Assessing Political Risk

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Assessing Political Risk
April 25, 2011

Assessing Political Risk

Dorchester, Inc. is a U.S. based conglomerate that would like to break into the international consumer electronic business. Eun and Resnick stated that “the scope of business activities has become highly international.” (p. 151) There are several factors that could have a crucial impact on any international business; however, the one that will be addressed in this paper is the political risk of investing internationally. Eun and Resnick stated that “in assessing investment opportunities in a foreign country, it is important for a parent firm to take into consideration the risk arising from the fact that investments are located in a foreign country.” (p. 405) Wagner stated that “the exercise of political power is the root cause of political risks in international business.” (p. 1) Every country has some type of political risk of doing business in that country; however, every country may not be impacted the same way. The impact of political risk is country specific. Eun and Resnick stated that “political risk that firms face can differ in terms of the incidence as well as the manner in which political events affect them.” (p. 405) Political risk can range from tax increases to briberies and extortions. The key factor for businesses is to have a clear understanding of the political risk of that country and the consequences that could potentially impact its business. The purpose of this paper is to assess the political risk that is associated with doing business in the three foreign countries known as Korea, China, and Japan. Korea Political Risk

South Korea is a fast growing country that ranked third out of 33 member countries of the Organization for Economic. That analysis was based on the macro risk of a country. Eun and Resnick defined micro risk “where all foreign operations are affected by adverse political developments in the host country.” All countries have some type of political risk and South Korea is no exception. South Korea is in constant threat of war from North Korea. North Korea is very unstable and is testing nuclear weapons that are in arms reach of South Korea. The effectiveness of the government is also a political risk. Herskovits and Marshall stated that “the inflexible bureaucracy adds to policy delays and inefficiency.” (p. 1) South Korea is also no exception to corruption. Herskovits and Marshall stated that “the biggest threat is the hidden barriers rather than corruption which are seen as less of a problem than in many regional countries.” (p. 1) China Political Risk

China has done very well with staying above the economic problems that countries are faced with. The country is doing well and they are growing; however, all countries have some type of political risk and China is no exception. Buckley and Marshall stated that “the recent rapid economic growth cannot be sustained as a burst of government encouraged credit shrinks, leading to a rise in joblessness and investor disquiet and sapping government spending power and ability to cushion these problems.” (p. 1) They are also disputing with other countries about the level of the Yuan. That dispute is causing problems with not only currency but also trade. China also has corruption issues. Buckley and Marshall stated that “corruption is an issue both for foreign investors in China and for national stability it has the potential to become a focus for social unrest if it is not adequately tackled.” (p. 1)

Japan’s Political Risk
Japan is not exempt from any political risk. Japan is in a lot of debt, this is causing unrest amongst investors. Sieng stated that “Japan’s new government faces a dilemma over how to keep its campaign promises while reining in huge debt.” (p.1) Other political issue that Japan is faced with are persistent deflation. Japan is also feuding with the US about repositioning of the air force base. This feud is causing strained...
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