Essay: Political risk

Multi National Economies are confronted with the political risk at home country as well as host country. In host countries, political risk associated with risky action by the ruling government and politically related institution and others like non-government extremist/green activities group. At the same time political risk that directly connected with an investment like sanctions or policies that blocked investment.
Globally, many countries anticipate the political risk. Investors, Government and Non ‘ government businesses directly or indirectly oppose political risk. The nature of political risk is like political instability, unpredictable political and government changes, regulating bodies strained and military nature of control. Based on the study by Atchison, David W & David J, 2003 political risk can be called as geopolitical risk and it is considered as an important factor for long term investment progressing. The study also listed out political risk, namely country’s political instability, terrorism and war, other closest political countries and expiry of export and import license. In addition to it the other political risk are breach of contract, restrictions on currency transfer and convertibility, expropriation, political violence (war, civil disturbance and terrorism), non-honoring of government guarantees, adverse regulatory changes, and restrictions on FDI outflows in home countries. Multi National Economies are confronted with the political risk at home country as well as host country. In host countries, political risk associated with risky action by the ruling government and politically related institution and others like non government extremist/green activities group. At the same time political risk that directly connected with an investment like sanctions or policies that blocked investment.
Political risk in the insurance industry is classified based currency exchange factor, violence regards to politic, void of contract due to breach, not delivering financial obligation. Developing countries taken initiative to minimize barriers in regards of doing the business. Political risk is listed as one of top concern and followed by stability of macroeconomics and not forgotten the access to the finance. Other than the mentioned expropriation like outright nationalization, changes, particularly in regulation, agreement and intervention by the government. At the beginning stage of the operation the political risk believes to be high. Businesses are aware of political risk pertaining operation in developing countries. In the event of the commodity price rise due to the financial crisis, therefore the government will take the action to renegotiation the concession and royalty agreement.
As these enterprises spread their operations into new destinations in developing countries, they become more aware of political risk. This has contributed to the political risk. In a global environment of rising commodity prices, as was the case prior to the financial crisis, some governments renegotiated concession and royalty agreements. As emerging economies embrace decentralization, local authorities, such as provincial or municipal governments, are expected to take on increasing responsibilities in providing infrastructure services. Lack of commitment by central government resulted in sub-sovereign fail to fulfill the commitments. Transfer and convertibility become other political risk which is very much related to transaction related to current else capital account, restricting outflow of foreign exchange. Ultimately, during financial crisis period the political risk still remains very high. The survey declared that political violence, terrorism and antigovernment movement of extremist or terrorist risk has increased the political risk. Breach of contract will take place in the event of political violence. The financial and economic turmoil related to the political risk. Global financial crisis contributes to the high political instability.
Social unrest has also become a notable political risk. Issues like unemployment and insufficient funding for social programs will develop high political risk in relation to the social unrest. Issues like the balance of payments out which affect the current account balance influence the commodity prices. Apart from that the foreign reserves instability due to the substantial countries pulling out as the result from financial crisis.

The common type risk that can be easily explained are divided into take over risk, protest risk, physical risk and economic risk. The takeover risk is anticipated by politically unstable countries whereby the ruling government not democratically elected. In the recent revolution that took place in Cuba, many American companies are expropriated. Democratically elected countries’ government takes over industries or companies. Dominic Republican government expropriated US owned company, namely Sierra Bauxita Dominicana in 2008.The owner has ceased the operation to avoid bearing continuous financial loss. The second type of the risk is called protest risk. Local members from home based countries may protest foreign country’s business entry. In 2004 protestors emerge in the form of Brazilian Environment group and protest oversea company in this case will be Alcoa a US based company invested to develop hydroelectric power plant. Alcoa strategically invests more money, especially on compensating large number of protestors. Royal Dutch Shell also works closely with environmentalist to minimize the political risk. The third type of risk is called physical risk which is taken in the form of violence which placed on employees. The oil producing region, namely Niger Delta in Nigeria subject to the violence by local groups in the form of attacking company premises and kidnapping foreign employees and demand more investment to be spent on local. Shell Dutch has to hire more security forces to provide the protection. At the same time Shell also engaged with negotiation to build schools for children, hospital for the sick and create more job opportunities for local residents. The fourth political risk is called economic risk. It is found in the form of higher tax imposed on product or industries. Zimbabwe had faced high inflation in 2000. The telecommunication company, namely Econet minimizes the risk of sending the technician to the other African region where they operate to support their employees stay employed and not starved.

Source: ChinaStones - https://china-stones.info/essays/business/essay-political-risk/


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