Global Management 9


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Global Management 9

  1. 1. Companies and the Nation State-2: risks and methods of handling them <ul><li>Main topics </li></ul><ul><li>Explore political, economic and business risk in an international context </li></ul><ul><li>Outline the methods for handling such issues </li></ul><ul><li>Revision session </li></ul>
  2. 2. Political, economic and business risk-1 <ul><li>Political risk: the probability that political forces will negatively affect a company’s profit or impede the attainment of other critical business objectives </li></ul><ul><ul><li>Lynch Ch 19 </li></ul></ul><ul><li>Examples: </li></ul><ul><ul><li>India: desire to protect Indian companies and markets from foreign competition </li></ul></ul><ul><ul><li>France: sensitive to acquisition of leading French companies by foreign MNEs </li></ul></ul><ul><ul><li>USA: Government pressure on to Airbus over alleged subsidies for development of new aircraft </li></ul></ul><ul><li>Distinguish between: </li></ul><ul><ul><li>Macro political risk : affecting all MNEs in a country </li></ul></ul><ul><ul><li>Micro political risk : affecting sectors of the economy only </li></ul></ul>
  3. 3. Political, economic and business risk-2 <ul><li>Economics </li></ul><ul><ul><li>Falling GDP </li></ul></ul><ul><ul><li>Inflation high </li></ul></ul><ul><ul><li>Capital flight from country </li></ul></ul><ul><ul><li>Foreign debts high </li></ul></ul><ul><ul><li>Commodity dependence </li></ul></ul><ul><ul><li>Low food output </li></ul></ul><ul><li>Society </li></ul><ul><ul><li>Urbanisation </li></ul></ul><ul><ul><li>Drugs </li></ul></ul><ul><ul><li>Corruption </li></ul></ul><ul><ul><li>Ethnic tension </li></ul></ul><ul><ul><li>Religious fundamentalism </li></ul></ul><ul><li>Politics </li></ul><ul><ul><li>Bad neighbours </li></ul></ul><ul><ul><li>Strongly authoritarian </li></ul></ul><ul><ul><li>Staleness: little change in rulers </li></ul></ul><ul><ul><li>Lack of democracy </li></ul></ul><ul><ul><li>Generals in power </li></ul></ul><ul><ul><li>War including guerrilla conflict </li></ul></ul>The following are all signs of macro political risk in a country: Source: Economist , 20th December 1986
  4. 4. Political, economic and business risk-3 <ul><li>Key issue: the forecasting and management of macro and micro political risks - see Lynch Ch 19 </li></ul><ul><li>Evaluate the macro political risk: use E-S-P paradigm to explore </li></ul><ul><ul><li>Influences on the economy and consequent political risks </li></ul></ul><ul><ul><li>Government actions </li></ul></ul><ul><li>Consider government lobbying and other means of making contact in order to explore the situation informally </li></ul><ul><li>Evaluate the micro political risk in relation to specific industries: </li></ul><ul><ul><li>Local ownership </li></ul></ul><ul><ul><li>Transferral of funds and profits </li></ul></ul><ul><ul><li>Re-export of finished product </li></ul></ul><ul><ul><li>Technology transfer </li></ul></ul><ul><ul><li>Trade barriers, etc. </li></ul></ul>
  5. 5. Political, economic and business risk-4 <ul><li>Company strategies for protection involving both macro and micro elements: </li></ul><ul><li>Integrative techniques : become part of host country, e.g. IBM in Europe </li></ul><ul><li>Protective techniques : maintain non-integration with host country, e.g. keep R&D in home country </li></ul><ul><li>Strategic use of joint ventures and partnerships , e.g. with local companies </li></ul><ul><li>Keypoint: carefully analyse strategic situation before entering into agreements. </li></ul>
  6. 6. Methods for handling risk-1 <ul><li>Well constructed negotiation strategies are essential for companies dealing with national governments </li></ul><ul><li>Evaluation of position via: </li></ul><ul><ul><li>exploration of strengths and needs </li></ul></ul><ul><ul><li>analysis of weaknesses </li></ul></ul><ul><ul><li>identification of pressure points: particular areas where persuasion may be possible </li></ul></ul><ul><li>Important to understand behavioural characteristics of participants: </li></ul><ul><ul><li>culture </li></ul></ul><ul><ul><li>ethics </li></ul></ul><ul><ul><li>business style </li></ul></ul><ul><li>Difficulties: </li></ul><ul><ul><li>Authority level of negotiator </li></ul></ul><ul><ul><li>Differing time horizons for objectives </li></ul></ul><ul><ul><li>Social customs, language </li></ul></ul><ul><ul><li>Use of written documents </li></ul></ul>See Lynch Ch 19
  7. 7. Methods for handling risk-2 Buyer Maximum bid 25 Desired bid: 23 Minimum: ? Seller Maximum ? Desired bid 24 Minimum 21 <ul><li>Negotiation strategies include: </li></ul><ul><li>Building interpersonal relationships prior to the deal: some cultures only </li></ul><ul><li>Discovery of time pressures on other party </li></ul><ul><li>Reciprocity: trading favours </li></ul><ul><li>Some negotiators start with, or demand, extreme offers to change expectations </li></ul><ul><li>Promises, threats, rewards, commitments, etc. </li></ul>Example of acceptance zone :
  8. 8. Methods for handling risk-3 <ul><li>Many negotiations conducted by companies are complex and take months to complete: some possible guidelines: </li></ul><ul><li>Important not to get trapped into being committed to the initial proposal </li></ul><ul><li>Several parties may be involved in negotiations: </li></ul><ul><ul><li>Company should not assume that local negotiator has full authority: check </li></ul></ul><ul><ul><li>Locals should not assume that team from company have unlimited experience </li></ul></ul><ul><ul><li>Government may wish to examine the extent to which this deal will become a test case for whatever policy it is pursuing </li></ul></ul><ul><li>Companies should try to lower the expectations of their potential partners: e.g. better to clarify tricky areas early in the deal </li></ul><ul><li>Governments need to be shown that it is not possible to impose performance guarantees: better to seek information on resources, motivations and expectations of each party </li></ul><ul><li>Usually better to withdraw rather than accept a flawed deal. </li></ul>