POLITICAL RISK MANAGEMENT BY [email protected]

8/7/2019 POLITICAL RISK MANAGEMENT BY [email protected]

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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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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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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

POLITICAL RISK MANAGEMENT BY [email protected]

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