NAVIGATING POLITICAL RISK IN INTERNATIONAL BUSINESS
Political risk - Likelihood of political events positively or negatively
impacting business. More complex with global supply chains. Varies by
nation, industry.
Sources of Risk
Conflict and Violence
Internal conflict: Discourages investment, damages assets and
people.
External conflict: Territorial disputes hurt business.
Terrorism and kidnapping: Violent tactics for political change.
Property Seizure
Confiscation: Government takes assets without compensation.
Expropriation: Government takes assets with compensation.
Nationalization: Government takeover of entire industry.
Government Policies
Ownership limits on foreign firms.
Local content requirements: Rules to use local materials,
workers.
Reducing Exposure
Monitor political climate and risk levels.
Maintain contacts with government.
Partner with local firms.
Ensure ethical practices.
Keep low profile, vary routines.
Know emergency procedures.
ECONOMIC DEVELOPMENT
Definition: Increase in economic well-being, quality of life, general
welfare of a nation's people. Includes economic and non-economic
aspects like health, safety, education, environment. Requires
economic growth.
Classifying Countries
Advanced: Highly industrialized, high quality of life. Ex: Western
Europe, US, Canada, Australia.
Emerging: Increased industrial activity and exports. Ex: Asia's 4
tigers, Latin America, Eastern Europe.
Developing: Low infrastructure, incomes. Rely on few sectors like
agriculture. Ex: Africa, Middle East.
Dualism: Advanced tech in some sectors, outdated in others.
National Production
GDP: Value of all goods/services produced domestically in a year.
Higher GDP per capita = greater development.
Limitations: Excludes volunteer work, illegal activities, cash
transactions.
Growth rates: Moderate GDP but high expected growth also
attracts investment.
Averages: Urban areas tend to have higher GDP per capita than
rural areas.
Purchasing Power Parity
PPP: Ability of currencies to buy same basket of goods in two
countries. Allows comparison across countries.
Ex: US GDP per capita is 3.1 times Mexico's when adjusted for PPP,
versus 6.6 times unadjusted.
Human Development
HDI: Long and healthy life, education, decent standard of living.
High income alone doesn't guarantee progress.
Ex: Cuba has much higher HDI rank than GNI per capita rank.
STRATEGIES FOR NAVIGATING POLITICAL RISK
While political risk is inevitable in international business, companies can
take steps to manage and minimize its impact. Here are some key
strategies:
Adaptation
Companies can adapt their operations and strategy to better fit the local
context. Common approaches include:
Partnerships with local firms to share risk and leverage local
expertise. This includes joint ventures, alliances, cross-holdings.
Localization to suit local tastes and culture. May involve modifying
operations, products, brand names. Lowers foreign image.
Development assistance to improve quality of life. Shows
commitment to community.
Insurance against political risks like expropriation, currency controls,
terrorism.
Information Gathering
Information helps predict and respond to political changes. Sources
include:
Employees with local experience and contacts. Must be recent
insight as politics can shift rapidly.
Specialized agencies providing political risk services - banks,
consultants, publications. Free government intelligence also
valuable.
Political Influence
Firms can influence politics through:
Lobbying to impact legislation and communicate benefits to
community.
Relationship building with stakeholders to get early warning of
issues.
Supporting positive international relations between home and host
countries. Stability aids business.
Abiding by multilateral agreements that force cooperation even
during conflicts.
The United Nations
Provides leadership on international issues like peace, human rights,
economics.
Valuable source of data on markets and business environments
through agencies like UNCTAD.
Limited direct business role but creates stability that enables
commerce.
ECONOMIC TRANSITION IN CHINA AND RUSSIA
The Winding Road of Economic Transition
Economic transition involves moving from centrally planned to free market
economies. It aims to gain efficiencies of capitalism but can mean
uncertainty and hardship. Key reform measures:
Stabilizing economy, controlling deficits, expanding credit
Market-based pricing
Privatization and property rights
Reducing trade barriers and allowing currency convertibility
Encouraging innovation and entrepreneurship
Transition Obstacles
Managerial expertise - central planning didn't require market
strategies
Capital shortages - transition requires major investments
Cultural differences - shock of individual responsibility versus
dependence on state
China's Economic Transition
Started reforms in 1970s. Allowed private farming, then
township/village enterprises with market distribution.
Massive economic growth recently. "Socialism with Chinese
characteristics."
Need patience and guanxi (relationships). Ideological differences
with private sector remain.
Challenges: Managing growth, social changes, reunification issues.
Russia's Economic Transition
Sudden change from communism under Gorbachev in 1980s
brought shortages and turbulence.
Managerial skills advanced but political instability threatens
progress. Conflicts in Georgia, Ukraine.
Investment climate hurt by attacks on businesses, property rights
issues. Sanctions over Ukraine.
If Russia seeks investment, must become more peaceful, enact
business-friendly laws.
