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POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT...

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POLITICAL RISK
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Page 1: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

POLITICAL RISK

Page 2: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

POLITICAL RISK

ARISES FROM THE UNCERTAINTY OVER THE

CONTINUATION OF A GOVERNMENT AND POLICIES

THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

Page 3: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

Moreover...

POLCIES, THAT ARE UNPLEASANT, DO NOT

CONSTITUTE RISK AS LONG AS THEY ARE TRANSPARENT

AND ENFORCED WITH CONSISTENCY.

Page 4: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

POLITICAL RISKS

INSTABILITY RISK

OWNERSHIP RISK

OPERATIONS RISK

TRANSFER RISK

Page 5: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

INSTABILITY RISK

ARISES FROM THE UNCERTAINTY ABOUT

STABILITY OF A GOVERNMENT.

Page 6: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

OWNERSHIP RISK

ARISES FROM THE UNCERTAINTY ABOUT A GOVERNMENT’S DECISION

TO REDUCE FOREIGN INVESTORS’ OWNERSHIP IN THEIR INVESTMENTS

IN THE COUNTRY.

Page 7: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

CONFISCATION

IMPOUNDING OF THE PROPERTY OF FOREIGN INVESTORS BY THE HOST

GOVERNMENT WITHOUT COPENSATION.

Page 8: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

EXPROPRIATION

PURCHASE OF PROPERTY FROM FOREIGN INVESTORS.

Page 9: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

NATIONALIZATION

PURCHASE OF PRIVATE BUSINESSES BY HOST GOVERNMENT.

Page 10: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

DOMESTICATION

PLANNED REDUCTION OF EQUITY HELD BY FOREIGN INVESTORS.

Page 11: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

OPERATIONS RISK

ARISES FROM THE UNCERTAINTY ABOUT HOST GOVERNMENT’S

POLICIES THAT MAY CONSTRAIN FOREIGN INVESTORS’ OPERATIONS

IN THE COUNTRY.

Page 12: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

They can change policies regarding...

• PRICES

• TERMS OF COMPETITION

• TAXATION

• PRODUCT SPECIFICATIONS

Page 13: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

MEASURES CAN BE HIGHLY VARIED AND UNLIMITED

AND

THEY CAN BE AS DEVASTATING AS EXPROPRIATION

Page 14: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

TRANSFER RISK

ARISES FROM THE UNCERTAINTY ABOUT GOVERNMENT POLICIES THAT MAY RESTRICT FOREIGN

INVESTORS’ ABILITY TO TRANSFER PROFITS OR CAPITAL OUT OF THE

COUNTRY.

Page 15: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

HOW TO ANALYZE POLITICAL RISKS

POLITICAL

SOCIAL

ECONOMIC

Page 16: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

EXTERNAL THREAT

QUESTION:

HOW LIKELY IS IT THAT AN OUTSIDE FORCE WILL DESTABILIZE THE GOVERNMENT OF A COUNTRY?

Page 17: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

THINGS TO LOOK FOR:

THE WORDS AND ACTIONS OF THE LEADERS OF THE ENEMY

COUNTRIES

Page 18: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

INTERNAL THREAT

QUESTION:

HOW LIKELY IS IT THAT THE GOVERNMENT WILL REMAIN

STABLE (ASSUMING THERE IS NO EXTERNAL THREAT)?

Page 19: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

A COUNTRY WHERE TRANSITION OF POWER FOLLOWS A FIXED

SCHEDULE AND IS PEACEFUL IS MORE STABLE .

Page 20: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

SUCH A COUNTRY ALLOW ITS PEOPLE TO CHOOSE THEIR RULERS AND

SPEAK THEIR MINDS.

Page 21: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

POLITICAL FREEDOM(ACCORDING TO FREEDOM HOUSE-99)

FREE PARTLY FREE NOT FREE

Argentina Armenia China

Bulgaria Brazil Egypt

Czech Rep Ghana Indonesia

Hungary Malaysia Nigeria

Taiwan Russia Saudi Arab

S. Africa Turkey Vietnam

Page 22: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

EXISTENCE OF DEMOCRATIC POLITICAL PROCESS DOES NOT

ALWAYS ENSURE POLITICAL STABILITY.

OTHER EXAMPLES INCLUDE:

INDIA, ISRAEL, ITALY, TURKEY

Page 23: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

LIKEWISE, EXISTENCE OF AN AUTOCRATIC GOVERNMENT DOES

NOT NECESSARILY IMPLY INSTABILITY.

Page 24: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

LOOK AT THE SIX ASIAN TIGERS

• CHINA IS A COMMUNIST COUNTRY.

• INDONESIA HAD MILITARY DICTATORSHIP & ONE PARTY RULE UNTIL RECENTLY.

• TAIWAN & SOUTH KOREAWERE AUTHORITARIAN STATES UNTIL RECENTLY.

• SINGAPORE HAS ELECTED AUTHORITARIAN GOVERNMENT

Page 25: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

HONG KONG’S COLONIAL GOVERNMENT WAS

UNDEMOCRATIC.

