Political Risk, Economic Risk

Good Essays
1.How do you assess political risk? What are its consequences? How can a firm manage political risk? What is micropolitical risk and how does it affect international business?

Political risk assessment can be done as simple as conducting an online research yourself, or by hiring experts and consultants familiar with the host country. They are able to inform the likelihood of political change and develop possible scenarios for future political conditions. Another form of assessing political risk can be assigning line managers in foreign subsidiaries or by having affiliates monitor local political activities. A firm can manage political risk by avoidance or withdrawal of current investments, or if they decide risk is worth the try, they do so through adaptation to the rules and policies established. They include: equity sharing – joint ventures, participative management, localization- transforming the firm to a national firm, development assistance- firm’s involvement in infrastructure development

Dependency and hedging are other means of risk reduction. Managers that use dependency will keep the subsidiary and host nation dependent on the parent corporation. Hedging will minimize losses by taking advantage of political risk insurance and local debt financing. Diversification is another way to manage political risk.

Micropolitical risk affects one industry or a few companies. Expropriation is an example, the host country of high risk might decide to take over a company’s assets and give an inadequate compensation. Such risk results in significant loss.

2. What is meant by economic risk in a nation? How can economic risk be analyzed and managed?

The book defines economic risk as a country’s ability or intention to meet its financial obligations. The level of economic stability in a country is related to the risk it poses to foreign companies. More developed nations pose little risk, while less developed nations are riskier. Changes in exchange

You May Also Find These Documents Helpful

  • Good Essays

    Mod 5

    • 5720 Words
    • 23 Pages

    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?…

    • 5720 Words
    • 23 Pages
    Good Essays
  • Powerful Essays

    MU1 Assignment 2

    • 1726 Words
    • 6 Pages

    The impact of the risks on global business it is dramatic in our days, changing the entire look of the industries and financial services. Some risks could be anticipated and identified but some could not. Companies now are using more and more key steps and principles to better manage the risks by;…

    • 1726 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    Political risk is the likelihood that the outside speculation of a business will be controlled by a mass of the administration's strategies. The suggestion to purchase out a Venezuelan soda pop maker and bottler Zip-6 in Venezuela will represent a potential hazard because of the Venezuelan economy that uses an administration process made up of trade controls, sponsorships and value controls. The political tension between the two nations is also due to the recent expulsion of senior U.S. diplomats by the Venezuelan government.…

    • 374 Words
    • 2 Pages
    Good Essays
  • Good Essays

    Before 2011, Libya was Africa’s third largest and the worlds 17th largest oil producer, pumping out 1.6 million barrels (2% of world total) a day. Over 85% of its crude oil was exported. February 2011 protesters and government clashed. Things quickly turned into a civil war between the rebel-comtrolled East, and the government controlled West. Foreign nationals were evacuated as were multinational oil companies. These foreign nationals and oil companies did not know what to do. They were bound by law, and also had a moral and ethical responsibility to safeguard shareholders’ assets, and also take care of their employees and their families. As of April 2011, no one knew how long things would take to end, or how they would. Abandoned assets and loss of revenue, the multinational companies could not afford to have future plans.…

    • 589 Words
    • 2 Pages
    Good Essays
  • Good Essays

    Political Environments

    • 800 Words
    • 4 Pages

    Q1. Identify three types of political risk evident in Chavez’s Venezuela and give an example of each.…

    • 800 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    Assignment questions

    • 586 Words
    • 3 Pages

    using a methodology that incorporates country risk and other types of risk that arise in…

    • 586 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Risk Types: Interest rate risk, Credit risk, Technology risk, Foreign exchange rate risk, Country or sovereign risk…

    • 367 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    a. Country/regional risk – the chance that domestic events (political upheaval, financial troubles, or natural disasters) will weaken the country/region’s market…

    • 415 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Case Study Munich Re

    • 577 Words
    • 2 Pages

    Essentially, one can define a political risk as any factor that poses a threat of losing money that is caused by changes in a country’s government or regulatory environment. Declaration of war or terrorism (or both!) are considered in this particular risk category, and are the most extreme examples of such. Terrorism wants to strike where it can hurt the most and is an entity with the patience to wait it out to do so. The terrorist attacks of September 11th was an attack on a world superpower. The attacks had many political and economic implications, as it halted US airspace, disrupted worldwide finance, as well as throw many in-area businesses into complete disarray. “These actions are representative of corporate terrorism with the greatest of scopes.” According to the text, companies can prepare for the potential risk associated with terrorism. Some of the options to reduce risk include employee training in terrorism avoidance, purchasing of terrorism insurance, as well as securing buildings and the associated grounds.…

    • 577 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    International Finance

    • 2817 Words
    • 12 Pages

    Comment: Political risk refers to potential actions by a host government that would reduce the value of a company’s investment. It includes at one extreme the expropriation without compensation of the subsidiary’s assets, but it…

    • 2817 Words
    • 12 Pages
    Powerful Essays
  • Good Essays

    Similarly, economic risk is the likelihood that certain events or changes in the economic status or a company or will cause drastic changes adversely affecting profits and other goals. The ability to measure and understand risk and determining which risk is acceptable is a…

    • 1146 Words
    • 5 Pages
    Good Essays
  • Powerful Essays

    Political Risk

    • 1573 Words
    • 7 Pages

    Micro Risk: a type of political risk that threatens the activities of a certain industry.…

    • 1573 Words
    • 7 Pages
    Powerful Essays
  • Good Essays

    An MNC conducts country risk analysis when it applies capital budgeting to determine whether to implement a new project in a particular country or to continue conducting business in a particular country.…

    • 794 Words
    • 4 Pages
    Good Essays
  • Powerful Essays

    Assessing Political Risk

    • 1172 Words
    • 5 Pages

    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)…

    • 1172 Words
    • 5 Pages
    Powerful Essays
  • Powerful Essays

    Fins3616 Answers Homework

    • 36973 Words
    • 148 Pages

    Political risk is the risk that a sovereign host government will unexpectedly change the rules of the game under which businesses operate.…

    • 36973 Words
    • 148 Pages
    Powerful Essays