INTERNATIONAL BUSINESS ENVIRONMENT

Political Risk and Multinational Corporations

(Contemplating Political risks for Foreign Direct Investment)

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ABSTRACT

In the age of globalization huge Multinational Corporation seek to maximize profits by expanding their business units to different regional markets from their home location to benefit from the lack of competition from local firms and to receive the advantage of outsourcing to different regional locations. Even though these multinational companies are rightly expanding their business they have to look out for certain problems that can arise out of fact that they have opened their business units in countries whose government, people and system all are strangers to them. Due to these reason corporations that are operating in problem prone areas such as the Middle East and North African (MENA) and South Asian region are at the risk of magnified political risk. This paper examines the political risks Multinational firms can be exposed to, along with the sources through which they arise and then attempts to provide the remedies to overcome these problem. Also a critical assessment of these remedies is attempted to check whether the preparation for the worst case scenarios are useful or not in helping a corporation to cope with the outbreak of a possible political threat.

ABSTRACTi

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Introduction1

Major Forms of Political Risk2

Political Risks for Multi-National Corporations2

i.Government Intervention:2

ii.Social unrest, War Violence and Acts of Terrorism:3

iii.Pressures from Non State actors:3

Cause and Sources for the rise of Potential Political Risks:4

Assessment of the Remedies for Prevention of Possible Political Risks8

Conclusion11

REFERENCES12



Political Risk and Multinational Corporations

(Contemplating Political risks for Foreign Direct Investment)

Introduction

Political risk is a term that encompasses a broad variety of circumstances affecting the daily routine of people, nations and organizations but with relevance to the topic it can briefly be described as the events, processes, characteristics of a socio-politico nature possessing the potential to directly-indirectly affect the goals of foreign direct investors negatively. (Jakobsen 2011, Pg: 3)

Foreign Direct investments refer to the capital transactions between organizations of one country into the organizations or outlets of another country to meet outsourcing objectives, gain profits or enter uncharted markets to evade competition and may also be used to gain monopoly of profits and business.

The relationship of politics with international business and their foreign direct investments is significant. Any organization specially a multi-national corporation contemplating to invest in another country needs to be sure that the host country has the preferable circumstances that will meet the objectives of outsourcing such as lower production cost, market advantages and higher profits. There is no standardized form of political risks and every country has it own unique combination of socio-politico risk factors, that arise out of different sources effects and actors (Jakobsen, 2011, pg: 6) for example: MNCs in Iran are susceptible to economics sanctions and multi-national corporations investing in Nigeria are at risk from rebel groups, kidnappings and sabotages from grievance-ridden locals (Jakobsen, 2012, pg: 10). Thus, it can be established that political risk plays an important role in the contemplation of foreign direct investment by multi-national corporations to ...