Political Risk International Business
POLITICAL RISK IN INTERNATIONAL BUSINESS The term business normally refers to the act of doing any transactions that ends up in earning or losing money.The act that is ending up in financial implications is called business.This business can be considered as a result of collective commercial transactions of all types involving government, private, corporate, individual or a group of individual, and so on.
Anyone involve in the business usually undertakes such operations only for the purpose of making profit, and only in the case of government involved business, there will be some other reason than profit making which could be political, economical, etc.
International business is recognized and / or defined as the business that is done across two or more country borders. International business involves selling, buying, making investment, transporting goods, logistical activities, etc between two or more countries.
The companies that are doing business worldwide are called multinational companies (MNCs). These companies are normally formed and incorporated in one country and then create their operations in various countries, and will have access to all the markets wherever they do trading. These companies are having different strategies and different approaches for different country operations due to many factors such as culture, interest, etc of the people in those countries. To mentions some examples, McDonalds, Sony, Shell, General Motors, Toyota, etc.
The very basic purpose of doing business is only to make money, predominantly, although there are businesses which are not mean for money or profit. Hence for the international business also, the basic purpose will be only profit making. However, there are some additional purposes for the international business, since the effort involved in the establishing the international business is more and complicated than just doing a domestic business. Some of the purposes of international business are discussed hereunder.
New Opportunities: While the corporations are extending their operations to the international market, the opportunities for them to develop their business and increased sales / revenue are more. Since the international business brings new products and new services to the country, there will be a good opportunity for finding new customers, and making a good volume of sales among the customers. Also, based on the geographical conditions, climatic conditions, available resources, etc there will be more opportunities for the MNCs to develop their business in terms of infrastructure, product lines, etc.
Low Cost: This is an advantageous purpose for the MNCs to have their operations in various countries. In countries like China, India, the human resources will be available in large number and hence the cost of labour becomes comparatively cheaper with the countries of origin of those MNCs. Hence the companies start their operations in those countries and reduce their cost of production lesser and lesser. Those products that are produced from there can be transferred to the other country’s operations of the same MNC. Hence over all the company’s cost of production is slashed to a very minimum amount.
For example, many Sony opened their operations in China, and most of the Sony products available in any of the country come from the manufacturing units of Sony in China. This way Sony capitalizes the international business concept. Resources: Resources are one of the major assets for any organization. Business while going international, get opportunities to improve the standard of the resources, many times at a cheaper cost. While the business is international, the organization will have access to various types of resources from various countries.
This is an added advantage to the company in developing their knowledge, and work force. Hence cross country knowledge is acquired by the organization, and hence the knowledge repository of the organization grows and hence to get more benefit from the resources. Just like the way the international business provides lots of benefits, there are lots of risks associated with the international business, which are discussed hereunder. Strategic Risk: Many of the international companies try to implement many of heir business strategy across all their branches in all the countries; however, due to many changes that exist between the countries wherein the operations are undertaken, many times the strategies will not work. For example, a strategy designed for the summer seasons in one country may not work in another country, since there could be a different season at that time, and vice versa. Hence strategy management is a potential risk in international management. Operation Risk: International business operations are happening across the globe.
The practical situation in one country and the situation in another country will never be the same. Mode of transport, maintenance of machinery, supply and demand of products required for production, logistic and inventory issues, etc will be on a regular basis and will create problem for a smooth production processes. Major cause of this operational risk will be the capital market variances between the countries and assets that are involved in the operational activities. Technological Risk: International business is highly dependent on the technology especially in terms of communication and transaction.
There is always a big risk in the security part of the electronic transactions and hence that creates a major risk for the international business. Cost of newer technologies, redundancy of the old technology and the locked cost in such investments, etc are the major risks due to technology. Environmental Risk: While the environment, such as air, pollution, water, etc of the country wherein the operation is happening is affecting the people and creating an environmental issue, which affects the reputation of the corporation functioning there as well.
The corporation also socially becomes responsible for such devastation of the environment. Economic Risk: This is anyway not in the hand of the business. If the country in which the business operation of the MNC is happening is not able to control the economic problems, which will eventually impact the MNC as well. Exchange rate, monitory policy, etc are the cause of such economic risks. Financial Risk: Currency rates and inflation rates are major cause of this type of risks. The financial situation of the country becomes instable, and that hits the organization badly.
