Political Risk and Its Impact on Investors and Corporations

Discuss how political risks affect investments OECD nations?

With the advent of technology and the globalization era, the world has become a global village. This phenomenon has bought various countries closer. Multinational companies are one of those companies that take the advantage of this and spread their operations in various countries. However expanding the business operations is not an easy task and it is very important for the business organization to consider various factors before they make their investment decisions for the given country. The most undermined factor is the political risk factor. Whether investing in a developing country or a developed one, considering the political risk should be an important routine for any Multinational Corporation. The given presentation will discuss why it is important for the MNCs to consider the political factors before making important investment decisions.

Political Risk can be described as the risk which is faced by the investors, corporations and governments concerning the various events and political decisions that tend to have an impact on the profit making ability of the firm. The given risk can be understood and avoided if it is well reasoned with investment and foresight.

Political risks generally refer to the complications a business has to face as an outcome of the various political scenarios in the country. These political changes may be brought about by the macro economic and social factors such as the fiscal, political, monetary and labor decisions as well as development.

It may also be because of the instability such as terrorism, riots civil wars and insurrection.

If the political risks in a country is low then it does not mean that the political freedom is high, some governments with stable political system are often very authoritative.

A multinational company is one which has it business operations and units spread in various parts of the globe.  They are known by various names such as the multinational enterprise, transnational enterprise, International Corporation among others.

These companies have a global popularity and become one of the biggest brands around the globe. The multinational companies often like to take advantage of the conditions in the country and take an advantage of it in order to expand its operations (Cavusgil et al., 2014).  There are various factors that these companies need to be aware of.

A list of some MNCs has been given below:

• Acer
• HCL
• Lenovo
• Samsung
• Apple
• Whirlpool
• Tesco
• Wal-Mart

Before entering a country for business purposes, the business needs to invest in a particular country in order to carry out the operations smoothly.  Investment means putting in certain amount of funds in a company and before any such investment is made, the companies need to make certain decisions as to prove the viability of the investment. This kind of decision is primarily known as an investment decision and they help the top management in assessing whether the funds invested are worth for the risk undertaken by the organization (Davarzani, Zanjirani Farahani & Rahmandad, 2015).

Factors That Contribute to Political Risk

Taking investment decisions are not easy and the firm needs to keep in mind various factors such as Political, Social, Technological and Environment so as to ensure that the firm is moving towards the right direction.

A popular belief is that the primary factors that tend to have an impact on the decisions made by the company are the financial and economical factors. However this is not true always and political factors are those factors that also need to be taken care of while considering making important investment decisions (Shenkar, Luo & Chi, 2014).

The primary reason behind this is that the political risk factors tend to have a direct impact on the operations of the firm. If the political environment of any country is unstable, it is advisable that the company should not be investing in the given country.

As stated previously the political risk factors tend to have on the operations of the company. This means that these factors tend to trigger an event which may then lead to unrest in the country. This unrest is generally harmful for the firm. The triggers may be raised because of the following:

Unrest or Wars- Very often there exists unrest in the country which may often take the face of civil wars or wars among the countries. These events have a harmful effect on the business environment which then tends to affect the MNCs

• Property policies- The MNCs will be needing a location to set up their production facilities and this factor may be a problem for the firms.
• Corruption factors- The corruption status of the country acts as a de-motivator for the firms as it tends to increase its initial costs.
• Political parties- The political parties often fight amongst themselves which can cause instability in the country.

Developing countries can be described as those countries which have a poor economic status and are still thriving towards the full development of their country. These countries are governed by a low growth rate and unemployment issues. These countries also have an unstable political environment (Aharoni, 2015). 

Furthermore, these countries are characterized by a large population which the causes scarcity of resources. There are many developing countries around the globe and some of them are Pakistan, Philippines Nepal, India, Brazil, Sri Lanka and Bangladesh, The economic condition of these countries are comparatively very weak.

The given triggering events tend to cause political instability in developing countries:

Civil unrest

There are various minority and social groups present in the given developing countries which are often at war with one another and this causes a situation of political instability in a business environment which may impact the operations of the MNC.

Unstable government

The government in the developing countries is often changing and the political parties often tend to fight among themselves to gain the seats available. This often causes riots and rallies which tend to affect the operations of the MNCs.

Examples of MNCs

Labor

There are various politicized trade unions present in the developing nations which cause problems when the MNCs enter the country. They believe that these MNCs will lead to an employment problem in the country and thus they oppose to their existence.

