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Political risk

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Chapter 13 Political risk ... Host country engagement or negotiation Figure 13.4 Host country attractiveness and negotiation PR is ... Document presentation format ... – PowerPoint PPT presentation

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Title: Political risk


1
Political risk
Chapter 13
2
Introduction
  • Country risk analysis examines the chances of
    non-market events (political, social and
    economic) causing financial, strategic or
    personnel losses to a firm following FDI in a
    specific country market.

3
Generic PEST framework
  • The generic political, economic, social (or
    socio-cultural) and technology (PEST) framework
    is used to
  • map out particular competitive environments or
    investment contexts for firms at the regional or
    national level.
  • compare country conditions.
  • build future scenarios to understand short-term
    and long-term threats and opportunities.

4
Figure 13.2 PEST framework for country analysis
5
Political risk
6
Political risk
  • Political risk The probability that political
    forces will negatively affect a multinationals
    profit or impede the attainment of other critical
    business objectives.
  • Examples?
  • Expropriation
  • Corruption
  • Breach of contracts
  • No contract law, no property right, or no
    enforcement

7
Levels of political risk
  • Macro political risk a risk that affects all
    foreign enterprises in the same way.
  • Micro political risk a risk that affects
    selected sectors of the economy or specific
    foreign businesses.

8
Types of political risk
  • Legal/governmental risks are potentially harmful
    to foreign businesses but are the product of, or
    permissible within, the existing political,
    economic and legislative system.
  • Non-legal or extra-governmental risks lie
    outside the system and are a violation of
    existing laws.

9
Figure 13.3 Types and levels of political risk
10
Country analysis and politicalrisk assessment
11
Quantifying risk vulnerability
  • All risk is relative.
  • The political/legal, economic, socio-cultural and
    technological environment of a foreign country
    has different implications depending on the type
    of international business that a firm is
    evaluating.
  • For example export restrictions are more
    important if a firm is seeking to set up a plant
    to produce goods for exports than if the products
    are for the local market.
  • ? Weighted Country Risk Assessment Model

12
Table 13.3 The Weighted Country Risk Assessment
Model Sources The approach and the items in the
table draw from prior risk assessment models and
studies, including D. W. Conklin, Analyzing and
Managing Country Risks, Ivey Business Journal,
vol. 66, no. 3 (January/February 2002), pp.
3642 S. T. Cavusgil, Measuring the Potential
of Emerging Markets An Indexing Approach,
Business Horizons, vol. 40, no. 1 (1997) A. I.
J. Dyck, Country Analysis (Boston, MA Harvard
Business School Press, 1997) E. Dichtl and H. G.
Köglmayr, Country Risk Ratings, Management
International Review, vol. 26, no. 4 (1986), pp.
412
13
Table 13.3 The Weighted Country Risk Assessment
Model (Continued) Sources The approach and the
items in the table draw from prior risk
assessment models and studies, including D. W.
Conklin, Analyzing and Managing Country Risks,
Ivey Business Journal, vol. 66, no. 3
(January/February 2002), pp. 3642 S. T.
Cavusgil, Measuring the Potential of Emerging
Markets An Indexing Approach, Business
Horizons, vol. 40, no. 1 (1997) A. I. J. Dyck,
Country Analysis (Boston, MA Harvard Business
School Press, 1997) E. Dichtl and H. G.
Köglmayr, Country Risk Ratings, Management
International Review, vol. 26, no. 4 (1986), pp.
412
14
Is Canada/North America one of the politically
safest places in the world?Political Risk World
Map by World Bank WGI Project(One of the most
popular indices on political risk)
15
Will political risk deter FDI?
16
Will political risk deter FDI?
17
Why political risk will deter FDI?
  • Increases the cost of doing business
  • For instance, increase the hurdle rate of return
    on investment
  • Adjust the cash flows of the project
  • Adjusted present value (APV) An NPV that takes
    into account sources of country risk that might
    impact a projects expected future cash flows.

18
What can you do about political risk?
  • PR analysis
  • PR Insurance (mostly home country based)
  • Host country engagement or negotiation

19
Figure 13.4 Host country attractiveness and
negotiation
20
PR is mostly referred to as a host country factor
in FDI, can it be a relevant home country factor
too?
Home-Country Political Risk
Outward FDI
?
21
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