditions. Economic conditions such as Balance of obligations or income syndication can influence politics risk because (1) they impact or tend to be the targets of government coverage; (2) the monetary environment can precipitate a big change in government; and (3) the financial situation may effect such political stars as everyone and special interest categories, subsequently influencing governmental plan ( I. Alon and M. Martin, A normative model of macro politics risk evaluation, Multinational Business Review (2) (1998), pp. 10-19. | Cited By in Scopus (10)Alon & Martin, 1998). Thus the resources of Micro political risk's can maintain the Firm's home country, the web host country, the international environment, or some combination thereof.

International business has grown rapidly in the past decade because of the changes in the surroundings and strategic essential. This has resulted to take into consideration of factor like political risk for the functions of international business. For examining Political risk international companies always talks about the number countries current or future political system. However, they always must face some political risk. For example: Full and on time payment by international customers may not be possible if you are working a Canadian company scheduled to instability of currency controls enforced by the government. Henisz(2000) revealed that multinationals face an increasing threat of expropriation if political hazard in the host country increases. Therefore evaluating the impact of politics risk is very phenomenal for international businesses, in particular when purchasing a new location.

Political factors affecting business

Normally, Multinational Organizations are more comfortable investing in markets with a good political environment and regulation transparency, to be able to assure game rules will not change dramatically making them to pay additional money for those changes or even loose their purchases (PriceWatershouseCoopers, 2006). Essentially the most changeable factors in which the international business offer with is the politics factor. At the end of administration period it becomes harder for international businesses to control even if the forming of the federal government is from the same get together.

Example: Some countries like Russia whose insurance policies may change dramatically credited to instability in governmence, If new administration come into electricity. Political factors performs an important role for company's admittance into new market because it affects the company not only in its procedures, short term and long-term goals but also in their main strategy.

Some of the Political factors which affect international businesses because of the policies placed by the host government are

Environmental Policies

Monetary and Fiscal policies

Immigration Policies

Agricultural support to locals

Schemes of regional development

Welfare state procedures which includes security, education, pensions and health

Protection of career and legislation of working conditions

Example: E. ON attempted to type in the Spanish market in Feb 2006 by offering sensitive to Endesa(largest Spanish energy organization) however the GasNatural(local organization) also exhibited interest for Endesa. Spanish Government supported the bet for GasNatural because they wanted to create "Spanish Energy Champion". The excellent minister of Spain, jose Luis Rodriguez Zapatero, was against to the E. Available. (The Economist, 2006). The Spanish federal had the energy to prevent E. ON offers by not only using administrative resources fitness but also almost forbidding it as a result of special right they had received through the ownership of 2. 95% of the company's stocks. (Lopez, 2006).

To minimize politics risk, EUROPE are voted as the normal market and this makes it easier as well as safer for other European countries because of it's supranational rules, to invest within the EU territory.

Types of Political Risk

The international businesses need to consider many of these issues while analysing degree of politics risk in a determined country to enter in. They must take into consideration of the basic safety, of not only their products also for their people in unstable political situations.

Ownership Risk

When procedures of international businesses are at risk scheduled to threatening of administration expropriation or takeover, which may result for the business to reduce their just offshore property. This may be said as nationalization of business and protectionism.

Risk of General Political instability

It might not cause buyers to withdraw from a particular country, as it is not considered to have very much effect on international businesses. However, it may raise uncertainty about foreign projects overseas.

Transfer Risk

Performance of the currency exchange rates will depend on the government policy. Company's power to transfer capital out of coordinator country may be affected because of resultant of federal policy in currency devaluation or economical downtime. If a company is creating an abundance in other country then it might be forced by number country government to return a significant amount, which is recognized as repatriation of earnings.

Operations Risk

The government insurance policies of the host country may become an obstructions for the improvement of international businesses in their functions such as marketing, finance or property. These insurance policies are known as functional risk.

The critical issues encountered by international businesses are the maintenance and establishment of legitimacy in their variety countries. Many international businesses has encountered this issue for example Nike had experienced this problem for its labour techniques in Asia(Maitland, 1997;Marshall, 1997). The attack on MNE businesses, including the devastation of Cargill's facilities in India(Dewan, 1994). In an even more extreme example, Shell was accused of conspiring with Nigerian administration to perform Ken Saro-Wiwa, who got led a marketing campaign against it environmental practices(Newburry & Gladwin, 1997).

