Political risk refers to risks faced by multinational companies from political actions in foreign countries they invest in. Such risks include laws requiring a certain percentage of local hires, investment in social projects, currency restrictions, discriminatory practices like higher taxes/fees, and expropriation. Political risk must be assessed based on the stability of the host government, prevailing political views, likely views of future governments, efficiency of government processes, economic stability, and strength of legal system. Political risks are classified as firm-specific, country-specific like transfer risk of blocked funds, cultural/institutional risks, and global risks affecting companies globally like terrorism. Reducing political risk involves cooperating with host countries, making appropriate investments, acting responsibly

1. INTERNATIONAL ASPECTS OF
FINANCIAL MANAGEMENT
POLITICAL RISK
Report by
Lesly Anne Lising

2. WHAT IS POLITICAL RISK?
Risk of changes in value owning to political actions in the
foreign country.
Political Risk of a Multinational Company
such as;
• Laws that specify minimum percentage of nationals
who must be employed in various positions
• Required investment n environmental and social
projects
• Restrictions on the convertibility of currencies
• Discriminatory practices ( higher taxes , higher utility
charges and requirement to pay higher wages)
• Expropriation-The taking of private property for public
use or in the public interest

3. Assessing Political Risk
Certain developing countries give foreign companies
concessions to invest such that they may have more
favourable cost that a domestic company
Political risk has a serious influence on the overall risk of
an investment project , it must be realistically assessed.
 How stable is the host government?
 What are the prevailing political winds?
 What is likely to be a new governments view of foreign
investment?

4. Cont. Assessing Political Risk
 How efficient is the government in processing
request?
 How much inflation and economic stability are
there?
 How strong and equitable are the courts?

5. Political Risk Classification
Firm Specific Risk
(Micro Risk)
Governance Risk
due to goal conflict
between an MNC and its host
government

6. Country Specific Risk
(Macro Risk
Transfer risk
concerns mainly the
problem of
blocked funds
Cultural and
Institutional Risk
*Ownership structure
*Human resource norms
*Religious heritage
*Nepotism and corruption
*Intellectual property rights
*Protectionism
Cont. Political Risk
Classification

7. Cont. Political Risk
Classification
Global Specific Risk
political risks that affect the MNE at the project or
corporate level but originate at the global level. Examples are
*terrorism
*anti-globalization movement
*environmental concerns
*poverty
*cyberattacks

8. 2015 Political Risk Landscape by
Marsh Risk Management Research
Briefing
Political Risk Map 2015: Geopolitical Tensions and Falling Oil Prices
Challenge Foreign Investors
Published: 19-Dec- 2014
Geopolitical tensions, falling commodity prices, separatist movements,
and more are shaping today’s political risk landscape. There is a clear
divide between healthy emerging markets and those that represent
poor investments for foreign investors, according to the Marsh Political
Risk Map 2015.
Drawing on data from Business Monitor International (BMI), a leading
source of independent political and credit risk analysis, the map
includes overall risk scores for 185 countries based on political risk
Several of the major factors that drove the political risk environment in
2014 as well as those that will likely continue into 2015, including:

9. 2015 Political Risk Landscape by
Marsh Risk Management Research
 Falling oil prices.
 Divergence among emerging economies that
represent strong investment opportunities versus
those that do not.
 Political violence beyond the Middle East and
North Africa.
 Autonomy and separatist movements.
 Greater global conflict.
 Social media
 State-sponsored cyber-attacks.
*http://asia.marsh.com/CountrySites/Philippines/MRMR/ID/43385/
Political-Risk-Map-2015-Geopolitical-Tensions-and-Falling-Oil-
Prices-Challenge-Foreign-Investors.aspx

10. Reducing Political Risk
A company investing in a foreign country should
take this steps to protect itself.
 Cooperating with the host country in hiring local
nationals
 Making the right types of investment
 Acting responsibly
 Joint venture with a company in the host country
 Making the subsidiary dependent on the parent for
technology , markets and/or supplies
 Getting political risk insurance

11. Political Risk Insurance
Public authorities in several countries for insuring the
risk inherent in foreign operations.
 England-ECGD (Export Credit Guarantee Department)
 France- COFACE ( Companies Françoise d’ Assurances
pour le commerce Exterieure), provide upto 95% against
political risks arising out of wars & nationalization & BFCE
(Banque Francchisee due Commerce Exterior).
 USA- Export-Import Bank (EXIM Bank)
 Germany- Hermes-Kredit-Versicherungs-
Aktiongesellschaft.
 Japan- Ministry of International Trade & Industry (MTTI).
 Italy- Institute Nazionale delle Assicurazioni.
Private Insurance:- Llyod of London, New Hampshire
Company & Company Beige d’ Assurance Credit

12. Political Insurance Sample
USA-OPIC (Overseas Private Investment
Corporation)
Types of Coverage
OPIC offers several types of political risk coverage:
Currency Inconvertibility, Expropriation, Political Violence
and more targeted specialty products.
•Currency Inconvertability
•Expropriation and Other Forms of Unlawful Government
Interference
•Regulatory Risk
•Political Violence
•Specialty Products
*http://www.opic.gov/what-we-offer/political-risk-insurance

13. The END