This chapter discusses strategies for managing political risk, government relations, and alliances. It explores evaluating political risks, macro and micro risk factors, techniques for responding to risk like developing relationships and lobbying. Alliances can benefit market entry but cultural differences and unpredictable host governments can challenge international joint ventures. Preparing for eventual alliance termination through legal agreements is important for success.

1. Chapter 10: Managing Political Risk, Government Relations, and Alliances By Sara Bennett, Rachel Andrae & Emily Motz

2. In this Chapter.. We will explore strategies for… evaluating political risks, managing government relations, and managing alliances with private and public partners.

3. Political RiskThe unanticipated likelihood that a business's foreign investment will be constrained by a host government’s policy.

4. E.g. ChinaWhy do YOU think that the United States is hesitant to take part in business with China? (In terms of political risk)Specific examples?

5. Macro vs. Micro Political Risk Macro Political Risk Analysis Analysis that reviews major political decisions likely to affect all enterprises in the countryE.g. China’s decision regarding restrictions on foreign exchange transactions because it affects all MNCs

6. International Corruption Perceptions IndexGROUP QUIZ! Rank these countries from Least to Most corrupt… Go! Uganda The NetherlandsMexicoDenmark United StatesCanadaVenezuela http://www.transparency.org/policy_research/surveys_indices/cpi/2010

7. Macro vs. Micro cont… Micro Political Risk Analysis Analysis directed toward government policies and actions that influence selected sectors of the economy or specific foreign businesses in the country Often take forms as…Industry regulationTaxes on specific types of business activityRestrictive local laws

8. Macro Risk Factors Freezing the movement of assets out of the host country Placing limits on the remittance of profits or capitalDevaluing the currency Refusing to abide by the contractual terms of agreements previously signed with the MNC Political turmoilGovernment corruption Industrial piracy (counterfeit products)

9. Micro Risk Factors“Some MNC’s treated differently by others” Industry regulationTaxes on specific types of business activityRestrictive local laws Impact of WTO and EU regulations on American MNCsGovernment policies that promote exports and discourage imports

10. Terrorism & Its Overseas ExpansionTerrorism- The use of force or violence against others to promote political or social viewsHow does this affect MNCs?

11. Analyzing the Expropriation Risk ExpropriationThe seizure of businesses by a host country with little, if any, compensation to the ownersIndigenization lawsLaws that require nationals to hold a majority interest in an operation

12. Managing Political Risk and Government RelationsPolitical RisksTransfer Government policies that limit the transfer of capital, payments, production, people, and technology in and out of the countryTariffs on exports and importsRestrictions on exportsDividend remittanceCapital repatriation

13. Cont…Cont..Operational risksGovernment policies and procedures that directly constrain management and performance of local operationsPrice controlsFinancing restrictionsExport commitmentsTaxesLocal sourcing requirements

14. Cont…Cont…Ownership control risksGovernment policies or actions that inhibit ownership or control of local operationsForeign-ownership limitationsPressure for local participationConfiscationExpropriationAbrogation of proprietary rights

15. Ownership Control RisksRussian government cancelled a 1.5 billion Exxon operation because there were “legal irregularities.” This makes other companies hesitant to work with Russia because they are very unpredictable when it comes to business.

16. General Nature of InvestmentConglomerate investmenta type of investment in which goods or services produced are not similar to those produced at homeVertical investmentThe production of raw materials or intermediate goods that are to be processed into final productsHorizontal investment An MNC investment in foreign operations to produce the same goods or services as those produced at home

17. QuestionWhich of these investments is the most risky and why?

18. Special Nature of InvestmentRelates to the sector of economic activity, technological sophistication, and pattern of ownership.Three sectors of economic activityPrimary sectorConsists of agriculture, forestry, and mineral exploration and extractionIndustrial sectorConsisting of manufacturing operationsService sector Includes transportation, finance, insurance, and related industries

19. Special Nature of InvestmentTechnological SophisticationScience-based industryRequires the constant introduction of new processes and products Non-science based industryPatterns of ownership Relates to whether the business is partially or wholly owned.

20. Techniques for Responding to Political Risk Relative bargaining power analysisThe MNC works to maintain a bargaining power position stronger than that of the host countryIntegrative, protective, and defensive techniques Helps the overseas operation become a part of the host country’s infrastructure Developing good relations with the host government and other local political groupsProducing as much of the product locally as possibly with the use of in-country suppliers and subcontractorsCreating joint ventures and hiring local people to manage and run the operationDoing as much local research and development as possibleDeveloping effective labor-management relations

21. ExampleCan you think of an example of relative bargaining power?

22. Cont… Protective and defensive techniques discourage the host government from interfering in operationsDoing as little local manufacturing as possible and conducting all research and development outside the countryLimiting the responsibility of local personnel and hiring only those who are vital to the operationRaising capital from local banks and the host government as well as outside sourcesDiversifying production of the product among a number of countries

23. Cont…Proactive political strategies are designed to develop and maintain ongoing favorable relationships with government policy makers as a tool to mitigate risk.Especially important when dealing with unstable policy environments

24. Cont… 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 firmFormal lobbyingCampaign financingSeeking advocacy through the embassy and consulates of the home countryFormal public relations and public affair activities such as grassroots campaigning and advertising

25. Cont…How does an MNC know which strategy they should use in their business?

26. Managing Alliances Alliances and joint ventures can significantly improve the success MNC entry and operation, especially in emerging economiesMotivating factorsFaster entry and payback, economies of scale and rationalization, complementary technologies and patents, and co-opting or blocking competitionPreparation for the likely eventual termination of the allianceLegal issuesBusiness issues

27. Role of Host Governments in AllianceAlliance or joint-venture partners may be beneficial to MNC entry and expansionHighly regulated industries such as banking, telecommunications, and health careCope with emerging-markets environments characterized by arbitrary and unpredictable corruptionMay be required by host governmentHost government may be unwilling to permit the alliance to terminate

28. Open Handset Alliancehttp://www.openhandsetalliance.com/oha_faq.html

29. Open Handset AllianceDiscussion:What are some challenges these MNC’s might face as a result of their alliance (specifically related to the Open Handset Alliance)?What certain cultural differences would cause the most problems in regard to alliances and international joint ventures (In general)?

30. ResponseWhat certain cultural differences would cause the most problems in regard to alliances and international joint ventures (In general)?UncertaintyLong-term orientationThese differences have a negative impact on survival and decrease the likelihood that firms will enter a foreign country through an alliance rather than a wholly owned subsidiary.These differences are more difficult to resolve than differences along other cultural dimensions.

31. Successful Management of AlliancesDepends on:Situational conditionsManagement instrumentsPerformance criteriaSuccess factors may include:partner selection

32. Cooperation agreement

33. Management structure

34. Accumulation process

35. Knowledge managementTermination of the allianceA difficult but important aspect of any successful alliance is preparation for the likely eventual termination of the alliance.Legal items critical to successful alliance “divorces”Conditions of terminationThe disposition of assets and liabilitiesDispute resolutionDistributorship arrangementsProtection of proprietary info and propertyRights over sales territories and obligations to customer

36. Role of Host Government in AlliancesHost governments are active in mandating that investors take on partners, and these mandates can pose managerial and operational challenges for MNC’s.Challenges?????

37. Role of host Government in AlliancesThe governments have a substantial role in the terms under which alliances are initially formed, the way in which they are managed, and even the terms of their dissolution. MNC’s must be aware of these influences and use carefully crafter strategies to manage host-government involvement in their alliances.