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8/10/2019 International Management - Phatak - Ch.3 slides
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McGraw-Hill/Irwin
International Management 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
International Management
Phatak, Bhagat, and Kashlak
8/10/2019 International Management - Phatak - Ch.3 slides
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McGraw-Hill/Irwin
International Management 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 3
The Political Environment and
Political Risk
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Learning Objectives
Describe the components, relationships, and interactions involved inthe political systems model, and explain how the one-nation modelcan be extended into a global business context.
Explain the reciprocal nature of the dynamics between political and
economic systems, policies, and relations.Define and differentiate among the various types of political risk, anddiscuss their implications for the multinational firm.
Discuss comprehensive frameworks for assessing political risk, from aglobal as well as a single-country perspective.
Understand alternative methods used to hedge against risk frompolitical and politically-imposed economic changes in a host country.
Understand practical implications of political risk for the managerworking overseas.
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Chapter Topics
Macro-level Environments and Uncertainties
The Political System
The Global Political System
The Interaction Between International Politics and
International Economics
Political Risk and the International Firm
A Global Framework for Assessing Political Risk
Managing International Political Risk
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Table 3-1: Macro-Environmental Uncertainties
Political Uncertainties
Government Policy Uncertainties
War
Revolution
Coup detat
Democratic changes in government
Fiscal and monetary reforms
Price controls
Trade restrictions
Nationalization
Government regulationBarriers to earnings repatriation
Inadequate provision to public service
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Table 3-1 (contd.)
Macroeconomic Uncertainties
Social Uncertainties
Inflation
Changes in relative price
Foreign exchange rates
Interest rates
Terms of trade
Changing social concerns
Social unrest
Riots
DemonstrationsSmall-scale terrorist movements
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Fig 3-1: The Political System
Power
---------------
Ideology
Power
---------------
Ideology
Power
---------------
Ideology
GOVT.Political
Decisions
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Consensus and Legitimacy
Consensus
Is the widespread acceptance of the decision-making process
in the political system by the individuals and groups in the
system. It is the instrument by which a government itselfbecomes legitimized
Legitimacy
Is the use of power of the state by officials in accordance
with prearranged and agreed upon rules. A legitimate act isalso legal, but a lawful command is not always legitimate
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Fig 3-2: Political and Economic Systems
Economic
System
Political
SystemPolitical
System
Economic
System
Market Economy
Central Planning
Totalitarianism
(Communism)
Totalitarianism
(Fascism)Democracy
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Fig 3-3: Political and Economic Change (1982 - 2002)
entral Planning Market
Economy
Economic hange
Democracy
Political
Change
Totalitarianism
Nigeria 1982
Russia 1982
Viet Nam 1982
China 1982 Chile 1982
Malaysia 1982
Chile 2002
Viet Nam 2002
China 2002
Russia 2002
Nigeria 2002
Malaysia 2002
European UnionCountries 1982 European UnionCountries 2002
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Political Risk
Political risk is the likelihood that
political forces will cause
unexpected and drastic changes in a
countrys environment that
significantly affect the
opportunities and operations of a
business enterprise
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Types of Political Risk
Country-Specific
Is manifested in the mutual hostility between Israel andSyria. One would expect that Israeli companies would findlittle support in Syria, and the same would apply for Syriancompanies in Israel
Company-Specific
Invokes either a favorable or unfavorable response aimed at aparticular company
Project-Specific
Involves special treatment bestowed on a certain type ofproject
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Types of Political Risk (contd.)
Transfer Risk
Is the change in the degree of ease or difficulty experienced
in making transfers of capital, goods, technology, and people
in and out of a countryOperational Risk
Is the impact on the operations of a firm caused by changes
in the governments policies
Ownership Risk
Involves a change in the proportion of equity owned by a
company in a foreign subsidiary
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Fig 3-4: Classification of Types of Risk for
Company A in Country XYZ
RISK SCOPE
Risk Type Macro Risk Micro Risk
Transfer Risk **
Operational Risk *
Ownership Risk ****
Legend **** = High * = Low
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The Political Process
An exhaustive study of the political process would involve the following:
1. Study the relative power of the dominant groups in the society, and become
familiar with their ideologies
2. Study the decision-making process in the government
3. Evaluate the relative strength and bargaining power of the political partiesin the legislative branch
4. Study who are the key decision-makers in both the legislative and executive
branches of government
5. Study the path traveled by the government in power over the past several
years in terms of its economic, social, and foreign policies
6. Evaluate the impacts on the industry and your company of the anticipated
political decisions of the government, i.e. the political risk facing the
industry and company in the host country
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Civil Strife in Host Country :
Mediating Factors
1. Coercive potential
2. Institutionalization
3. Facilitation4. Legitimacy of the regime
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Fig 3-5: Framework for Assessing Civil Strife
Institutiona
lization
LegitimacyOf the
Regime
Coercive
Potential
Facilitation
Level ofPerceived
Deprivation
Level of
Civil Strife
Change inGovernment or
Governmental Policies
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Ex. 3-1: Staying Safe While Working Overseas
Always remain aware of your surroundings and avoid unusual
circumstances
Walk with authority and purpose while in public areas
Call ahead to notify others of your travel plans or appointmentsAlternate your routes to work on a regular basis
Alternate your timing to and from your work location
Avoid wearing American or British flag pins or other insignia in
publicSpeak in the native language where youre working
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Fig 3-6: The Environments of
Political Risk
PoliticalRisk
International
Organizations
and Groups
International EventsHome Country
Environment
Host Country
Environment
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Fig 3-7: Managing Political, Legal and
Economic Risk
Defensive/
Reactive
Proactive/
Merging
Direct Indirect
> Legal Action
> Host Operations
Dependent on Home> Control Makeup of
Management
> Diversification
> Joint Ventures
> Licensing Agreements
> Other Host Partners
> Promote Host Goals
> Risk Insurance
> Contingency Planning
> Home Country Govt.
Pressure on Host Govt.
> Lobbying Home and
Host Governments
> Corporate Citizenship
in Host Country
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Key Terms and Concepts
Political system
Political forces
Level of perceived deprivation
Coercive potentialInstitutionalization and civil strife
Facilitation and civil strife
Regime legitimacy and civil strife
Civil strifeMacro and micro risk
Proactive and reactive hedges
OPIC