While the government does not have strict rules in areas such as transferring investment funds to other countries, the economic financial conditions become worse. However, the Political risks in the area of international business are large and are highly considerable more than other risks. Since international business is happening in different countries, the business is facing directions and regulations from various political governments. Any changes that are happening in the political situations will have an impact on the way the business is running the country.
The leader of the country or the political person in the country will be responsible for such impact of risk; however, the organization will have a lesser say in such situations. The possibility of international business risks is always high. The very moment the business goes abroad, the government to which the business is subjected to will change. Hence irrespective of the amount of impact, there will be surely impact on the business from the political side. The government issues related to the overall country-wide policies, changes in the higher officials such as ministers, or other such positions will directly impact the business.
The impacts of the risks are varied from soft to extreme. Terrorism, war, etc are extreme risks, while change of president or prime minister, or different political parties coming into power, etc is moderate risks. However, it is easy to understand and accept that any of this risk will surely be in existence in any given country and hence that will affect the business organization which is doing an international business in that country. The political risks can be classified into micro risks and macro risks.
Micro political risks are very common to the country in which it is happening, and will affect the entire company’s existence in the company or something of that magnitude. For example if there is a political instable relationship between two countries, then there will be a risk of closing down the business of the organizations in one country who base location is the other country. On the other hand macro level political risks are something that is affecting all the international business in host country in which the political changes are happening.
For example, if there is a political emergency in the county all the international business would come to cease. Such emergency may also work against the foreign direct investment from all the countries, which is again nullifying the international business in the host country. For any risks that are faced in the business, multiple solutions are available. In the context of political risks related to international business, the general strategy the MNCs normally follow is to do a political risk analysis on the country in which the MNC is going to start its operation.
If the international business is just about making a foreign investment, before the investment is made a good and detailed risk analysis or research is advisable. There are many independent consultants who do such risk analysis and researches on potential countries. Such reports can be purchased by these MNCs or they can form their own team in making such analysis. MNCs can also adopt some risky strategy which has to be calculative.
At times, while investing in a country which is proven for political risk, the MNC can see a better and attractive return from the investment. Hence the strategy needs amendment based on the negotiation with the host government for further compensations and at the same time providing some reasonable benefits for the country resources, such as man power, and other structural facilities. Such MNCs are establishing their operations in those countries and help the country to develop their economy and increase the standard of living there.
Another strategy normally tried by the MNCs are involving into the business in the risk prone countries and also make considerable investments in the political risk insurances. By doing so, the possible losses the MNC may face can be compensated by the insurance, if happen so. However, such investments in the international business are made only when the corporation foresees a good and attractive return from those host countries. Interestingly investment in political insurance may also amount to risks, since the insurance claim may not be obtained as it is promised to be.
Based on the available option, the recommendation could be to do a good and through research on the political situation of the country wherein the MNC is going to commence its business. While the MNC is hoping to have a wide range of investments in many countries, it is advisable to have a separate department in the company which is looking after such risks, either doing their independent research or having assistance from the well know consultants in the market. Business earns profit in the form of money; however, it also exposed to many risks.
There are risks related to the internal environmental factors, as well as external environmental factors. External factors are not in the control of the business organization, and hence handling becomes difficult. When the business goes abroad and become an international business, then the exposure to various external environmental factors increases, while the possible benefits also increases. Political risk is one of the major risks associated with international business, which is the main concern of the MNCs going abroad.
MNCs are forced to face both micro and macro political risks. However, since the political risks are a well known factor, there are many research conducted across the world about most of the countries. Hence the MNCs are also having sufficient information to take a decision on the available options and plan their strategy towards opening up their business abroad. In many countries, international business works and give and take policy, where the MNC benefited financially while the hose country is benefited in terms of economy, life standards, and knowledge sharing.
References * Alan M. Rugman, Simon Collinson. 2008. International Business. London: Prentice Hall * Oded Shenkar, Yadong Luo. 2008. International Business. Chicago: Sage Publicaitons * Daniels, J. , Radebaugh, L. , Sullivan, D. (2007). International Business: environment and operations, 11th edition. Prentice Hall. * Joshi, Rakesh Mohan, (2009) International Business, Oxford University Press * Travis, T. (2007). Doing Business Anywhere: The Essential Guide to Going Global. Hoboken: John Wiley&Sons.