Land issues

Although the developing countries have a high population, the land in these nations is generally quite limited. This is the reason why the tribal population, rural population and other people who are displaced because of the companies tend to oppose and pose as a risk.

Given below are certain reasons why the MNCs are concerned about the political risks in the developing countries:

Political instability has the capability of providing inconvenience of the business organizations. If there is political unrest in the country the MNC might be forced to shut down its business operations and this may have an impact on the profitability of the firm.

If the political party of the government or of the country is against a particular company then the followers if the party may chose to oppose against the firm which may then form a barrier against the firm

The unstable government in the developing countries may impact an MNC because changing governments tend to have changing policies which may not be suitable for the firm at all times.

The change in the regulations and the legislative policies are also dependent on the political parties. If the political parties change after an election, then that may have an impact on the business of the MNC because the company might have been used to a previous policy which would be more beneficial for them and for this reason, a new policy by a new government may harm the operations.

Slide 11

The given figure provides the different political risks that the investors are affected by in the developing countries.  It states that around 58% of the political risks arise from the regulatory changes that are a result of the political instability

Secondly around 43% risks come from restrictions in the business environment. In the same manner, around 45% are affected by the breach of contract. In a similar manner 13% are associated with terrorism, 7% with war and 33% with civil disturbance.

The main risks that affect the multinational company in the developing countries and the primary reasons why the MNCs give importance to these in the developing countries are given as follows:

Importance of Investment Decisions and How Political Factors Contribute

Anti globalization movement

Many political entities and government in lieu of promoting the economy of the given developing company and hence they influence the locals to avoid using their products. Such a scenario may affect the investment decisions of the firm as they may not want to bear the losses of associating with the firm.

Poverty

There exists wide range poverty in the given developing countries and for this reason; they are very often unable to purchase the product which may then lead to problems for the firm.

Terrorism

Terrorism is a common phenomenon in the developing countries. Due to terrorism, the financial as well as social environment of the business is affected which may not be beneficial for the firm, and then they may have to consider their investment in the developing countries.

Cyber attacks

Cyber attacks are very common in the developing countries and no company would like it if their operations are affected and their information leaked.

Political Risks in Developed Countries

Developed countries are although in a better position than that of the position of the developing countries, they are also affected by certain economic crises which then have an impact on the political scenario of the countries. This political unrest might pose as an unfavorable situation in the country which then might have an impact on the operations of the business organization or the MNC.

In the given scenario, the example of the European Nation can be used, whereby the political instability with respect to the Brexit has impacted the financial stock market and the condition of the business or the multinational companies in the given continent.

Due to these financial conditions, the employment and financial stability falters which then further dissatisfies the voters and then creates a sense of doom for the MNCs.

It is important for the multinational companies to consider the business environment especially the political risks of the develop countries as well because the tripling effect of the politics of the developed country has a profound effect on all the organizations around the globe (Perlmutter, 2017).  Their magnitude of effect is much higher than that of the effects of the developing countries.

The two biggest examples of such a political scenario are the Trump election in the United States and the Brexit in Europe. These events have disrupted the scenario for business in the given countries as well as the political conditions in the other countries as well.

Different Types of Political Risks in Developing Countries

To minimize the risks, the companies may take various steps such as:

Engaging in CSR Activities

If the company engages in sufficient CSR Activities, then the company may be successful in appealing to the countries that its intentions are beneficial and then it may not face severe political risks.

The alternate backup channels must always be kept as an option in cases if the environment in a country gets risky, the company can still continue its operations and work towards the welfare of the firm.

If the MNCs are able to create more job opportunities for the people in the countries ten it might achieve success. They can also invest in political risk insurance to ensure that the risk effects are minimized.

Conclusion

Therefore, from the analysis it can be concluded that the kind of country does not matter, as the politics environment of all types of country are changing and unstable. Hence, a multinational company needs to consider these political factors seriously.

The multinational corporations pay a special attention to the developing countries because the political instability is high in these countries as when compared to the OECD ones. However, MNCs also need to be wary of the conditions in the developed countries as they are equally important and have a tripling effect.

References

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Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International business (pp.67-75). Pearson Australia.

Davarzani, H., Zanjirani Farahani, R., & Rahmandad, H. (2015). Understanding econo-political risks: impact of sanctions on an automotive supply     chain. International Journal of Operations & Production Management, 35(11), 1567-1591.

Perlmutter, H. V. (2017). The tortuous evolution of the multinational corporation. In International Business (pp. 117-126). Routledge.

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