8 Political Risks

Political Risk

Political Risk Management

Causes of political risk to MNCs

Need for foreign investment

Investor govt influence Strength of law and order

Risk transfer activities

Integrated local business community

Political risks emerge where drivers are not mitigated by restrainers

EQUILIBRIUM

Restraining forces

Driving forces Anti-foreign ideology Political violence Economic problems Unstable polity, active military Border disputes; War Anger over recent events Environmental issues

Yesterday’s Risks

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Post-colonial expropriations  Indonesia

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Nationalization by left-wing regimes  Cuba

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Violent revolution  Iran

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Hatred towards those who are different  Anti Sikh riots, 1984

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Today’s Risks- research yourself! 

Economic crises  Argentina (repatriation restrictions)  Indonesia (contract abrogation) 

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Creeping expropriation  Ukraine (output quota restatement)

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Dysfunctional legal/regulatory systems  Russia (abuse of minority shareholders)

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Ethnic, religious and separatist conflicts

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Armenia (licence revocation)

World wide Terrorism Al-Qaida, Hezbolla, Tamil tigers

Dictator interests Pakistan, North Korea, Afghanistan

Tomorrow’s Risks? • Transitional regimes – Central Asia • World wide Terrorism – Online recruitments, Nuclear wars – Pakistan, Iran • Targeting US, Modern symbols – Ahmedijinad, Zarqawi • Shifting global relations • Economic crises

…..and…?

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Political Risk screening areas Economic factors Size of GNP and growth rate Nature of development plans Resistance to recession Forex methods etc Political factors Government stability Conflict between social groups Attitude towards foreign investment Nationalisation threats etc Governmental factors Fiscal and monetary policies Competence of bureaucracy Fairness of courts etc Descriptor Area

Geographical factors Infrastructure Raw materials Distance to markets etc Labour factors Availability of qualified staff Labour climate Social costs etc Tax factors Rates Morality Incentives etc

Capital factors Local availability Banking system Home country attitudes etc Business methods General ethics Marketing system Profit structure Firm-specific factors

Controlling the risks: buffering

Home government

Avoid exposure

Influence

Investor Transfer

Risk takers

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Integration

•Borrow at home/elsewhere •R&D outside host •Decision-making outside host •Control IP •Licensing, franchising

Host country •Borrow locally •Form JVs •Employ local staff

Information sources • Online providers – Convenient, consistent, wide range but issues of depth and cost

• Management consultancies – Focussed, relevant but issues of knowledge and cost

• Academics – Detailed, accurate but issues of business focus

• Ex-diplomats – Network and influence but issues of business focus, consistency, depth, cost and range

• Business consultants – Business focus but issues of knowledge, relevance, depth

• Government – Range, convenience but issues of political bias

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Terrorism- Biggest threat to MNCs today TYPES:

Activists / Pressure Groups

Domestic

International

Cranks & Criminals

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Foreign Terrorist Groups Cranks and Criminals

International: Terrorism • International terrorism is a real danger because: – Its members have no borders – Iconic targeting – Suicide methods – ‘the CNN factor’

• Al-Qaeda is a constant and real danger – Afghanistan (Taliban) – India (Kashmir) – Iraq – Saudi Arabia

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Targeting • The key point: Al Qaeda’s aim is to foment a conflict between the West and the Islamic world. • So targets are: – Symbolic – Large scale – Guaranteed to generate media coverage – Huge numbers of deaths and destruction Descriptor Area

Domestic • Mindless violence based on religion, language etc. - Gujarat massacre • Nationalism / separatism – Thackeray, Sri Lankan rebels

• “Occupation” – Iraq – Gaza Strip & West Bank

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International • Taking domestic terrorism elsewhere – Kurdish separatists in Europe – Algerians in France – Chechens rebels – Palestinians – Iraq?

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Moscow theatre hostage crisis • The infamous Moscow theater hostage crisis,also known as the 2002 Nord Est siege, was the seizure of a crowded Moscow theatre Oct 23, 2002 by about 40 armed Chechen militants who claimed allegiance to the separatist movement in Chechnya. They took 850 hostages and demanded the withdrawal of Russian forces from Chechnya. The siege was led by Movsar Barayey, 22 years old. • After a two-and-a-half day siege, Russian forces pumped an unknown chemical agent (classified) into the building's ventilation system and raided it. Officially, 39 of the terrorists were killed by Russian forces, along with at least 129 of the hostages (nine of them foreigners). Some estimates have put the civilian death toll at more than 200.

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Activists / Single Issue Groups

• Animal rights • Anti-abortionists • Anti-hunting • Anti-GMO • NGOs eg. Cola war

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Cranks and criminals • Loners • Kids • Extortionists • Snipers • Racists

Can produce disruption as big as ‘real’ terrorism!

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