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Specific Political Risks. Firm-Specific Political Risks Are Risks Directed at A Particular Company

This document discusses different types of political risks that can threaten businesses operating internationally. It distinguishes between firm-specific risks that target individual companies versus country-wide risks that affect all businesses. Examples of firm-specific risks include contract nullification or terrorist attacks, while country-wide risks include currency restrictions or civil wars. The document also differentiates between risks arising from government actions, both legal and illegal, versus risks from political instability. It concludes by advising businesses to properly plan and conduct due diligence when entering new markets to help manage these political risks.

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83 views2 pages

Specific Political Risks. Firm-Specific Political Risks Are Risks Directed at A Particular Company

This document discusses different types of political risks that can threaten businesses operating internationally. It distinguishes between firm-specific risks that target individual companies versus country-wide risks that affect all businesses. Examples of firm-specific risks include contract nullification or terrorist attacks, while country-wide risks include currency restrictions or civil wars. The document also differentiates between risks arising from government actions, both legal and illegal, versus risks from political instability. It concludes by advising businesses to properly plan and conduct due diligence when entering new markets to help manage these political risks.

Uploaded by

abhi0704
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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POLITICAL RISK The exercise of political power is the root cause of political risks in international business.

How political power is exercised determines whether government action threatens a firm's value. For example, a dramatic political event may pose little risk to a multinational enterprise, while subtle policy changes can greatly impact a firm's performance. A studentled protest for political change may not change the investment climate at all, while a change in local tax law can erode a firm's profits very quickly. It is the task of the risk manager or company CFO to identify whether a government action poses a threat to a firm's financial well-being. The first distinction that must be made is between firm-specific political risks and countryspecific political risks. Firm-specific political risks are risks directed at a particular company and are, by nature, discriminatory. For instance, the risk that a government will nullify its contract with a given firm or that a terrorist group will target the firm's physical operations are firm-specific. By contrast, country-specific political risks are not directed at a firm, but are countrywide, and may affect firm performance. Examples include a government's decision to forbid currency transfers or the outbreak of a civil war within the host country. Firms may be able to reduce both the likelihood and impact of firm-specific risks by incorporating strong arbitration language into a contract or by enhancing on-site

security to protect against terrorist attacks. By contrast, firms usually have little control over the impact of country-level political risks on their operations. The only sure way to avoid country-level political risks is to stop operating in the country in question. There is a second distinction to be made between types of political risk: government risks and instability risks. Government risks are those that arise from the actions of a governmental authority, whether that authority is used legally or not. A legitimately enacted tax hike or an extortion ring that is allowed to operate and is led by a local police chief may both be considered government risks. Indeed, many government risks, particularly those that are firmspecific, contain an ambiguous mixture of legal and illegal elements. Instability risks, on the other hand, arise from political power struggles. HOW TO MANAGE POLITICAL RISK

Although there are a number of ways to protect your firm against political risks, proper planning and due diligence are most important. Too many businesses begin operations in an unfamiliar country without having taken the time and devoted the resources necessary to ensure a better-than-average chance of success. Developing solid relations with relevant governing authorities is the preferred approach, but this may not always be possible or even desirable. Another important component of creating a political-risk-friendly investment environment is to establish a good relationship with your workforce.

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