Example of Political Risk

Cargill which is one of the world's greatest private agricultural company moved into in India in 1987 inorder not and then build salt extraction and processing facilities in traditional western India but also to build and deliver high quality hybrid seeds in southern part of India, which is Bangalore.

At the start only its seeds job in Banglore experienced issues because the Indian federal government had already introduced new seed insurance policy task in 1988, which endevour " to update seeds and offer the Indian farmers with the best planting materials on the planet so as to optimize his input"(Pania, 1992:82). The Cargill company experienced many problems like resistance from local farmers, who have been urged by local politicians. The farmers were upset on Cargill's seed products job because they thought by this move they might lose their traditional self-sufficiency in seed creation, leave them to rely on multinational companies and could also cause monetary exploitation and financial problems. The tension among the farmers risen to this degree that some of the warehouses and offices of Cargill's were damaged and used up down by upset farmers.

Likely effects on International Businesses credited to Political Risk

Both insiders and outsiders will probably engage in financial and politics activities directed at altering Web host Country perceptions of the legitimacy with changing government procedures in ways that profit them and/ or damage rivals(Eden and Molot, 1996).

Taking of Assets

It will not only result in loss of sales and future gains but also investments.

Campaign against international goods

The plan against the products of international businesses will have an effect on the company's sales. Therefore inorder to boost general population image through public relation marketing campaign a whole lot of spending of capital is expected.

Mandatory labour benefits legislation

This may bring about increasing the operating cost of the international businesses.

Higher Taxation

International Business must pay higher fees which results in low profit percentage.


If the inflation rate of the united states increases in which the international business are working, the operating cost of the international businesses also increases.

Political Risk Assessment

It should contain three interrelated parts. The first part should assist in identifying those components of political risk that are not only related to FDI but also to build up an cleverness system for monitoring and assessing the changes in politics system in the sponsor country. The second part is the allowance of company in dealing with changing conditions by political risk diagnosis integration using its strategic planning. The third part is to keep the company safe from, especially from the chance of expropriation by devising strategies.

Monitoring Conditions

According to study conducted by Pricewaterhouse-Coopers and Eurasia group in 2006, at more than 100 global companies, 83% of the international businesses said that their company keep an eye on the local politics environment for his or her investment.

Domestic Local climate:

The level of national assault which is assessed by tendencies towards subversions, political turmoil or rebellion. The most important factor which international business should consider while investment is the amount of political violence, crisis of government and power of political celebrations.

Economic climate:

A comprehensive analysis of the overseas investment weather. The factors include rate of inflation, authorities interference in the economy, external debt levels, BOP deficits and information on the speed of gross set.

Foreign Relationships:

These factors include the proof an arms race, defence budget size and marriage with its neighbours.


American production company is proposing to construct its plant in Chile, to manufacture subassemblies for Chile companies, which exports to Argentina. Which means company's politics risk fell into three categories, that are:The political threat of operating in Chile, risk in the partnership between Chile and Argentina in conditions of export trade and the chance specific to company's operation. Inside the first category, the company identified Chiles home climate, economic local climate and foreign relations on its investment. In the second category, company should be concerned about political threat of Chilean-Argentinean trade relationships. In the third category, the American company examined project specific dangers such as styles of local politics in the chosen location, treatment of federal government in that sector and the incidence of labour militancy.

In-house expertise

There are several steps in which company can acquire Internal expertise about the web host country and these are by educating existing management, by heading beyond your company for retaining outdoor experts or by hiring local management for supervising a subsidiary.

The second aspect in creating a In-house know-how is by growing an brains system so that relevant information can be collected and allocated. While providing an alternative solution source of examination this intelligence system helps in complementing the info provided by series management. Example: The countries that are bigger and even more important this task can be simpler. China is drawn by a whole lot of foreign investment. There can be an increasing amount of English language- translations, Chinese affairs analysis and information newsletter about business intelligence/politics. For international businesses getting access to such literature is bound therefore spending on the development of its intellect system is very essential.

