Political Risk Factors

Political Risk Factors
An MNC must assess country risk not only in countries where it currently does business but also in those where it expects to export or establish subsidiaries. Several risk characteristics of a country may signifi cantly affect performance, and the MNC should be concerned about the likely degree of impact for each. The September 11, 2001, terrorist attack on the United States heightened the awareness of political risk.

As one might expect, many country characteristics related to the political environment can infl uence an MNC. An extreme form of political risk is the possibility that the host country will take over a subsidiary. In some cases of expropriation, some compensation (the amount decided by the host country government) is awarded. In other cases, the assets are confi scated and no compensation is provided. Expropriation
can take place peacefully or by force.

The folllowing are some of the more common forms of political risk:

• Attitude of consumers in the host country
• Actions of host government
• Blockage of fund transfers
• Currency inconvertibility
• War
• Bureaucracy
• Corruption
Will examine each of these characteristics

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Attitude of Consumers in the Host Country

A mild form of political risk (to an exporter) is a tendency of residents to purchase only locally produced goods. Even if the exporter decides to set up a subsidiary in the foreign country, this philosophy could prevent its success. All countries tend to exert some pressure on consumers to purchase from locally owned manufacturers.

(In the United States, consumers are to look for the “Made in the U.S.A.” label.) MNCs that consider entering a foreign market (or have already entered that market) must monitor the general loyalty of consumers toward locally produced products.

If consumers are very loyal to local products, a joint venture with a local company may be more feasible than an exporting strategy. The September 11, 2001, terrorist attack caused some consumers to pay more attention to the country where products are produced. Actions of Host Government Various actions of a host government can affect the cash fl ow of an MNC.

For example, a host government might impose pollution control standards (which affect costs) and additional corporate taxes (which affect after-tax earnings) as well as withholding taxes and fund transfer restrictions (which affect after-tax cash fl ows sent to the

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