This document discusses political risk management strategies for multinational corporations operating abroad. It covers Freeport-McMoRan's operations in Indonesia which face high political risk. It also discusses macro and micro political risks faced by MNCs and how unstable governments and changing policies can constrain foreign investments and trade. Finally, it outlines techniques for MNCs to manage political risks, including relative bargaining power analysis, integrative and defensive strategies, and proactive political engagement.

1. MANAGING POLITICAL
RISK, GOVERNMENT
RELATIONS, AND
ALLIANCES–CHAPTER 10
Alex, Hailey, and Alyssa

2. 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

3. 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

4. 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

5. 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

6. ??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?

7. 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.

8. 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

9. Terrorism and Its Overseas
Expansion
 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

10. 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

11. Managing Political Risk
 Comprehensive framework- considers and
identifies all political risks
 Political risks
1. transfer
2. operational
3. ownership-control

12.  General nature of investment
1. conglomerate
2. vertical
3. horizontal
3 sectors of economic activity
1. primary
2. industrial
3. service

13. Techniques
 3 strategies:
1. relative bargaining power analysis
2. integrative, protective, and defensive
techniques
3. proactive political strategies

14. Relative Bargaining Power
Analysis
 MNC bargaining power stronger than host
 ex. technology
 depends on many factors
 perception of MNC

15. Integrative, Protective, and
Defensive 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

16. 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.

17. 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 Motorola's Power PC Chip.

18. Primary factors motivating firms to
enter into International Strategic
Alliances:
• 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

19. The Role of Host Governments in
Alliances
 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.

20. Starbucks Coffee & Beijing Mei Da
Coffee 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.