Mod 5

Topics: Risk, Culture, Political risk Pages: 17 (5720 words) Published: December 17, 2011
Chapter 1

4. Discuss examples of recent macro political risk events and the effect they have or might have on a foreign subsidiary. What are micro political risk events? Give some examples and explain how they affect international business. Micro political risk is the risk of loss of assets or income that is specific to one company or one industry. For example, a McDonald's restaurant is destroyed in Indonesia as the result of a fundamentalist uprising against American companies. Other micro political risks can occur in more vulnerable industries such as mining and extraction in which locals may feel that the MNC is stealing their natural resources. The recent political events in Venezuela focused attention on a Coca-Cola bottling plant where army officials took control of the planet and distributed products to local residents. This occurred under the eye of the Venezuelan government. Only one firm (Coca-Cola) was victimized. Students can search for additional examples and show how the events caused management of those local operations to change their operating procedures.

5. What means can managers use to assess political risk? What do you think is the relative effectiveness of these different methods? At the time you are reading this, what countries or areas do you feel have political risk sufficient to discourage you from doing business there? Political risk assessment techniques include: issues monitoring systems, use of experts or consultants, consultation with internal staff, computer modeling; quantification of variables into ranking systems, and use of consulting ratings. These assessment techniques have varying effectiveness, depending on the region of the world involved and the extent to which subjective, rather than objective, data must be used and interpreted. Analysts should remember to distinguish between systems that are based on past events rather than current assessments of key stakeholder conflicts.

6. Can political risk be “managed”? If so, what methods can be used to manage such risk, and how effective are they? Discuss the lengths to which you would go to manage political risk relative to the kinds of returns you would expect to gain. Managing political risk can be achieved but at different levels. On one level, they can decide to suspend their firm’s dealings with a certain country at a given point – either by the avoidance of investment or by the withdrawal of current investment. On another level, if they decide that the risk is relatively low in a particular country or that a high-risk environment is worth the potential returns, they may chose to start operations there and to accommodate that the risk through adaptation to the political regulatory environment. Adaptation can take many forms, each designed to respond to the concerns of particular local area. Some forms of adaptation are; equity sharing, participative management, localization of the operation, and development assistance. Other forms of managing political risk available to managers are dependency and hedging. Some means that managers might use to maintain dependency – keeping the subsidiary and the host nation dependent on the parent corporation are; input control, market control, position control, and staged contribution strategies. The events that managers use of hedging are; political risk insurance and local debt financing. Multinational corporations also manage political risk through their global strategic choices. Many large companies diversify their operations both by investing in many countries and by operating through joint ventures with a local firm or government or through local licensees. By involving local people, companies, and agencies, firms minimize the risk of negative outcomes due to political events

7. Explain what is meant by the economic risk of a nation. Use a specific country as an example. Can economic risk in this country be anticipated? How? How does economic instability affect other...
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