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1Prentice Hall, 2002 Chapter 10Daniels
Chapter TenRisk Management and Asset Protection
2Prentice Hall, 2002 Chapter 10Daniels
Chapter Objectives To appreciate the difference between risk and
uncertainty To grasp the idea of managing risk as an opportunity
versus risk as a hazard To learn about foreign exchange risk and the tools that
traders and companies use to manage it To understand the idea of political risk, its principal
types, and active versus passive management approaches
To profile competing views of the scope of intellectual property rights
To realize how companies establish and protect intellectual property rights
3Prentice Hall, 2002 Chapter 10Daniels
IntroductionFDI, particularly in the economies of
emerging markets, offers many opportunities
Sources of risk that especially menace international operations:• Fluctuations in foreign exchange values
• Political disruption and turmoil
• Intellectual property violations
4Prentice Hall, 2002 Chapter 10Daniels
The Idea of Risk ManagementThe best-laid plans of managers and companies run into
challenges when things do not go as plannedChallenges can arise from:
• Internal conditionsAbrupt shortage of money to finance expansions
• Unforeseen changes in the marketplace Uncertainty
oComes from changes in economic, social, and political trends
• RiskThe chance that a specific company will gain or
lose money on a particular investment activity
5Prentice Hall, 2002 Chapter 10Daniels
The Idea of Risk ManagementThe view of risk follows the notion that a basic
relationship exists between risk and returnPrudently managed risky markets promise
terrific growth opportunities and great profit potential for the confident MNE
Typically, the idea of risk conjures images of negative events such as devastating financial loss
oManaging risk as a hazard pushes managers to come up with methods to reduce the odds of a negative event
Globalization steadily pushes firms to see risk more as the price of better opportunities
6Prentice Hall, 2002 Chapter 10Daniels
Foreign Exchange RiskTo many, the most striking operating differences
between domestic and international business is the financial basis of exchange
Companies try to forecast exchange rate changes in the effort to reduce their possible costs
Companies try to limit the downside of currency fluctuation by:• Modeling currency trends
• Forecasting exchange rate movements
Several factors violate the law of supply and demand:• National governments
7Prentice Hall, 2002 Chapter 10Daniels
Foreign Exchange RiskThe irony of government intervention in the foreign
exchange market is that it is theoretically impossible for any form of intervention to permanently alter the value of a national currency
Government intervention tends to happen in hazardous styles that create extensive foreign exchange risk for international companies
Exchange rate changes can impact:
• Marketing decisions
• Production decisions
• Financial decisions
8Prentice Hall, 2002 Chapter 10Daniels
Foreign Exchange RiskCurrency values change frequentlyA change in the exchange rate can result in
three different exposures for a company• Translation exposure: created by the present
measurement of past activity
• Transaction exposure: exchange rate fluctuations materially change the expected income from a transaction that is denominated in foreign currency
• Economic exposure: materially influence a firm’s future earning power
9Prentice Hall, 2002 Chapter 10Daniels
Foreign Exchange RiskTypically, managers use a mix of the major tools of the
foreign exchange market:• Spot exchange rate: the rate at which a foreign exchange
market would willingly convert one currency into another currency
• Forward exchange rate: governs future deals
• Currency swap: refers to the simultaneous purchase and sale of a given amount of foreign exchange for different value dates
Management of economic exposure requires that a company carefully review its idea of risk and assemble the optimum mix of countries within which to build and operate its plants
10Prentice Hall, 2002 Chapter 10Daniels
Political Risk Political risk: the chance that political decisions, events, or
conditions in a particular nation will affect the business environment in ways that lead investors to lose some or all of the value of their investment or be forced to accept a lower-than-projected rate of return
There are several types of political risk:• Systemic political risk: generally, the political process within a
particular nation does not routinely subject foreign operations to discriminatory treatment
• Procedural political risk: can interfere with the process of transactions
• Distributive political risk: this form may be subtle
• Catastrophic political risk: includes random political developments that adversely affect the operations of companies and MNEs
11Prentice Hall, 2002 Chapter 10Daniels
12Prentice Hall, 2002 Chapter 10Daniels
Political RiskThe actions of host governments and local political
institutions and actors directly shape the success or failure of overseas operations
Methods of political risk management include:
• Active management: depends on identifying the indicators that best measure political riskPolitical risk management services
• Passive management: treat political risk as an unpredictable hazard of international business and seek ways to hedge their exposureOPICMultilateral development banks (MDBs)Private insurance
13Prentice Hall, 2002 Chapter 10Daniels
Intellectual Property Rights Intellectual property: the creative ideas, innovative expertise, and
intangible insight that gives an individual, company, or country a competitive advantage
Intellectual property rights (IPRs): refers to rights of the registered owner of the particular invention, literary or artistic work, symbol, name, image, or design
World Intellectual Property Organization (WIPO): a United Nations agency established in 1907, administers agreements
A country’s view of IPRs is influenced by:
• Level of economic development
• National cultural attitudes
• Social and economic institutions Many organizations are trying to set minimum standards for the
protection and enforcement of IPRs
14Prentice Hall, 2002 Chapter 10Daniels
15Prentice Hall, 2002 Chapter 10Daniels
Intellectual Property RightsThe basis and scope of disagreement among
nations on IPRs create fundamental gaps that will not be easily resolved
Companies are trying to devise ways to manage this risk:
• Employee relations
• Dealing with outside parties
• A tough reputation
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