International businesses are among the ideal platforms where communities can grow and develop. This is attributed to how they help create employment in different sectors and invest in the underdeveloped aspects. Although an international business can benefit a community, political risks may result in most of these businesses collapsing. Common political risks that can be detrimental to international businesses include government interference and expropriation, political violence, policy changes, and transfer and currency conversion. Maintaining the stability of the aforementioned factors will help in the growth of international businesses.
Keywords: international business, political risk, expropriation, policy changes.
Managing Political Risk in International Business
The stability and survival of our societies in this modern era are guided by a wide range of aspects with one of the common one being political aspects. As a result, the chances of a political risk arising in any sector, including international businesses, are very high. However, different countries have distinct values and how they perceive a political risk (Meissner, 2016). For instance, how the U.S. may perceive a political risk may differ from how countries in the Middle East perceive the same. Based on such aspects, every political move made by different countries must be adequately thought of before its implementation because it can positively or negatively impact international business (Meissner, 2016). On most occasions, countries that worry about political risks believe that when particular political upheaval arises, their businesses may be negatively affected. Although it is difficult to predict whether a particular activity may lead to political risks, it is essential to note that it happens in democratic and totalitarian countries (Meissner, 2016). In international business settings, political risks arise at both the macro and micro levels. Some causes of political risks may arise due to government interference, transfer and conversion, and political violence. In aspects of government interference, it can lead to implementing measures on foreign investments such as seizing, confiscating, or expropriating a company’s investment (Meissner, 2016). Implement such measures in an integration setting may result in most of these businesses collapsing. As a result, political risks must be effectively addressed before causing detrimental effects (Meissner, 2016). This essay, therefore, seeks to expound on how political risks may not be ideal for international businesses and the strategies that can be adapted to address the emerging political risks.
Description of the relationship between managing political risks and the core values of community and development
International businesses are among the ideal platforms where communities can grow and develop. This is attributed to how they help create employment in different sectors and invest in the underdeveloped aspects. Although an international business can benefit a community, political risks may result in most businesses collapsing. For instance, political instabilities in the concerned countries may affect the business and communities at large (Meissner, 2016). Additionally, the failure to involve the communities in the government legislative activities may predispose the communities at risk because not all laws passed are beneficial. Some may increase the cost of living or even pass policies that may support business activities that may pollute the environment. This may lead to a reduction in the general quality of life and development of the community.
Secondly, political risks in any country lead to a reduction in the equity ratios and a reduction in foreign direct investment (FDI). When a community experiences a reduced FDI, it makes a community experience reduced economic growth and emergence of issues such as wage gaps, inequalities, corruption, and a diminished value of international equities (Meissner, 2016). Such aspects may lead to more detrimental issues such as the inability of a country to repay its debts and the inability of a country to repay its bond markets. Based on such aspects, managing these political risks is crucial for maintaining communities’ stability, core values, and growth.
Types of Political Risks
International business can be a risky investment even in the most stable and developed countries. Over the past decades, political risks have become more pronounced, with countries instituting several measures that can be used to manage such incidences. Different types of political risks exist and may negatively affect the sustainability of international businesses. The following parts of the essay will analyze how various political aspects negatively affect this sector.
Expropriation and government interference
Expropriation and government involvement is one of the major barriers to the effective operation of international businesses. Expropriation denotes the process whereby a given country’s government seizes all foreign assets while compensating its original owner (Kriebaum, 2012). In other words, it refers to the process by which the ownership of privately owned property is involuntarily transferred to a host country. Although expropriation may generate some money to the original owners of a given property, some involved governments may remain protracted hence keeping the final amount compensated to the owners at the lowest levels (Kriebaum, 2012). Some host countries may fail to compensate in some situations, leading to conflicts between the host countries and the expropriated firm.
