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Political Risk and Political Risk Assessment

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'obsolescing bargains' 13. Empirical Relationship (Continued) Negative correlations (less risk) ... Political bargaining type - who has power and influence where ... – PowerPoint PPT presentation

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Title: Political Risk and Political Risk Assessment


1
Political Risk and Political Risk Assessment

2
  • Political Risk Analysis
  • Definitions
  • Empirical relationships
  • Forecasting techniques
  • Using risk analysis
  • Managing political risks

3
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4
  • Definition of Political Risk
  • Possibility of an unexpected politically-
  • motivated event affecting the outcome of an
    investment
  • Instability vs. risk
  • Classified based on
  • - actor responsible
  • - nature of effect
  • - breadth (micro vs. macro)

5
Types of Political Risks
Cause Cause Cause
Result Government Others
Property Loss Confiscation Destruction
Income Loss Discrimination Disruption
de la Torre Neckar (1988), p. 223
6
Main Types of Political Risks
  • Expropriation
  • Forced divestment of equity ownership of a
    foreign direct investor (Minor 1994)
  • Peaked in the mid-70s almost nil now
  • Mostly Africa till 1980, then Latin America
  • Declined since
  • Key sectors already nationalized
  • Economic need gt privatization
  • Regulate rather than expropriate
  • Many hosts have joined MIGA (Multilateral
    Investment Guarantee Agency)
  • Some controversy over future
  • is free enterprise here to stay, or will there
    be a backlash when privatization, etc. fails to
    provide widespread benefits?

7
Main Types of Political Risks (Continued)
  • Terrorism
  • Terrorist acts infrequent, but spectacular
  • - L. America 1 esp. kidnappings
  • - U.S. owned corps. Esp. targets, U.S. public
    institutions
  • - China, India, Turley, Israel etc.
  • -sept 11, Iraq
  • Little research-seems to be primarily groups
    denied a voice in legitimate channels
  • Symbolism particularly important (MacDonalds,
    etc.)
  • Selective Intervention
  • Most risks are less dramatic changes in the rules
    of the game.
  • Some areas of government policy affect
    foreign-owned companies more than most domestic
    ones

8
Main Types of Political Risks (Continued)
  • Restrictions on Cross-Border Transfer of
    Resources
  • Tariffs, NTBs inhibit sourcing, exporting
  • FX controls limit repatriation
  • Capital controls
  • Labour regs
  • Taxation Concerns
  • Restrictions on transfer pricing
  • Unitary taxation policies
  • Withholding taxes
  • Availability of tax holidays and other incentives

9
Main Types of Political Risks (Continued)
  • Investment Restrictions
  • Sectoral restrictions
  • Requirements for JVs, local ownership
  • Transparency of licensing procedures
  • Requirements for disclosure of technology
  • Requirements for forced divestiture
  • Operating Restrictions
  • limits on expansion, ownership of land, etc.
  • Discriminatory access to labour, inputs
  • Restrictions on local market access
  • Performance requirements (e.g. employment
    export levels, etc.)
  • Unequal access to government procurement

10
Main Types of Political Risks (Continued)
  • Non-Neutrality of the Legal Environment
  • Judges or other arbiters insulated from political
    pressure
  • International and regional conventions
  • International conventions re compensation
  • Guarantees of national treatment
  • Regulations with Differential Effects on
    Foreigners
  • Some may be much harder for foreign companies to
    comply with

11
Main Types of Political Risks (Continued)
  • Crossfire Problems
  • Activities may lead to international or home
    country sanctions or consumer boycotts against
    the country or firms that deal there
  • - human rights abuses (e.g. imprisonment,
    torture or murder of political opponents use of
    prison labor persecution of minority groups not
    abiding by election results)
  • - conflicts with neighboring countries
  • - lack of concern for the environment,
    endangered species, etc.
  • - disregard for international agreements (e.g.
    re nuclear non-proliferation)
  • - the misuse of social issues as means of
    protectionism
  • What kind of cross-fire problems associated with
    Iraq wine-makers in the Bordeaux region faced?

12
Political RiskEmpirical Relationship
  • Most studies examine correlates of
    expropriation
  • Minor (1993) no link with stability
  • Positive correlations (more risk)
  • - extractive, service and key sectors
  • - JVs with the host government
  • - host countries with pervasive governments
  • (hands-on)
  • - medium-technology
  • - need for scapegoats
  • - obsolescing bargains

13
Empirical Relationship (Continued)
  • Negative correlations (less risk)
  • - integrated subsidiaries that depend on rest of
  • network
  • - low/high tech
  • - lobbying
  • Makhija (1993) information indicating
  • convergence of MNC actions and government
  • economic objectives

14
Forecasting Techniques
  • old hands ask experts for gut instinct,
    personal evaluations
  • - taps expertise, but may be dated, subjective
    or irrelevant
  • grand tour send executives for personal
    visits
  • access to top decision makers, first-hand
    exposure, but superficial
  • may hear self-interested pleading
  • quantitative
  • Delphi obtain expert views, aggregate and give
    to same experts for chance to revise their views
    given what others think repeat until consensus
  • tends towards conventional predictions
  • econometric use historical data,
    macro-orientation, but low-cost, may be helpful
    for initial screening

15
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16
  • The Economist Method
  • Political Risk Service (PRS) -- 100 points
  • 33 points economic factors
  • falling GDP/per capita
  • high inflation
  • capital flight
  • decline in productivity
  • raw materials as percentage of exports
  • 50 points politics
  • bad neighbours
  • authoritarianism
  • staleness
  • illegitimacy
  • generals in power
  • war/armed insurrection

17
The Economist MethodPolitical Risk Service
(PRS) -- 100 points
  • 17 points society
  • urbanization
  • race
  • Islamic fundamentalism
  • corruption
  • ethnic tension

18
  • Political Analysis
  • Expert qualitative studies
  • - rational actor-type
  • - what is the logical action given goals
  • - best if unitary actor and major decision
  • - organizational type
  • - organizations do what they have always done
  • - best for small decisions by bureaucracies
  • Political bargaining type
  • - who has power and influence where
  • - best for fractionated power environments
  • Results are best when model fits the
    characteristics of the decision and the
    decision-maker

19
  • Example of Rational Actor Analysis A Focus on
    Government Foreign Business Relationships
  • Examination of FDI costs and benefits
  • Benefits Capital inflow, job creation, better
    jobs (?), tax revenue, improved balance of
    payment, technology transfer, training, market
    access
  • Costs Branch-plant Syndrome, sovereignty and
    National Security

20
Government Actions When Interests Are in
Conflict (Source Head) Issue division of
spoils (assets and future profits) Actions
limit profit repatriation, taxation,
expropriation, force companies to sell off all
or part of a subsidiary below market
value. Issue technology transfer/control/ Actio
ns maximum foreign ownership rules,
joint-venture requirements, investment
21
Government Actions When interests are in
Conflicts (Source Head) contd Issue
sourcing of inputs Actions tariffs and quota in
key imported inputs, domestic control
rules Issue contribution to balance of
payments Action export requirements
22
  • Managing Political Risk (counter moves)
  • Insurance from EDC, etc.
  • JVs with local or foreign partners
  • Local stakeholders
  • Structural dependency
  • Lobbying
  • Planned divestiture with s/t profits
  • Integrate with strategy
  • Security for expatriates
  • General rule make the costs to the government
    of an
  • undesirable move to the firm very costly. Provide
    incentives for appropriate government
    regulations
  • and policies.
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