Chapter 10: Managing Political Risk, Government Relations and

AlliancesKevin, Kristen, Daniel and Joseph

Main QuestionsWhat types of political risk would a company

entering Russia face? France? Identify and describe three. How are these risks similar/different?

Most firms attempt to quantify their political risk, although they do not assign specific weights to the respective criteria. Why is this approach so popular? Would the companies be better off assigning weights to each of the risks being assumed?

If a high tech firm wanted to set up operations in Iran, what steps might it take to ensure that the subsidiary would not be expropriated? What strategies would be helpful?

Political RiskPolitical risk: the unanticipated likelihood that a

business’s foreign investment will be constrained by a host government’s policy

Since 9/11 political risk assessment has become extremely important as tensions were high between countries

Risk factors of political risk: freezing movement of assets out of host country, placing limits on remittance of profits or capital, devaluing currency, appropriating assets, refusing to abide by contractual terms of agreements previously signed with MNC

Russia vs. FranceRussia has had trouble transitioning to a

market driven economy. Russia was tightening controls on flow of foreign currencies (macro political risk)

Russia risk: no consistent legal regulation, hyper centralized and personalized political system, weak and dependent judiciary system

France: strong uncertainty avoidance. Stick to legal regulations strictly, adverse economic policy making, government instability

Main QuestionsWhat types of political risk would a company

entering Russia face? France? Identify and describe three. How are these risks similar/different?

Most firms attempt to quantify their political risk, although they do not assign specific weights to the respective criteria. Why is this approach so popular? Would the companies be better off assigning weights to each of the risks being assumed?

If a high tech firm wanted to set up operations in Iran, what steps might it take to ensure that the subsidiary would not be expropriated? What strategies would be helpful?

Quantifying RiskBy not assigning specific weights, companies

can rely on using a specific range of values in order to accurately evaluate the level of risk

A range of values can be easier to assess rather than strict benchmarks

Assigning RiskEach risk holds a variable amount of

importance depending on the countryThe value of imminent internal conflicts, for

example, may be huge in one country and nonexistent in another

Impact of TerrorismHow has terrorism impacted foreign interest in

Iran and Saudi Arabia, considering the vast oil reserves that are there?

MNCs are disinclined to do business in these countries due to their high risk associated with terrorism, but the need for oil has hindered this logic

By doing business with such countries as Iran and Saudi Arabia, MNCs must assess political risk, install modern security, compile crisis plans, and prepare employees for possible situations

How have terrorist attacks affected political relationships between countries such as the US and Russia?Terrorist attacks have tarnished the political

relationships between the US and Russia until recently

In 2009, US Secretary of State Hillary Clinton met with Sergey Lavrov and symbolically hit a “reset” button in regards to US-Russia relations

President Obama “…refuses to cast Russia as an enemy”

Example of a negative situation that has been resolved amicably between both parties

http://www.youtube.com/watch?v=0GdLClHAMB0

Main QuestionsWhat types of political risk would a company

entering Russia face? France? Identify and describe three. How are these risks similar/different?

Most firms attempt to quantify their political risk, although they do not assign specific weights to the respective criteria. Why is this approach so popular? Would the companies be better off assigning weights to each of the risks being assumed?

If a high tech firm wanted to set up operations in Iran, what steps might it take to ensure that the subsidiary would not be expropriated? What strategies would be helpful?

ExpropriationExpropriation is the seizure of businesses by

a host country with little, if any, compensation to the owners

Three strategies:Local PartnersLimit High TechAcquire an Affiliate

http://www.youtube.com/watch?v=EJvFwcyBIQw

Case: Rushing into RussiaChicago based computer chip manufacturer

is thinking of expanding to RussiaCEO recalls a time when Russia experienced

political instability, but believes that should be done by now

Confident they will be accepted by RussiaBanker concerned that the company will

either lose its investmentnot be able to get profits out of the country

Rushing into RussiaCEO believes, that with the help of an

international management consultant, he can identify and minimize the risks.

What are some of the political risks the company will face?

Using figure 10-3, what strategy would you recommend that the firm use? Why?

What suggestions would you offer during the company’s negotiations with Russia?

Responding to RiskIntegrative – Techniques that help overseas

operations become a part of the host country’s infrastructure

Protective and Defensive – Techniques that discourage the host government from interfering in operations

Proactive – Political interventions designed to shape and influence the political decisions prior to their impact on the firm