Topics: Risk, Risk management, Investment Pages: 16 (5687 words) Published: February 5, 2015
Chapter 10: Managing Political Risk, Government Relations, and Alliances

Learning Objectives and Chapter Summary

EXAMINE how MNCs evaluate political risk.

Political risk is the likelihood that the foreign investment of a business will be constrained by a host government’s policies. In dealing with this risk, companies conduct both macro and micro political risk analyses. Specific consideration is given to changing host-government policies, expropriation, and operational profitability risk.

PRESENT some common methods used for managing and reducing political risk.

MNCs attempt to manage their political risk in two basic ways. One is by developing a comprehensive framework for identifying and describing these risks. This includes consideration of political, operational, and ownership-control risks. A second is by quantifying the variables that help constitute the risk.

DISCUSS strategies to mitigate political risk and develop productive relations with governments.

Common risk management strategies are the use of relative bargaining power, integrative, protective, and defensive techniques, and proactive political strategies.

DESCRIBE challenges to and strategies for effectively manage alliances.

Effective alliance management includes careful selection of partners, defining the tasks and scope of the alliance, addressing cross-cultural differences, and responding to host-government requirements.

The World of International Management: Shell’s Russian Roulette

Summary: In 2006 Royal Dutch Shell owned a majority stake in the Sakhalin0II energy project, the largest oil and gas project in the world. However, Russian took (at very discounted prices) half of that share for its Russian-based Gazprom, despite the fact that the country had depended on the foreign investment to get its production infrastructure up and running. The agreements in the 1990s had been fair and profitable for both sides until cost overruns soured the government. Shell was forced to choose between withdrawing from Russia or accepting its new demands; Shell stayed. BP faced similar problems: disagreements over strategy, visa problems, criminal investigation of the CEO, stalled talks. BP eventually “sold” its 50 percent stake in TNK-BP.

The World Bank in 2013 ranked Russia 178th out of 185 on dealing with construction permits. Corruption, red tape, security concerns, and overall lack of faith in governmental policies result in an especially difficult political environment. Today the business environment is a deterrent for growth.

Suggested Class Discussion:

1. What made Russia such an attractive opportunity for Shell? What changed?

2. How have Russia policies affected foreign oil companies in the country? Do you think the companies brought their problem on themselves? Why or why not?

3. How can a political risk assessment help international managers quantify the risk in a particular country prior to making an investment?

Related Internet Sites:

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Chapter Outline with Lecture Notes and Teaching Tips

The Nature and Analysis of Political Risk

1) The unanticipated likelihood that a foreign investment will be constrained by a host government's policies is known as political risk. Political risk is especially evident in emerging economies.

2) Examples of risk factors: freezing the movement of assets out of the host country, placing limits on the remittance of profits or capital, devaluing the currency, appropriating assets, and refusing to abide by the contractual terms of agreements previously signed with the MNC

3) China’s recent moves: price controls, currency restrictions, limits on sale of state-owned companies—may reflect economic slowdown, but will make it more difficult to move money in and out of the country....
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