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POLITICAL RISK

POLITICAL RISK. 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.

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POLITICAL RISK

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  1. POLITICALRISK

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

  3. Moreover... POLCIES, THAT ARE UNPLEASANT, DO NOT CONSTITUTE RISK AS LONG AS THEY ARE TRANSPARENT AND ENFORCED WITH CONSISTENCY.

  4. POLITICAL RISKS INSTABILITY RISK OWNERSHIP RISK OPERATIONS RISK TRANSFER RISK

  5. INSTABILITY RISK ARISES FROM THE UNCERTAINTY ABOUT STABILITY OF A GOVERNMENT.

  6. OWNERSHIP RISK ARISES FROM THE UNCERTAINTY ABOUT A GOVERNMENT’S DECISION TO REDUCE FOREIGN INVESTORS’ OWNERSHIP IN THEIR INVESTMENTS IN THE COUNTRY.

  7. CONFISCATION IMPOUNDING OF THE PROPERTY OF FOREIGN INVESTORS BY THE HOST GOVERNMENT WITHOUT COPENSATION.

  8. EXPROPRIATION PURCHASE OF PROPERTY FROM FOREIGN INVESTORS.

  9. NATIONALIZATION PURCHASE OF PRIVATE BUSINESSES BY HOST GOVERNMENT.

  10. DOMESTICATION PLANNED REDUCTION OF EQUITY HELD BY FOREIGN INVESTORS.

  11. OPERATIONS RISK ARISES FROM THE UNCERTAINTY ABOUT HOST GOVERNMENT’S POLICIES THAT MAY CONSTRAIN FOREIGN INVESTORS’ OPERATIONS IN THE COUNTRY.

  12. They can change policies regarding... • PRICES • TERMS OF COMPETITION • TAXATION • PRODUCT SPECIFICATIONS

  13. MEASURES CAN BE HIGHLY VARIED AND UNLIMITED AND THEY CAN BE AS DEVASTATING AS EXPROPRIATION

  14. TRANSFER RISK ARISES FROM THE UNCERTAINTY ABOUT GOVERNMENT POLICIES THAT MAY RESTRICT FOREIGN INVESTORS’ ABILITY TO TRANSFER PROFITS OR CAPITAL OUT OF THE COUNTRY.

  15. HOW TO ANALYZE POLITICAL RISKS POLITICAL SOCIAL ECONOMIC

  16. EXTERNAL THREAT QUESTION: HOW LIKELY IS IT THAT AN OUTSIDE FORCE WILL DESTABILIZE THE GOVERNMENT OF A COUNTRY?

  17. THINGS TO LOOK FOR: THE WORDS AND ACTIONS OF THE LEADERS OF THE ENEMY COUNTRIES

  18. INTERNAL THREAT QUESTION: HOW LIKELY IS IT THAT THE GOVERNMENT WILL REMAIN STABLE (ASSUMING THERE IS NO EXTERNAL THREAT)?

  19. A COUNTRY WHERE TRANSITION OF POWER FOLLOWS A FIXED SCHEDULE AND IS PEACEFUL IS MORE STABLE .

  20. SUCH A COUNTRY ALLOW ITS PEOPLE TO CHOOSE THEIR RULERS AND SPEAK THEIR MINDS.

  21. 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

  22. EXISTENCE OF DEMOCRATIC POLITICAL PROCESS DOES NOT ALWAYS ENSURE POLITICAL STABILITY. OTHER EXAMPLES INCLUDE: INDIA, ISRAEL, ITALY, TURKEY

  23. LIKEWISE, EXISTENCE OF AN AUTOCRATIC GOVERNMENT DOES NOT NECESSARILY IMPLY INSTABILITY.

  24. 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

  25. HONG KONG’S COLONIAL GOVERNMENT WAS UNDEMOCRATIC.

  26. SIGNALS TO LOOK FOR: • SEPARATIST MOVEMENTS • POLITICAL MOVEMENTS • RADICAL MOVEMENTS • ETHNIC TENSIONS • DISCONTENT

  27. OWNERSHIP RISKS QUESTION: WILL THE GOVERNMENT ACT IN A WAY THAT WILL DEPRIVE A FOREIGN FIRM FROM CONTINUING ITS OWNERSHIP IN THE COUNTRY?

  28. And what they have to say about specific countries. Anger of the labor toward foreign policies… toward foreign firms of specific countries or firms. Pay attention to the attitude of the leaders.

  29. OPERATIONS RISK QUESTION: WHAT IS THE LIKELIHOOD THAT A GOVERNMENT WILL CHANGE POLICIES THAT IMPACT ON FOREIGN FIRMS’ PROFITABILITY.

  30. THINGS TO LOOK FOR. DEBT SERVICE RATIO EXTERNAL DEPENDENCE LIQUIDITY

  31. DEBT SERVICE RATIO A COUNTRY’S ANNUAL DEBT INTEREST AND PRINCIPAL LIABILITY AS A PERCENT OF EXPORTS OF GOODS AND SERVICES

  32. 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)

  33. 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)

  34. 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%

  35. EXTERNAL DEPENDENCE A COUNTRY’S TOTAL EXPORT & IMPORT BILL AS A PERCENTAGE OF ITS GNP (1998) • Argentina 18% • Brazil 15% • Hungary 107% • Indonesia 55%

  36. LIQUIDITY LENGTH OF TIME A COUNTRY CAN CONTINUE TO IMPORT AT THE PRESENT LEVEL BY DRAWING DOWN ITS FOREIGN EXCHANGE RESERVES.

  37. 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

  38. ECONOMIC POLICY • IS THE COUNTRY INVESTING IN EDUCATION & INFRASTRUCTURE? • IS IT OPEN TO TRADE? • IS IT LETTING THE MARKET HAVE ITS WAY?

  39. INTERVENTION BY GOVERNMENT BREEDS BUREAUCRACY THAT PULLS THE COUNTRY BACKWARDS. IT BREEDS CORRUPTION AND INEFFICIENCY.

  40. LOW Switzerland Norway Austria Germany Netherlands Brunei Japan HIGH Liberia Somalia Sudan Iraq Myanmar Uganda Ethiopia POLITICAL RISK SCORES

  41. HOW TO COPE WITH POLITICAL RISK Avoidance Approach Insurance Approach Negotiation Approach

  42. Insurance Approach Political Risk Insurance • Overseas Private Investment Corporation (OPIC) • American International Group • Lloyds of London

  43. 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.

  44. BARGAINING POWER OF MNCs • Access to Technology • Integration in Global Production • Access to Global Markets • Access to Foreign Exchange • Provider of Jobs & Capital

  45. 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

  46. BARGAINING POWER FRAMEWORK RELATIVE BARGAINING POSITION OF THE FIRM AND OUTCOME STAKE FOR THE FIRM

  47. Low Outcome Stake Walk Away If Charged, Avoid the Charge

  48. High Outcome Stake/Low Bargaining Position Accede to Demands

  49. High Outcome Stake/High Bargaining Position Negotiate

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