International Management

1. International Management Phatak, Bhagat, and Kashlak

2. Chapter 3 The Political Environment and Political Risk

3. Learning Objectives • Describe the components, relationships, and interactions involved in the political systems model, and explain how the one-nation model can be extended into a global business context. • Explain the reciprocal nature of the dynamics between political and economic systems, policies, and relations. • Define and differentiate among the various types of political risk, and discuss their implications for the multinational firm. • Discuss comprehensive frameworks for assessing political risk, from a global as well as a single-country perspective. • Understand alternative methods used to hedge against risk from political and politically-imposed economic changes in a host country. • Understand practical implications of political risk for the manager working overseas.

4. Chapter Topics • Macro-level Environments and Uncertainties • The Political System • The Global Political System • The Interaction Between International Politics and International Economics • Political Risk and the International Firm • A Global Framework for Assessing Political Risk • Managing International Political Risk

5. Political Uncertainties Government Policy Uncertainties War Revolution coup d'état Democratic changes in government Fiscal and monetary reforms Price controls Trade restrictions Nationalization Government regulation Barriers to earnings repatriation Inadequate provision to public service Table 3-1: Macro-Environmental Uncertainties(Types)

6. Macroeconomic Uncertainties Social Uncertainties Inflation Changes in relative price Foreign exchange rates Interest rates Terms of trade Changing social concerns Social unrest Riots Demonstrations Small-scale terrorist movements Table 3-1 (contd.)

7. Fig 3-1: The Political System Power --------------- Ideology Power --------------- Ideology Political GOVT. Decisions Power --------------- Ideology

8. Consensus and Legitimacy Consensus • Is the widespread acceptance of the decision-making process in the political system by the individuals and groups in the system. It is the instrument by which a government itself becomes legitimized Legitimacy • Is the use of power of the state by officials in accordance with prearranged and agreed upon rules. A legitimate act is also legal, but a lawful command is not always legitimate

9. Fig 3-2: Political and Economic Systems Economic System Central Planning Political System Political System Totalitarianism (Fascism) Totalitarianism (Communism) Democracy Market Economy Economic System

10. Fig 3-3: Political and Economic Change (1982 - 2002) Democracy Political Change Totalitarianism European Union Countries 1982 European Union Countries 2002 Malaysia 2002 Malaysia 1982 Russia 2002 Chile 2002 Nigeria 1982 Nigeria 2002 Russia 1982 China 2002 China 1982 Chile 1982 Viet Nam 2002 Viet Nam 1982 Central Planning Market Economy Economic Change

11. Political Risk Political risk is the likelihood that political forces will cause unexpected and drastic changes in a country’s environment that significantly affects the opportunities and operations of a business enterprise

12. Types of Political Risk Country-Specific • Is manifested in the mutual hostility between Israel and Syria. One would expect that Israeli companies would find little support in Syria, and the same would apply for Syrian companies in Israel Company-Specific • Invokes either a favorable or unfavorable response aimed at a particular company Project-Specific • Involves special treatment bestowed on a certain type of project

13. Types of Political Risk (contd.) Transfer Risk • Is the change in the degree of ease or difficulty experienced in making transfers of capital, goods, technology, and people in and out of a country Operational Risk • Is the impact on the operations of a firm caused by changes in the government’s policies Ownership Risk • Involves a change in the proportion of equity owned by a company in a foreign subsidiary

14. Fig 3-4: Classification of Types of Risk for Company A in Country XYZ Legend **** = High * = Low

15. The Political Process An exhaustive study of the political process would involve the following: • Study the relative power of the dominant groups in the society, and become familiar with their ideologies • Study the decision-making process in the government • Evaluate the relative strength and bargaining power of the political parties in the legislative branch • Study who are the key decision-makers in both the legislative and executive branches of government • Study the path traveled by the government in power over the past several years in terms of its economic, social, and foreign policies • Evaluate the impacts on the industry and your company of the anticipated political decisions of the government, i.e. the political risk facing the industry and company in the host country

16. Civil Strife in Host Country :Mediating Factors • Coercive potential • Institutionalization • Facilitation • Legitimacy of the regime

17. Fig 3-5: Framework for Assessing Civil Strife

18. Ex. 3-1: Staying Safe While Working Overseas • Always remain aware of your surroundings and avoid unusual circumstances • Walk with authority and purpose while in public areas • Call ahead to notify others of your travel plans or appointments • Alternate your routes to work on a regular basis • Alternate your timing to and from your work location • Avoid wearing American or British flag pins or other insignia in public • Speak in the native language where you’re working

19. Fig 3-6: The Environments of Political Risk Host Country Environment International Organizations and Groups PoliticalRisk Home Country Environment International Events

20. Fig 3-7: Managing Political, Legal and Economic Risk Direct Indirect > Legal Action > Host Operations Dependent on Home > Control Makeup of Management > Risk Insurance > Contingency Planning > Home Country Govt. Pressure on Host Govt. Defensive/ Reactive Proactive/ Merging • > Joint Ventures > Licensing Agreements > Other Host Partners • > Promote Host Goals > Lobbying Home and Host Governments > Corporate Citizenship in Host Country

21. Key Terms and Concepts • Political system • Political forces • Level of perceived deprivation • Coercive potential • Institutionalization and civil strife • Facilitation and civil strife • Regime legitimacy and civil strife • Civil strife • Macro and micro risk • Proactive and reactive hedges • OPIC