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Political and Economics Risks of Multinational Corporations (MNCs)

The most popular way for international expansion is for a local firm to acquire foreign companies. One of the most benefits for international expansion is global distribution capability that helps expanding the market share. In the meantime, domestic trade is far less risky than International trade.
In International trade, the exporter is most often not familiar with the buyer, and therefore is not sure whether the importer is creditworthy. If inventory is sold abroad and the buyer refuses to pay, it may be impossible, for the seller to have any legal resort to receive any payment from. In addition, there is a greater risk of political instability.

1. Discuss how political risk differs from country risk and in what ways political events in a foreign country can affect local financial operations of an MNC.
2. Do you believe that there are financial and/or operational measures MNC can take to eliminate political risk related to foreign investment project? If not, in your opinion, can MNC at least minimize the political risk? Please discuss how.
3. What are the advantages and disadvantages of having a global distribution capability? Do you think that the advantages are more than the disadvantages? Please discuss
4. Do you believe that foreign investments exposing multinational corporation to political and economic risks? Please explain the rationale behind your discussion.

Solution Preview

1. Discuss how political risk differs from country risk and in what ways political events in a foreign country can affect local financial operations of an MNC.

Guide resources:

You can make use of Jakobsen's article on "Political risk for multinational companies: Empirical evidence from a new dataset" retrieved on April 21, 2014 from http://www.wiscnetwork.org/porto2011/papers/WISC_2011-560.pdf.

Investopedia (2014). Definition of 'Political Risk'. Retrieved on April 21, 2014 from
http://www.investopedia.com/terms/p/politicalrisk.asp.

Investopedia (2014). Definition of 'Political Risk'. Retrieved on April 21, 2014 from
http://www.investopedia.com/terms/c/countryrisk.asp.

Guide discussion/notes:

Country risk is more wider in scope that a political risk. A country risk "include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk, which is the risk of capital being locked up or frozen by government action" (Investopedia, 2014).

The article by Jacobsen noted these political risks affecting MNCs from country to country:
Nigeria - kidnappings and acts of sabotage directed against the oil industry by rebel groups or grievance - ridden local communities;
Iran - economic sanctions being implemented by foreign states because of Tehrans purported nuclear ambitions;
Burma, a military dictatorship, the actions of (often foreign-based) activists has ...

Solution Summary

This guide shows that multinational corporations were, and still are, subjected to political and economic risks. The brief discussion emphasized that there is a solution to mitigate these risks.

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