Transition economies seem profitable to be a part of before they get their full start up, but they are still very unstable, policies are still changing, political problems still have the potential to arise,
Presentation3 - chapter 10
MANAGING POLITICALRISK, GOVERNMENTRELATIONS, ANDALLIANCES–CHAPTER 10Alex, Hailey, and Alyssa
BusinessWeek Freeport-McMoRan Copper & Gold Inc. Bought rights to Grasberg 90% revenues Much unrest: Papuan rebels, environmental risks, governmental complications High political risk Government’s right to its own natural resources Riots and blockades by locals for a share of the wealth This is a high-risk company If Freeport diversified, it would rank higher on S&P and its stocks would sell higher
Political Risk Unstable governments threaten MNCs Changing policies can constrain MNCs’ trade and investments China joined WTO, limited policies, deterred future trade and investments MNCs adjust practices/policies accordingly Potential problems not understanding new policies Many government changes after 9/11 and MNCs are not as willing to invest in the Middle East
Macro and Micro Analysis of Political Risk Macro Political Risk – major political decisions that affect all MNCs China’sforeign trade policy changes affected all business in the country Micro Political Risk – political decisions having a narrower scope, affecting segments of MNCs China’s policy revision in telecommunication affected only a sector of the business economy
Macro Political Risk What kind of countries make macro level decisions? Economically unstable countries Transition economies Corrupt governments – make legal business hard Macro politics can really hinder MNCs productivity Unable to react to counterfeit operations because of macro political policies that make the process not worth the fight. MNCs have to get creative. Indian counterfeit operation stopped by new
??Questions?? Is it worth the risk to acquire foreign investments in up and coming economies such as Russia, India, and China knowing that this puts your MNC at higher risk for macro political problems? What are 3 types of political risk that an MNCs entering Russia or France would face? How are these countries’ political risks similar/different?
Ranking of Countries’Corruption In the book, the US is ranked 20th out of 85 nations. We don’t have a perfect business environment. Germany and Hong Kong beat us out.
Micro Political Risk Often industry taxes, restrictive local laws Not only policies or laws, but actions as well Dumping only affected steel industry Problem? Some MNCs are treated differently than others in the same country Examples EU has stopped mergers to prevent monopolies South American government is currently encouraging exports and discouraging imports. Hurts some MNCs
Terrorism and Its OverseasExpansion Terrorism- violence or force used to promote political or social views ultimate goal-government and citizens change policies and yield to terrorists’ beliefs Types of Terrorism: 1. classic 2. amateur 3. religiously motivated effects on MNC
Expropriation Risk Expropriation- business seizes host country and provides little compensation Indigenization laws- required nationals to hold a majority interest in an operation likely in non-Western countries strategies to minimize expropriation operational profitability
Managing Political Risk Comprehensive framework- considers and identifies all political risks Political risks 1. transfer 2. operational 3. ownership-control
General nature of investment 1. conglomerate 2. vertical 3. horizontal 3 sectors of economic activity 1. primary 2. industrial 3. service
Techniques 3 strategies:1. relative bargaining power analysis2. integrative, protective, and defensive techniques3. proactive political strategies
Relative Bargaining PowerAnalysis MNC bargaining power stronger than host ex. technology depends on many factors perception of MNC
Integrative, Protective, andDefensive Techniques Integrative techniques enable the overseas operation to become a part of the host country’s infrastructure Protective and defensive techniques discourage host government interference more likely to be used by companies ex. Microsoft technology
Political Decisions Affecting MNCs How can MNCs respond to unpredictable government decisions? Proactive Political Strategies:• Lobbying, campaign financing, advocacy, and other political interventions designed to shape and influence the political decisions prior to their impact on the firm.• They are designed to develop and maintain ongoing favorable relationships with government policy makers as a tool to mitigate risk before it becomes unmanageable.
Managing Alliances Another dimension of management strategy related to political risk and government relations is managing relationships with alliance partners. Example: Motorola in China has many alliances with state-owned enterprises, like its joint venture with Nanjing Panda Electronics to produce a personal computer. The heart of the computer will be Motorolas Power PC Chip.
Primary factors motivating firms toenter into International StrategicAlliances:• Faster entry and payback• Economies of scale and rationalization• Complementary technologies and patents• Co-opting or blocking competition A fundamental challenge of alliances is managing operations with partners from different national cultures. Cultural differences create uncertainties and misunderstandings in the relationship. Can you think of any Misunderstandings a business might have with its international alliance? Partner selection and task selection criteria have been identified as critical variables that influence alliance success or failure
The Role of Host Governments inAlliances Host Governments are active in mandating that investors take on partners, and these mandates can pose managerial and operational challenges for MNCs When host governments do not require alliances or joint venture as a condition for entry, many MNCs find that having alliances or joint venture partners is an advantageous. Established alliances with local partners primarily gain market access and contend with local regulations.
Starbucks Coffee & Beijing Mei DaCoffee Company working together. The Joint venture is focusing on the training of the local managers. Recruits are sent to Washington to learn how to make various types of Starbucks Coffee..• “People don’t go to Starbucks for the coffee but for the experience” MNCsare going back and renegotiating old contracts to seek improvements.