When analyzing expropriation in internal businesses, it often occurs in two primary forms: direct and indirect expropriation. Direct expropriation is one of the common forms. It arises when a given host country forcibly appropriates the intangible or tangible resources through the institution of various administrative and legislative actions (Isakoff, 2015). One crucial aspect about direct expropriation is that it can be easily identified since it is open and deliberate. Most of the involved governments engage in outright seizing property owned by foreign bodies or individuals and making it mandatory to transfer their title. Direct expropriation has been witnessed in different countries (Isakoff, 2015). For instance, in May 2009, Venezuela nationalized its oil industry and took it over from the private sector. During this period, Venezuela passed a law that allowed its government to take over oil service contractors, including those owned by the U.S. and Britain (Isakoff, 2015). One strategy used by Venezuela to expropriate the oil installations was the military. This move saw the U.S. and British companies lose ownership since Venezuela brought in new workers from India and Iran. Such engagements have further seen Venezuela expropriating other privately owned corporations, including steel mills, retail stores, and cement-making factories. With Venezuela constantly expropriating ownership from investors, it currently has a variety of expropriation cases under arbitration (Isakoff, 2015).
On the other hand, indirect expropriation may occur where the government uses police powers to take over and seize businesses owned by private investors. The government way also institutes other measures that all fall under indirect expropriation. One of the ways is regulatory taking (Isakoff, 2015). This is mainly achieved by the state instituting regulatory measures such as using the powers from the police to compensate foreign investors. On most occasions, indirect expropriation does not occur under a single regulatory action but can take place through various interconnected regulations. This form of expropriation is regarded as creeping expropriation (Isakoff, 2015). This type of expropriation occurs when a given state wants to achieve similar results to those under direct expropriation by instituting various regulatory measures overs a stipulated time frame. Indirect expropriation and government interferences pose various disadvantages to the investors. For instance, as governments gain more control over foreign businesses, it may result in investors losing control of their businesses and future profits (Isakoff, 2015). Expropriation risks can be addressed by avoiding investing in certain countries, negotiations, or through power leveraging.
Fuel Supply Agreements
Fuel supply agreements are among the common aspect that plays a part in binding a foreign investor to a given country where he or she wants to invest in the oil investment sector. Fuel comes in different forms, including oil, electricity, and gas, among others. The economic benefits associated with fuel supply remain one of the most critical assets in different countries (Eichner & Pethig, 2014). Over the past centuries, different countries and investors debated the legal systems that should govern the exploration and distribution of fuel. With the debates going on, one suggested way of addressing this issue is through developing oil supply agreements (Eichner & Pethig, 2014). Fuel supply agreements on most occasions are executed between a given generating company and an oil supplier who is supposed to supply fuel to different beneficiaries in a given country. It can arise when a specific foreign investor agrees to supply oil to a given country of their preferences (Eichner & Pethig, 2014).
Fuel supply agreements are essential since they aid in guiding the operations of an investor in their foreign countries. Like any other business, fuel supply agreements may fail to be executed due to various political risks (Eichner & Pethig, 2014). For instance, the host country may decide to change the agreements and impose various regulatory measures. Although some international companies in a fuel supply agreement may continue producing and supplying fuel, the host country may decide to control and manage the business (Eichner & Pethig, 2014). This leaves the investor with the limited opportunity of having a say on what would work best for their business or not. An investor who sees such an act being imposed on their business may choose to quit and move their investments to other countries. Based on the adverse effects of political risk on international business, investors in collaboration with the host countries need to institute different measures that can be used to address such impacts (Eichner & Pethig, 2014). For instance, they can enter into a negotiating environment whereby the investor and the host country meet and agree to work based on the initial agreements. Although such a move may work for a given ruler, a new ruler may come in and change the agreement based on their preferences. Investors need to take caution and analyze the political climate and qualities of the government where they want to venture into business with before investing.
Transfer and Conversion
When engaging in an international business, the investors may be required to convert money from one currency to another. However, most investors may experience transfer risks in the host countries where they experience problems converting money from one country to another. Transfer risk affects various international businesses and can be attributed to a wide range of political factors (Cavusgil et al., 2014). Most transfer risks often arise due to changes in the value of money, restrictions imposed on currency exchange, and the value of a given set of goods. In incidences involving goods, most investors may get the supply of materials from other countries. However, when they want to pay for the goods, the host country may see that some of its foreign reserves are rapidly leaving the countries. This aspect may result in the central bank instituting measures to prevent the country’s currency movement without getting approval (Cavusgil et al., 2014). In the long run, instituting such regulations makes it impossible for investors to make payments or even get the goods needed to run their businesses.
The other aspect related to currency is the convertibility risk. This type of risk often arises when a given buyer has already received their goods as orders. However, ongoing to make payments, the buyer’s government does not allow the conversion of its local currencies to that of other countries (Cavusgil et al., 2014). Some of the primary factors that may lead to convertibility risks include wars or a huge negative trade balance.
