MANAGING POLITICAL RISK, GOVERNMENT RELATIONS, AND ALLIANCES–CHAPTER 10

Alex, Hailey, and Alyssa

BusinessWeek

Freeport-McMoRan Copper & Gold Inc. Bought rights to Grasberg 90% revenues Much unrest: Papuan rebels, environmental

risks, governmental complications High political risk

Government’s right to its own natural resources Riots and blockades by locals for a share of the

wealth This is a high-risk company If Freeport diversified, it would rank higher

on S&P and its stocks would sell higher

Political Risk

Unstable governments threaten MNCs Changing policies can constrain MNCs’

trade and investments China joined WTO, limited policies, deterred

future trade and investments MNCs adjust practices/policies

accordingly Potential problems not understanding new

policies Many government changes after 9/11

and MNCs are not as willing to invest in the Middle East

Macro and Micro Analysis of Political Risk

Macro Political Risk – major political decisions that affect all MNCs China’s foreign trade policy changes

affected all business in the country Micro Political Risk – political decisions

having a narrower scope, affecting segments of MNCs China’s policy revision in

telecommunication affected only a sector of the business economy

Macro Political Risk

What kind of countries make macro level decisions? Economically unstable countries Transition economies Corrupt governments – make legal business hard

Macro politics can really hinder MNCs productivity Unable to react to counterfeit operations because

of macro political policies that make the process not worth the fight. MNCs have to get creative. Indian counterfeit operation stopped by new

packaging

??Questions??

Is it worth the risk to acquire foreign investments in up and coming economies such as Russia, India, and China knowing that this puts your MNC at higher risk for macro political problems?

What are 3 types of political risk that an MNCs entering Russia or France would face? How are these countries’ political risks

similar/different?

Ranking of Countries’ Corruption

In the book, the US is ranked 20th out of 85 nations. We don’t have a perfect business environment. Germany and Hong Kong beat us out.

Micro Political Risk

Often industry taxes, restrictive local laws

Not only policies or laws, but actions as well Dumping only affected steel industry

Problem? Some MNCs are treated differently than others in the same country

Examples EU has stopped mergers to prevent

monopolies South American government is currently

encouraging exports and discouraging imports. Hurts some MNCs

Terrorism and Its Overseas Expansion

Terrorism- violence or force used to promote political or social views ultimate goal-government and citizens change

policies and yield to terrorists’ beliefs

Types of Terrorism:1. classic2. amateur3. religiously motivated

effects on MNC

Expropriation Risk

Expropriation- business seizes host country and provides little compensation

Indigenization laws- required nationals to hold a majority interest in an operation likely in non-Western countries

strategies to minimize expropriation operational profitability

Managing Political Risk

Comprehensive framework- considers and identifies all political risks

Political risks1. transfer2. operational3. ownership-control

General nature of investment1. conglomerate2. vertical3. horizontal

3 sectors of economic activity4. primary5. industrial6. service

Techniques

3 strategies:1. relative bargaining power analysis2. integrative, protective, and defensive

techniques3. proactive political strategies

Relative Bargaining Power Analysis MNC bargaining power stronger than

host ex. technology

depends on many factors perception of MNC

Integrative, Protective, and Defensive Techniques

Integrative techniques enable the overseas operation to become a

part of the host country’s infrastructure Protective and defensive techniques

discourage host government interference more likely to be used by companies

ex. Microsoft technology

Political Decisions Affecting MNCs

How can MNCs respond to unpredictable government decisions?

Proactive Political Strategies:• Lobbying, campaign financing, advocacy, and other

political interventions designed to shape and influence the political decisions prior to their impact on the firm.

• They are designed to develop and maintain ongoing favorable relationships with government policy makers as a tool to mitigate risk before it becomes unmanageable.

Managing Alliances

Another dimension of management strategy related to political risk and government relations is managing relationships with alliance partners.

Example: Motorola in China has many alliances with state-

owned enterprises, like its joint venture with Nanjing Panda Electronics to produce a personal computer. The heart of the computer will be Motorola's Power PC Chip.

Primary factors motivating firms to enter into International Strategic Alliances:

• Faster entry and payback• Economies of scale and rationalization• Complementary technologies and patents• Co-opting or blocking competition A fundamental challenge of alliances is managing operations with

partners from different national cultures. Cultural differences create uncertainties and misunderstandings in the relationship.

Can you think of any Misunderstandings a business might have with its international alliance?

Partner selection and task selection criteria have been identified as critical variables that influence alliance success or failure

The Role of Host Governments in Alliances

Host Governments are active in mandating that investors take on partners, and these mandates can pose managerial and operational challenges for MNCs

When host governments do not require alliances or joint venture as a condition for entry, many MNCs find that having alliances or joint venture partners is an advantageous. Established alliances with local partners primarily gain market access and contend with local regulations.

Starbucks Coffee & Beijing Mei Da Coffee Company working together.

The Joint venture is focusing on the training of the local managers. Recruits are sent to Washington to learn how to make various types of Starbucks Coffee..

• “People don’t go to Starbucks for the coffee but for the experience”

MNCs are going back and renegotiating old contracts to seek improvements.