International Management - Phatak - Ch.3 slides

8/10/2019 International Management - Phatak - Ch.3 slides

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McGraw-Hill/Irwin

International Management 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

International Management

Phatak, Bhagat, and Kashlak


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McGraw-Hill/Irwin

International Management 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter 3

The Political Environment and

Political Risk


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Learning Objectives

Describe the components, relationships, and interactions involved inthe political systems model, and explain how the one-nation modelcan be extended into a global business context.

Explain the reciprocal nature of the dynamics between political and

economic systems, policies, and relations.Define and differentiate among the various types of political risk, anddiscuss their implications for the multinational firm.

Discuss comprehensive frameworks for assessing political risk, from aglobal as well as a single-country perspective.

Understand alternative methods used to hedge against risk frompolitical and politically-imposed economic changes in a host country.

Understand practical implications of political risk for the managerworking overseas.


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Chapter Topics

Macro-level Environments and Uncertainties

The Political System

The Global Political System

The Interaction Between International Politics and

International Economics

Political Risk and the International Firm

A Global Framework for Assessing Political Risk

Managing International Political Risk


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Table 3-1: Macro-Environmental Uncertainties

Political Uncertainties

Government Policy Uncertainties

War

Revolution

Coup detat

Democratic changes in government

Fiscal and monetary reforms

Price controls

Trade restrictions

Nationalization

Government regulationBarriers to earnings repatriation

Inadequate provision to public service


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Table 3-1 (contd.)

Macroeconomic Uncertainties

Social Uncertainties

Inflation

Changes in relative price

Foreign exchange rates

Interest rates

Terms of trade

Changing social concerns

Social unrest

Riots

DemonstrationsSmall-scale terrorist movements


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Fig 3-1: The Political System

Power

---------------

Ideology

Power

---------------

Ideology

Power

---------------

Ideology

GOVT.Political

Decisions


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Consensus and Legitimacy

Consensus

Is the widespread acceptance of the decision-making process

in the political system by the individuals and groups in the

system. It is the instrument by which a government itselfbecomes legitimized

Legitimacy

Is the use of power of the state by officials in accordance

with prearranged and agreed upon rules. A legitimate act isalso legal, but a lawful command is not always legitimate


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Fig 3-2: Political and Economic Systems

Economic

System

Political

SystemPolitical

System

Economic

System

Market Economy

Central Planning

Totalitarianism

(Communism)

Totalitarianism

(Fascism)Democracy


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Fig 3-3: Political and Economic Change (1982 - 2002)

entral Planning Market

Economy

Economic hange

Democracy

Political

Change

Totalitarianism

Nigeria 1982

Russia 1982

Viet Nam 1982

China 1982 Chile 1982

Malaysia 1982

Chile 2002

Viet Nam 2002

China 2002

Russia 2002

Nigeria 2002

Malaysia 2002

European UnionCountries 1982 European UnionCountries 2002


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Political Risk

Political risk is the likelihood that

political forces will cause

unexpected and drastic changes in a

countrys environment that

significantly affect the

opportunities and operations of a

business enterprise


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Types of Political Risk

Country-Specific

Is manifested in the mutual hostility between Israel andSyria. One would expect that Israeli companies would findlittle support in Syria, and the same would apply for Syriancompanies in Israel

Company-Specific

Invokes either a favorable or unfavorable response aimed at aparticular company

Project-Specific

Involves special treatment bestowed on a certain type ofproject


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Types of Political Risk (contd.)

Transfer Risk

Is the change in the degree of ease or difficulty experienced

in making transfers of capital, goods, technology, and people

in and out of a countryOperational Risk

Is the impact on the operations of a firm caused by changes

in the governments policies

Ownership Risk

Involves a change in the proportion of equity owned by a

company in a foreign subsidiary


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Fig 3-4: Classification of Types of Risk for

Company A in Country XYZ

RISK SCOPE

Risk Type Macro Risk Micro Risk

Transfer Risk **

Operational Risk *

Ownership Risk ****

Legend **** = High * = Low

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The Political Process

An exhaustive study of the political process would involve the following:

1. Study the relative power of the dominant groups in the society, and become

familiar with their ideologies

2. Study the decision-making process in the government

3. Evaluate the relative strength and bargaining power of the political partiesin the legislative branch

4. Study who are the key decision-makers in both the legislative and executive

branches of government

5. Study the path traveled by the government in power over the past several

years in terms of its economic, social, and foreign policies

6. Evaluate the impacts on the industry and your company of the anticipated

political decisions of the government, i.e. the political risk facing the

industry and company in the host country

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Civil Strife in Host Country :

Mediating Factors

1. Coercive potential

2. Institutionalization

3. Facilitation4. Legitimacy of the regime

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Fig 3-5: Framework for Assessing Civil Strife

Institutiona

lization

LegitimacyOf the

Regime

Coercive

Potential

Facilitation

Level ofPerceived

Deprivation

Level of

Civil Strife

Change inGovernment or

Governmental Policies

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Ex. 3-1: Staying Safe While Working Overseas

Always remain aware of your surroundings and avoid unusual

circumstances

Walk with authority and purpose while in public areas

Call ahead to notify others of your travel plans or appointmentsAlternate your routes to work on a regular basis

Alternate your timing to and from your work location

Avoid wearing American or British flag pins or other insignia in

publicSpeak in the native language where youre working

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Fig 3-6: The Environments of

Political Risk

PoliticalRisk

International

Organizations

and Groups

International EventsHome Country

Environment

Host Country

Environment

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Fig 3-7: Managing Political, Legal and

Economic Risk

Defensive/

Reactive

Proactive/

Merging

Direct Indirect

> Legal Action

> Host Operations

Dependent on Home> Control Makeup of

Management

> Diversification

> Joint Ventures

> Licensing Agreements

> Other Host Partners

> Promote Host Goals

> Risk Insurance

> Contingency Planning

> Home Country Govt.

Pressure on Host Govt.

> Lobbying Home and

Host Governments

> Corporate Citizenship

in Host Country

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Key Terms and Concepts

Political system

Political forces

Level of perceived deprivation

Coercive potentialInstitutionalization and civil strife

Facilitation and civil strife

Regime legitimacy and civil strife

Civil strifeMacro and micro risk

Proactive and reactive hedges

OPIC

International Management - Phatak - Ch.3 slides

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