POLITICAL RISK MANAGEMENT BY P.RAI87@GMAIL.COM
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8/7/2019 POLITICAL RISK MANAGEMENT BY P.RAI87@GMAIL.COM
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POLITICAL RISK
MANAGEMENT
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POLITICAL RISKPOLITICAL RISK
Political risk is a type of risk faced by investors,corporations, and governments. It is a risk that can be
understood and managed with reasoned foresight andinvestment.
For investors, political risk can simply be defined as
the risk of losing money due to changes that occurin a countrys government or regulatory environment.
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TYPES OFTYPES OF POLITICAL RISKPOLITICAL RISK
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Macro Political Risk
Micro Political Risk
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Macro Political RiskMacro Political Risk
A macro political risk affects all international
businesses in the same way. Expropriation,the
seizure of privately owned assets,as farm or afactory ,by government with little or no
compensation to the owner.
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Macro Risk Impact
Barriers to repatriation of
profits
No motivation to improve
efficiency
Confiscation of properties Loss of assets and future
profits
Loss of technology or other
intellectual property
Loss of future profits
Mandatory labour
legislations , inflation
Increased operating costs
Civil wars Destruction of property,loss of
sales, increased security cost
Currency devaluation Reduced values of repatriated
earnings
Impact of political risk on
international business
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Micro Political RiskMicro Political Risk
A micro political risk affects specific foreign
business.
It includes industry regulation, taxes kidnapping and
terrorist threats.
Example:
Indias decision in 1975 to reduce foreign equity to
40% and Perus decision to nationalise its coppermines.
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MICRO RISK IMPACT
kidnappings.,
terrorists,threats,etc.
Disrupted production,
higher security cost,
reduced productivity
Increased taxation Reduced after tax profits
Officials dishonesty Loss of business,
increased operating cost
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Impact of political risk on
international business
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Ranking of countries
Hungry 78 77South Koria 76 75Poland 74 72Bulgaria 70 69Mexico 67 67China 66 61
Brazil 66 64Turkey 65 64Argentina 66 64South Africa 64 65Russia 63 61India 62 62Thailand 61 60Egypt 60 58Algeria 59 59Saudi Arabia 57 57
Indonesia 57 55Colombia 56 55Ukrain 56 57Philippines 55 56Iran 51 49Venezuela 50 52Nigeria 48 47Pakistan 45 50
2006 2007
Source: GPRI by Eurasia group
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Criteria for evaluating political risk
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Political economic environment
Stability of the political system
Imminent internal conflicts
External threats to stability
Realibility of the country as a trading partner
constitutional gurantees
Effictiveness of public administrations
Labour relation and social peace
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Criteria for evaluating political risk
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Domestic-economic conditions
Size of the populations
Per capita income
Economic growth over the last five years
Potential growth over the last three years
Inflation over the past two years
Avalibility of high quality local labour force
Contd..
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Criteria for evaluating political risk
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External-economic relations
Import and export restrictions
Restriction on foreign investment
Restriction on monetary transfer
Balance of payment situation legal protection for branch and products
Contd..
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Managing Political RiskManaging Political Risk
Avoiding investment
Adaptation
Threat
Lobbying
Terrorism Consultants
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POLITICAL RISK ASSESSMENT
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Approaches for
managing political risk
Relative bargaining power
Integrated techniques
Proactive and defensive techniques
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CONCLUSION Establish a good relationship with your
workforce
Be alert to what is happening in your host
country
Don't underestimate the potential benefits ofusing Political Risk Insurance (PRI) to
manage your political risks.
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Bibliography
International business by K.Ashwathappa;3rd
edition;2008;the mc-graw-hill companies
International business by Pradeep Sinha;1st
edition;2008
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