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POLITICAL RISK

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Title: POLITICAL RISK


1
POLITICAL RISK
2
POLITICAL RISK
  • ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION
    OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN
    INVESTORS PROFITABILITY.

3
Moreover...
  • POLCIES, THAT ARE UNPLEASANT, DO NOT CONSTITUTE
    RISK AS LONG AS THEY ARE TRANSPARENT AND ENFORCED
    WITH CONSISTENCY.

4
POLITICAL RISKS
  • INSTABILITY RISK
  • OWNERSHIP RISK
  • OPERATIONS RISK
  • TRANSFER RISK

5
INSTABILITY RISK
  • ARISES FROM THE UNCERTAINTY ABOUT STABILITY OF A
    GOVERNMENT.

6
OWNERSHIP RISK
  • ARISES FROM THE UNCERTAINTY ABOUT A GOVERNMENTS
    DECISION TO REDUCE FOREIGN INVESTORS OWNERSHIP
    IN THEIR INVESTMENTS IN THE COUNTRY.

7
CONFISCATION
  • IMPOUNDING OF THE PROPERTY OF FOREIGN INVESTORS
    BY THE HOST GOVERNMENT WITHOUT COPENSATION.

8
EXPROPRIATION
  • PURCHASE OF PROPERTY FROM FOREIGN INVESTORS.

9
NATIONALIZATION
  • PURCHASE OF PRIVATE BUSINESSES BY HOST GOVERNMENT.

10
DOMESTICATION
  • PLANNED REDUCTION OF EQUITY HELD BY FOREIGN
    INVESTORS.

11
OPERATIONS RISK
  • ARISES FROM THE UNCERTAINTY ABOUT HOST
    GOVERNMENTS POLICIES THAT MAY CONSTRAIN FOREIGN
    INVESTORS OPERATIONS IN THE COUNTRY.

12
They can change policies regarding...
  • PRICES
  • TERMS OF COMPETITION
  • TAXATION
  • PRODUCT SPECIFICATIONS

13
  • MEASURES CAN BE HIGHLY VARIED AND UNLIMITED
  • AND
  • THEY CAN BE AS DEVASTATING AS EXPROPRIATION

14
TRANSFER RISK
  • ARISES FROM THE UNCERTAINTY ABOUT GOVERNMENT
    POLICIES THAT MAY RESTRICT FOREIGN INVESTORS
    ABILITY TO TRANSFER PROFITS OR CAPITAL OUT OF THE
    COUNTRY.

15
HOW TO ANALYZE POLITICAL RISKS
  • POLITICAL
  • SOCIAL
  • ECONOMIC

16
EXTERNAL THREAT
  • QUESTION
  • HOW LIKELY IS IT THAT AN OUTSIDE FORCE WILL
    DESTABILIZE THE GOVERNMENT OF A COUNTRY?

17
THINGS TO LOOK FOR
  • THE WORDS AND ACTIONS OF THE LEADERS OF THE ENEMY
    COUNTRIES

18
INTERNAL THREAT
  • QUESTION
  • HOW LIKELY IS IT THAT THE GOVERNMENT WILL REMAIN
    STABLE (ASSUMING THERE IS NO EXTERNAL THREAT)?

19
  • A COUNTRY WHERE TRANSITION OF POWER FOLLOWS A
    FIXED SCHEDULE AND IS PEACEFUL IS MORE STABLE .

20
  • SUCH A COUNTRY ALLOW ITS PEOPLE TO CHOOSE THEIR
    RULERS AND SPEAK THEIR MINDS.

21
POLITICAL FREEDOM(ACCORDING TO FREEDOM HOUSE-99)
  • FREE PARTLY FREE NOT FREE
  • Argentina Armenia China
  • Bulgaria Brazil Egypt
  • Czech Rep Ghana Indonesia
  • Hungary Malaysia Nigeria
  • Taiwan Russia Saudi Arab
  • S. Africa Turkey Vietnam

22
  • EXISTENCE OF DEMOCRATIC POLITICAL PROCESS DOES
    NOT ALWAYS ENSURE POLITICAL STABILITY.
  • OTHER EXAMPLES INCLUDE
  • INDIA, ISRAEL, ITALY, TURKEY

23
  • LIKEWISE, EXISTENCE OF AN AUTOCRATIC GOVERNMENT
    DOES NOT NECESSARILY IMPLY INSTABILITY.

24
LOOK AT THE SIX ASIAN TIGERS
  • CHINA IS A COMMUNIST COUNTRY.
  • INDONESIA HAD MILITARY DICTATORSHIP ONE PARTY
    RULE UNTIL RECENTLY.
  • TAIWAN SOUTH KOREAWERE AUTHORITARIAN STATES
    UNTIL RECENTLY.
  • SINGAPORE HAS ELECTED AUTHORITARIAN GOVERNMENT

25
HONG KONGS COLONIAL GOVERNMENT WAS UNDEMOCRATIC.

26
SIGNALS TO LOOK FOR
  • SEPARATIST MOVEMENTS
  • POLITICAL MOVEMENTS
  • RADICAL MOVEMENTS
  • ETHNIC TENSIONS
  • DISCONTENT

27
OWNERSHIP RISKS
  • QUESTION
  • WILL THE GOVERNMENT ACT IN A WAY THAT WILL
    DEPRIVE A FOREIGN FIRM FROM CONTINUING ITS
    OWNERSHIP IN THE COUNTRY?