Fluctuations in the exchange rates are an additional factor that may negatively affect international businesses. On most occasions, currency fluctuation may arise from the floating exchange rate system. The demand and supply of different currencies are among the main factors that can predict the stability of given currencies (Cavusgil et al., 2014). When a given country is experiencing fluctuations in its currencies, it can lead to detrimental impacts on the economy of the affected country, remittance inflows, and businesses both domestic and international. Therefore, the appreciation or depreciation of a given country’s currency may positively and negatively affect businesses. When analyzing the international business sector, when the investor relies on the importation and exportation of supplies from other countries, currency fluctuations may have severe effects. For instance, when an investor had projected their profit to $ 6 million, any fluctuations in the local currencies may reduce these profits to $ 5 million (Cavusgil et al., 2014). However, if the currencies remain stable, a business may reap more profits. Apart from supplies, currency fluctuations can also lead to other unforeseen consequences. For example, currency fluctuations may lead to the business spending more on fuel, increasing overall shipping costs. Risks involving transfer and conversion can be prevented by selecting one type of currency to trade with. Additionally, ensuring political stability can be an additional way of ensuring currency stability (Cavusgil et al., 2014).
Political Violence
Political violence can take different forms, including terrorism, wars, and civil strife, among others. When the different forms of violence are politically motivated, it can have far-reaching consequences to the domestic and international markets. For instance, when a prospective country has various incidences or terrorist attacks, it may instill fear in investors, preventing them from investing in different educational and business sectors (Saha & Yap, 2017). Additionally, a country experiencing political violence such as terrorism may also instill fear in the residents, amplifying individual attacks. Different countries have experienced political violence, which has resulted in the destruction of different businesses, leading to losses among investors. For instance, in Ethiopia, the emergence of violence in September 2017 resulted in certain ethnic groups demonstrating against discrimination that they were constantly facing. This move led to the local and government engaging in different confrontations and protests (Saha & Yap, 2017. During this period, the locals targeted international companies that they believed were received favors from the government. This resulted in most of the investors losing their investment to looters.
When engaging in international businesses, political investors need to ensure that they evaluate the political climate of a given country before investing. Following this measure will help ensure investors are aware of what they should expect in an international business setting (Saha & Yap, 2017). At the pre-investment level, an investor may prevent the effects posed by a political risk by not committing to taking part in an international setting. The other way through which impacts from political violence can be addressed is by taking insurance cover for the business and people working in the organization. Although it is good to take insurance covers, investors involved in international businesses should ensure that they take the covers in very hostile countries. Most developed countries have political risk insurance that is easily accessible. Additionally, third-world countries also have overseas business risk insurance outfits (Saha & Yap, 2017). Suppose political violence arises and a business is destroyed either through terrorism or civil strife. In that case, the investor can be easily compensated, which may help them recover their lost assets and start up again.
Policy Changes.
Policies are an essential aspect when conducting international business. On most occasions, different states are tasked with drafting and implementing rules and frameworks that help regulate domestic and international businesses (Odell, 2014). Creating such policies often lays a foundation for different businesses to compete favorably under a given environment. One aspect of government institute policies is that they change from time to time. Such changes may negatively or positively influence the growth of businesses. One policy that can affect international businesses is taxation policies (Odell, 2014). When a host country raises its corporation tax, it will increase the cost of operating businesses. Additionally, an increase in the interest rates can also lead to a rise in the cost of running businesses and reducing expenditure from customers. This may, in the long run, lead to a reduction in business sales, leading to losses (Odell, 2014).
Policy changes can be managed in different ways. For instance, the government should involve different individuals, including investors, when drafting certain policy changes. This will result in every person giving their opinions regarding the ideal measures that should be adopted. Additionally, international businesses can manage the risks of policy changes by taking the short-term profit maximization policy (Odell, 2014). Adopting this policy will help ensure that investments are made quickly, hence saving an investor the chances of incurring massive losses.
Conclusion
Political risks serve as a threat to the growth and expansion of international businesses. Some of the common political risks include expropriation and government interference, political violence, and policy changes. Foreign investors should make sure that they analyze the political environments of different countries before investing. Additionally, taking insurance covers may help shield businesses if a risk caused by politics leads to detrimental effects.
References
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