Strategic integration

With the assistance of tactical planning two job takes on an important role in integrating political risk assessment. The first is, inorder to invest in different conditions of politics risk establishment of hurdle rates and the second one is making of capital budgeting programs for reflecting changes in the amount of political risk. In this particular situation not only international lender but also multinational oil companies have had vast encounters for integrating political risk evaluation into proper planning. For instance: Exxon was one of the first companies in creating hurdle rates for profits on return (ROI) due to conditions of political risk.

In some conditions size of investment can be divisible. Capital budget plans can be modified inorder to indicate increased risk. These conditions are only appropriate to natural resources companies and bankers in their early stages of development. For example: Oil companies under conditions of not only low but also secure politics risk can budget a certain amount of capital for development and exploration and so can spend declining portion of capital from that budget scheduled to increase in political risk; in place, to drill only 4 exploratory wells instead of 6. Likewise, scheduled to upsurge in the level of political risk banking companies can impose higher rates on new lending options and can also increase monthly premiums on existing loans. i. e imposing higher hurdle rates.

Risk reduction Strategies

It would be very hard for international businesses to cope with political instability or with inside violence but international businesses may use lots of ways to discourage expropriation. This can be attained by not only increasing the business's political leverage but also by causing its assets problematic for the variety country government to nationalize.

Individual risk for international businesses can be reduced through diversification. In this situation, However it may will depend on the business to choose, inorder to improve the political cost of nationalization to the variety federal government by diversifying the chance of their businesses among other international stakeholders or multinationals. While increasing their politics leverage it is vital for international businesses to diversify their risk.

In the funding decision, country should not rely on solo country resources instead they need to monitor broad international financing.

Example: Companies such as Kennicott copper in Chile and Marcona Mining in Peru, to increase their political clout both companies diversified their resources of debt capital. After nationalizing they could gain incredible support from international banking community and also from those lenders in their negotiations with particular to number governments.

Joint enterprise investment assignments with overseas nationals or with overseas companies is another method of diversifying political risk. Allowance of host countries stockholders to take part in money or a joint venture with local company is other method of diversification but it could be said that only diversification is not assured against politics risk

Example: In winter 2005, when the movement of gas from Russia into Europe was reduced businesses and homes across the region suffered due to reduction in energy.

The easiest way of avoiding nationalization is by making companies investment difficult to nationalize and one of the most effective method of increasing companies leverage resistant to the host federal is by keeping control of marketing network as well as distribution of the company's product.

How to analyse Political Risk

International Businesses should think about the following factors of country risk evaluation, when deciding FDI in number countries.

Industrial regulation

Foreign capital controls

Civil unrest

System of Government

Diplomatic problems

Country risk research has been defined as "the study of conditions, situations and occurrences that might impact favourably or unfavourably on performing business or purchasing a country". (Yavas, 1989 & Merrill, 1982).

Evaluating Political Risks

International businesses which are preparing to do business far away must do depth research about the number country and also should find answers to the next questions

Commitment of the existing government towards the rules of possession rights

When is the chances of another election or length of time left for the current government

Over the next five years chances of economic and political instability in the host country

Risks of safe practices and success of international assignments due to creation of new government

Chances of new government to propose changes in insurance policies that would influence international businesses

What contracts are in place between the host government and the investors authorities for investment

How would its program and ideology change in the current express of business affairs, if a new federal were to be formed

Corruption belief index of the host country, since there is negative impact of corruption on FDI flows(Wei, 2000)

Consequences of Terrorism

If a terrorist assault takes place it could affect countries current economic climate and its businesses along with vehicles, security and travel.

Evaluating legal concerns

Laws and rules of every country are different. If international companies are doing businesses in other countries they must follow the law and make work safe for workers, which may increase the cost of the business.

In Practice

Managers can visit coordinator country and take the help of federal government agencies, international loan company and insurers, Country risk diagnosis companies and can also use internet industry association's inorder to evaluate the political risk of the host country.


On Balance, political risk does not cause major problems for international businesses. Although such politics risk can't ever be entirely removed but their effect on international businesses can be reduced with the aid of systematic diagnosis and management. These methods discussed in this article represents how to determine and manage politics risk for international businesses.

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