Exam 10: Managing Political Risk, Government Relations, and Alliances

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Once political risk has been analyzed by a framework, quantitative analysis, or both, the MNC then will attempt to manage the risk further through a carefully developed response. The MNC can also proactively improve its relationship with governments by means of preemptive political strategies to mitigate risk before it appears. A way by which MNCs attempt to protect themselves from expropriation or minimize government interference in their operations is to use integration and the implementation of protective and defensive techniques. Integrative techniques are designed to help the overseas operation become part of the host country's infrastructure. The objective is to be perceived as "less foreign" and thus unlikely to be the target of government action. Some of the most integrative techniques include (1) developing good relations with the host government and other local political groups; (2) producing as much of the product locally as possible with the use of in-country suppliers and subcontractors, thus making it a "domestic" product; (3) creating joint ventures and hiring local people to manage and run the operation; (4) doing as much local research and development as possible; and (5) developing effective labor management relations. Protective and defensive techniques are designed to discourage the host government from interfering in operations, mainly by avoiding complex ties to the host country's economy. In contrast to the integrative techniques, these actually encourage nonintegration of the enterprise in the local environment.

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Expropriation is the seizure of businesses with little, if any, compensation to the owners. Such seizures of foreign enterprises by developing countries were quite common in the old days. In the main, expropriation is more likely to occur in non-Western countries that are poor, relatively unstable, and suspicious of foreign multinationals. Some firms are more vulnerable to expropriation than others. Often, those at greatest risk are in extractive, agricultural, or infrastructural industries such as utilities and transportation, because of their importance to the country. In addition, large firms often are more likely targets than small firms, because more is to be gained by expropriating from large firms. MNCs can take a wide variety of strategies to minimize their chances of expropriation. They can bring in local partners. They can limit the use of high technology so that if the firm is expropriated, the country cannot duplicate the technology. They also can acquire an affiliate that depends on the parent company for key areas of the operation, such as financing, research, and technology transfer, so that no practical value exists in seizing the affiliate.