Macro and Micro Political Risk

Topics: Foreign direct investment, Risk, Investment Pages: 9 (3224 words) Published: November 4, 2010
Compare and contrast macro political risk with micro political risk. Discuss policies to combat their impacts on international business activities. Strategic planning is essential prior to any individual or company deciding to engage in international business whether as direct/indirect investment or through trade. An evaluation of risks should be considered and strategies developed accordingly prior to any potential investment in a foreign country. One such risk which requires consideration is political risk i.e. "governmental or societal actions and policies, originating either within or outside the host country, and negatively affecting either a select group of, or the majority of, foreign business operations and investments." (Simon, 1982). This can be broken down in ‘macro political risk’ i.e. a risk which affects all foreign enterprise at all levels and ‘micro political risk’, risk which affects only specific industries or certain companies. According to Rugman (2009) types of political risk can be categorised into two i.e. “legal/governmental” and “non-legal/extra-governmental”. Below is an in-depth discussion addressing these risks and the approaches which can be adopted in order to succeed as a foreign investor. A significant factor to acknowledge when considering macro political risk is that of government. If a country demonstrates political stability and an agreeable policy towards foreign investment then investors may be more inclined to invest in a country where the risk of changes government and legislation is low. One such risk at a macro level which is difficult to predict is ‘expropriation’ i.e. the confiscation of foreign property with little no compensation. In 1938 the American Oil Fields were expropriated by the Mexican government (Mises, 2006) and more recently in after program of “indigenization” (Rugman, 2008) Zimbabwe seized farms and private businesses without giving any compensation to the owners ( Changes bureaucracy or legislation can have a direct effect on the amount of foreign direct investment (FDI) it attract e.g. after the collapse of communism in 1990’s Russia programme of privatisation gave foreign investors lucrative opportunities to buy up previously state-own enterprises (Brooks et al, 2004). Indeed, political awareness is vital to FDI. Just as having an understanding of a foreign countries cultural and social issues are important so too is an awareness of their “political issues and tensions” (Brooks et al, 2004). For example in 2006 after a Danish newspaper printed a cartoon depicting the prophet Mohamed many middle-eastern Islamic countries cried out for the boycotting of Danish export goods ( and more recently there has been a “consumer-led” call in Britain for a boycott of Israeli goods and services in response to their military attacks on the Gaza strip ( Changes in a host country’s economic policy through internal or external will require constant monitoring by foreign firms. Bremmer (2005) would agree suggesting that “if China’s rapidly growing economy overshoots a soft landing and crashes into recession, the impact on Chile, Russia, India and the US will be measurable within hours”, “China’s political decisions today will have dramatic long-term effects on its markets”. Indeed, as it was recently reported - foreign based manufacturing firms based in South-East Asia are concerned about the recession and subsequent effect on monetary policy ( According to Brooks et al (2006) when a similar situation last arose in 1998 Japan fell into a recession and unemployment rose the prime minister was replaced. Other countries in South-East Asia fell into recession and in Malaysia the vice president was sacked and discriminatory restrictions were put into place “to restore confidence in the economy and to prevent money leaving the country” (Brooks et al, 2006). Looking at political risk on a...
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