Importanceof Managing Political and Country Risk for the Multinational Firm
Importanceof Managing Political and Country Risk for the Multinational Firm
Everybusiness activity has an aspect of risk which cannot be overlooked. Asuccessful company is that which has elaborate mechanisms forassessing the risks involved in any venture before committingfinancial resources. Even though the political and country risks arehard to handles by companies, it is possible to manage them.According to experts, knowing the risks surrounding an economicactivity is valuable knowledge which is used by a firm to adapt toits area of operation. Each firm has employees who specialize inpredicting the unforeseen present and future risks1.Due diligence is required in making strategies that will ensure thecompany does not suffer a loss in a business enterprise2.Country risk is a concept that is well understood by individualswhose activities have a direct relationship with the economic flowsthat are present internationally. Economic activities have a directinfluence on the political and social aspects of any society.
Asummary of the risk indicators in a county is compiled by anassessment team to since the spread of a business operation to othercountries requires an evaluation, identification and a preciseanalysis of the risks that occur globally in any national economy. Ingeneral, country risk gives a summary of the potential risks that aparticular country exposes to international firms and thus, it actsas a diagnosis of a country that actively participates in businesstransactions with other nations. Over a span of five years, a lot ofreports have been published by international organizations includingWorld Bank and United Nations. The index rankings such as WorldCompetitive Yearbook, Global Risk Reports by World Economic Forum anda report on economic freedom by the Heritage Foundation are some ofthe reports that provide valuable information to international firmswhich are venturing into new markets. An additional ranking categorybased on the comparison of strengths and weaknesses of the economy ofdifferent countries was suggested by the World Economic Forum (WEF)in 20013.Allthese information enables easy management of risk by multinationalcompanies.
Transactionsof economic agents such as loans and assets result in the creation ofrisks to any business. Multinational companies require investments tofinance their business ideas and assets that help in conducting theiroperations. There are research organizations which conduct surveys todetermine the safety levels in different countries by assessingnation`s environment and ranking them by market penetration and thefavorable conditions of doing business. Countries with politicalinstability are usually ranked low because the risks are extremelyhigh and any international firm will think twice before investing inthat particular country either directly or indirectly. The ratingcriteria are based on the number of times a particular country isfeatured on news outlets on matters that deal with the countriescauses of instability. Also, a ranking based on social, economic andinstitutional factors is useful in determining the overall conditionof a nation`s risks. The reason for ranking countries is to give asummary of the world’s political situation so that multinationalfirms will make informed decisions that will enable them toparticipate in the global economy. The advancing technology isproviding an easy way of disseminating information that can be usedin risk assessment. Because it is hard to predict politicalinstability, the analysis is done from a human beings perspective.The methods include: “Delphi techniques”, “grand tours”,“quantitative methods”, and “old hands. The Grand toursinvolves the visit to a particular country by the executive membersof a firm to get first-hand information about the business andpolitical environment. Old hands is a technique that involvesconsulting a number of experts who specialize in the specificcountry. The first technique relies on the collected data fromexperts to come up with a conclusion that summarizes the politicalrisks involved. The quantitative approach is tasked with analysisdata from the country so that political trends can be derived fromit. The technique is effective in predicting the probability offuture risks occurring.
Currently,political risk has become a complex and multifaceted phenomenon. According to Moreira, political risk comprises of state failure,international wars, government instability, breaches of contract,economic sanctions, terrorism, discrimination and breaches ofcontract4.The risk is not spontaneous rather a process that develops over time,For instance, the frequent standoff between government institutionssuch as the judiciary and executive can be inconsequential in theshort run, but in the long-term, it mat result into politicalinstability. Thus, the risks develop over time, and if detected intime, the firm operating in that country may prevent potential lossesdue to political violence. Although many people assume politicalrisks only have adverse effects on business, some advantages can bederived from the exploitation of political opportunities such as lowtaxes put by a government to attract international companies toinvest in the country. The risks due to political instability are notonly confined to the host country but also from external factors.With the advancement in technology, tools have been developed thatare able to analyze the data collected from different countries.Software that runs on powerful computers is able to predict the trendof risks that are likely to occur in a country. Information sharinghas helped in providing timely warning to a potential political orcountry risk. Firms are able to effectively protect themselves whenthe risk occur.
Inconclusion, risks have become a crucial part of our social andpolitical lives. Risks are indicators of potential failure, andtherefore, great care should be taken to determine and manage risksso that losses are prevented or reduced. Taking a risk has become anorm in both international business enterprises and domesticenvironment. Managers and political leaders have an uphill task ofexecuting their duties in an atmosphere that is comprised of risksthat keep changing every moment.Thus is important to manage the risks involved so that a firm willincrease its profit margins. Even though it is hard to control risks,it is advisable to manage them.
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1 Moreira, S. 2013. "Learning from Failure: China’s Overseas Oil Investments." Journal of Current Chinese 42 (1): 131-165.
2 Aon. 2013. "Aon Political Risk Map 2013: Historical Regional Overviews." Accessed March 28, 2017. http://www.riskmap.aon.co.uk/Regional_Overviews.asp.
3 Reliefweb. 2013. "More children killed in Central African Republic amid escalating violen." Accessed April 20, 2013. http://reliefweb.int/report/central-african-republic/more-children-killed-centralafrican-republic-amid-escalatin.
4 Reeves, E. 2012. "Sudan: re-defining the “Arab Spring” South Sudan News Agency." JUly 15. Accessed September 12, 2013. http://www.southsudannewsagency.com/opinion/analyses/sudan-re-defining-the qarab-springq .