28
Pay attention to the attitude of the leaders.
  • And what they have to say about specific
    countries.
  • Anger of the labor toward foreign policies
  • toward foreign firms of specific countries
  • or firms.

29
OPERATIONS RISK
  • QUESTION
  • WHAT IS THE LIKELIHOOD THAT A GOVERNMENT WILL
    CHANGE POLICIES THAT IMPACT ON FOREIGN FIRMS
    PROFITABILITY.

30
THINGS TO LOOK FOR.
  • DEBT SERVICE RATIO
  • EXTERNAL DEPENDENCE
  • LIQUIDITY

31
DEBT SERVICE RATIO
  • A COUNTRYS ANNUAL DEBT INTEREST AND PRINCIPAL
    LIABILITY AS A PERCENT OF EXPORTS OF GOODS AND
    SERVICES

32
How do countries score?
  • ACCEPTABLE
  • Poland, Malaysia, Thailand
  • PRECAUTIONARY 20 BUT
  • Chile, India, Mexico, Turkey
  • DANGEROUS 30
  • Argentina, Brazil, Hungary, Indonesia
  • (Data is from 1995)

33
It may be all right if a country
  • Has highly diversified export base.
  • Both products and markets.
  • Can reduce imports in a crisis.
  • Fraction of total imports that comprise of oil
    and food (over 35 is alarming).
  • Has long-term capacity to repay debt.
  • Total debt/GDP (over 40 is alarming)

34
How do these measure up?
  • Oil Food Total Debt
  • Ratio -94 to GNP-97
  • Argentina 07 38
  • Brazil 26 23
  • Hungary 19 52
  • Indonesia Low 62

35
EXTERNAL DEPENDENCE
  • A COUNTRYS TOTAL EXPORT IMPORT BILL AS A
    PERCENTAGE OF ITS GNP (1998)
  • Argentina 18
  • Brazil 15
  • Hungary 107
  • Indonesia 55

36
LIQUIDITY
  • LENGTH OF TIME A COUNTRY CAN CONTINUE TO IMPORT
    AT THE PRESENT LEVEL BY DRAWING DOWN ITS FOREIGN
    EXCHANGE RESERVES.

37
  • 2-3 MONTHS IS PRECAUTIONARYLESS THAN 2 MONTHS IS
    ALARMING
  • (Data for 1998)
  • Argentina 8.5 Months
  • Brazil 6.5 Months
  • Hungary 4.5 Months
  • Indonesia 4.5 Months

38
ECONOMIC POLICY
  • IS THE COUNTRY INVESTING IN EDUCATION
    INFRASTRUCTURE?
  • IS IT OPEN TO TRADE?
  • IS IT LETTING THE MARKET HAVE ITS WAY?

39
  • INTERVENTION BY GOVERNMENT BREEDS BUREAUCRACY
    THAT PULLS THE COUNTRY BACKWARDS.
  • IT BREEDS CORRUPTION AND INEFFICIENCY.

40
POLITICAL RISK SCORES
  • LOW
  • Switzerland
  • Norway
  • Austria
  • Germany
  • Netherlands
  • Brunei
  • Japan
  • HIGH
  • Liberia
  • Somalia
  • Sudan
  • Iraq
  • Myanmar
  • Uganda
  • Ethiopia

41
HOW TO COPE WITH POLITICAL RISK
  • Avoidance Approach
  • Insurance Approach
  • Negotiation Approach

42
Insurance Approach
  • Political Risk Insurance
  • Overseas Private Investment Corporation (OPIC)
  • American International Group
  • Lloyds of London

43
Bargaining Approach
  • WHEN THE BARGAINING POWER POSITION OF A FIRM
    RELATIVE TO THAT OF THE HOST GOVERNMENT IS
    STRONG, THE FIRM WILL EXPERIENCE LOW LEVEL OF
    INTERVENTION IN ITS OPERATIONS.

44
BARGAINING POWER OF MNCs
  • Access to Technology
  • Integration in Global Production
  • Access to Global Markets
  • Access to Foreign Exchange
  • Provider of Jobs Capital

45
BARGAINING POWER OF COUNTRIES
  • Market Size and Growth Potential
  • Attractive Resource Base
  • Attractive Efficient Infrastructure
  • History of Consistent , Flexible, and Fair
    Relations with Foreign Investors

46
BARGAINING POWER FRAMEWORK
  • RELATIVE BARGAINING POSITION OF THE FIRM
  • AND
  • OUTCOME STAKE FOR THE FIRM

47
Low Outcome Stake
  • Walk Away
  • If Charged, Avoid the Charge

48
High Outcome Stake/Low Bargaining Position
  • Accede to Demands

49
High Outcome Stake/High Bargaining Position
  • Negotiate
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