Page 26: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

SIGNALS TO LOOK FOR:

• SEPARATIST MOVEMENTS

• POLITICAL MOVEMENTS

• RADICAL MOVEMENTS

• ETHNIC TENSIONS

• DISCONTENT

Page 27: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

OWNERSHIP RISKS

QUESTION:

WILL THE GOVERNMENT ACT IN A WAY THAT WILL DEPRIVE A

FOREIGN FIRM FROM CONTINUING ITS OWNERSHIP IN THE COUNTRY?

Page 28: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

Pay attention to the attitude of the leaders.

• And what they have to say about specific countries.

• Anger of the labor toward foreign policies…

• toward foreign firms of specific countries

• or firms.

Page 29: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

OPERATIONS RISK

QUESTION:

WHAT IS THE LIKELIHOOD THAT A GOVERNMENT WILL CHANGE

POLICIES THAT IMPACT ON FOREIGN FIRMS’ PROFITABILITY.

Page 30: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

THINGS TO LOOK FOR.

DEBT SERVICE RATIO

EXTERNAL DEPENDENCE

LIQUIDITY

Page 31: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

DEBT SERVICE RATIO

A COUNTRY’S ANNUAL DEBT INTEREST AND PRINCIPAL LIABILITY

AS A PERCENT OF EXPORTS OF GOODS AND SERVICES

Page 32: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

How do countries score?ACCEPTABLE <20%

Poland, Malaysia, Thailand

PRECAUTIONARY >20% BUT <30%

Chile, India, Mexico, Turkey

DANGEROUS >30%

Argentina, Brazil, Hungary, Indonesia

(Data is from 1995)

Page 33: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

It may be all right if a country:

• Has highly diversified export base.– Both products and markets.

• Can reduce imports in a crisis.– Fraction of total imports that comprise of oil

and food (over 35% is alarming).

• Has long-term capacity to repay debt.– Total debt/GDP (over 40% is alarming)

Page 34: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

How do these measure up?

Oil& Food Total Debt

Ratio-94 to GNP-97

• Argentina 07% 38%

• Brazil 26% 23%

• Hungary 19% 52%

• Indonesia Low 62%

Page 35: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

EXTERNAL DEPENDENCEA COUNTRY’S TOTAL EXPORT &

IMPORT BILL AS A PERCENTAGE OF ITS GNP (1998)

• Argentina 18%

• Brazil 15%

• Hungary 107%

• Indonesia 55%

Page 36: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

LIQUIDITY

LENGTH OF TIME A COUNTRY CAN CONTINUE TO IMPORT AT THE PRESENT LEVEL BY DRAWING

DOWN ITS FOREIGN EXCHANGE RESERVES.

Page 37: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

2-3 MONTHS IS PRECAUTIONARYLESS THAN 2 MONTHS IS ALARMING

(Data for 1998)

• Argentina 8.5 Months

• Brazil 6.5 Months

• Hungary 4.5 Months

• Indonesia 4.5 Months

Page 38: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

ECONOMIC POLICY

• IS THE COUNTRY INVESTING IN EDUCATION & INFRASTRUCTURE?

• IS IT OPEN TO TRADE?

• IS IT LETTING THE MARKET HAVE ITS WAY?

Page 39: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

INTERVENTION BY GOVERNMENT

BREEDS BUREAUCRACY THAT PULLS THE COUNTRY BACKWARDS.

IT BREEDS CORRUPTION AND INEFFICIENCY.

Page 40: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

POLITICAL RISK SCORES

LOW

Switzerland

Norway

Austria

Germany

Netherlands

Brunei

Japan

HIGH

Liberia

Somalia

Sudan

Iraq

Myanmar

Uganda

Ethiopia

Page 41: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

HOW TO COPE WITH POLITICAL RISK

Avoidance Approach

Insurance Approach

Negotiation Approach

Page 42: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

Insurance Approach

Political Risk Insurance

– Overseas Private Investment Corporation (OPIC)

– American International Group

– Lloyds of London

Page 43: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

Bargaining Approach

WHEN THE BARGAINING POWER POSITION OF A FIRM RELATIVE TO

THAT OF THE HOST GOVERNMENT IS STRONG, THE FIRM WILL

EXPERIENCE LOW LEVEL OF INTERVENTION IN ITS OPERATIONS.

Page 44: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

BARGAINING POWER OF MNCs

• Access to Technology

• Integration in Global Production

• Access to Global Markets

• Access to Foreign Exchange

• Provider of Jobs & Capital

Page 45: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

BARGAINING POWER OF COUNTRIES

• Market Size and Growth Potential

• Attractive Resource Base

• Attractive & Efficient Infrastructure

• History of Consistent , Flexible, and Fair Relations with Foreign Investors

Page 46: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

BARGAINING POWER FRAMEWORK

RELATIVE BARGAINING POSITION OF THE FIRM

AND

OUTCOME STAKE FOR THE FIRM

Page 47: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

Low Outcome Stake

Walk Away

If Charged, Avoid the Charge

Page 48: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

High Outcome Stake/Low Bargaining Position

Accede to Demands

Page 49: POLITICAL RISK. ARISES FROM THE UNCERTAINTY OVER THE CONTINUATION OF A GOVERNMENT AND POLICIES THAT IMPACT FOREIGN INVESTORS’ PROFITABILITY.

High Outcome Stake/High Bargaining Position

Negotiate


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