Political Risk Management of Investment of UK in Saudi Arabia - Essay Example

Introduction

Political risks can be classified into three categories:

• Firm specification risks that are commonly referred as micro risks. They are political type of risks that have effect on Multinational Enterprises (MNE) at the corporate or project level. An MNE is faced with foreign exchange and business risks.
• Macro risks are also referred to country specific risks. They are the type of political risks that have effect on the MNE at the project or corporate level but has origination at the country’s level (Saikal, 2004). The most common political risks that are categorized at the country level are institutional and cultural risks.
• Global political risks are the political risks that have effect on the MNE at corporate or project level which originates from the globe level. For instance, environmental concerns, poverty, terrorism, anti-globalization movement and cyber-attacks.

Political Risk Assessment

Prediction of the Micro Risk

From a multinational firm viewpoint, assessment of the political stability of the host country must be the first step with an objective of anticipation for effects of the political type of changes that are based on activities of a certain firm (Glambosky, Gleason, & Murdock, 2015). Many of the foreign firms that have operations in Saudi Arabia have differing degrees of vulnerability in regards to Saudi Arabia regulations and policies. Oil extractive firms, multinational banks, private insurance carriers, manufacturing firms and the world wide hotel chains have exposure to politically inspired limits and restrictions. It is therefore important to make advance protective steps that will help in minimizing the unplanned type of risks.

Prediction of the Macro Risk

Prediction of macro risk helps multinational firms, defense planners, and government foreign policy decisive units in making decisions (AlJohani & AlQahtani, 2016). It will include the analysis of Saudi Arabia historical stableness, indications of the stability of their economy, the evidence of the current dissatisfaction or turmoil and the religious and cultural activities. This will be assembled from local Saudi newspapers, monitoring of their television and radio broadcasts, and by contact with those already active investors in oil in Saudi Arabia.

Prediction of the Global Specific Risks

It is the most difficult type of prediction among the three types. Since there is much importance in predicting terrorism, there is much anticipation of looking at the new indices that are the same to a country’s major indices, but of which is dedicated to observing their locations, types of terrorist threats, and the potential targets.

Firm Specific Risk

These are risks that confront the investor and they include governance and foreign exchange risks.

Governance Risk

It is the ability of exercising efficient control over an investor’s way of operation within a country’s political and legal environment. Governance is a subject with similarities with the consolidated profits that is to be addressed for the subsidiary and the individual business unit of the investment as a whole (Kyaw, Manley, & Shetty, 2011). The important risk on the subsidiary level of an investment emerges from conflict on goals between the objective of the host country and operating private firms that have a personal influence for their own benefit. Many of the governments have the responsibility of their own citizens. Conflicts between the objectives of an investors and the hosting government usually arise on issues such as perceived infringement on the national sovereignty, economic developments, sharing and not sharing interests with the locals, foreign control of the key industries have, the use of foreign workers versus the domestic and the exploitation of natural resources.

Investment Agreement Negotiations

The agreement for investment displays responsibilities and rights of both the host government and the foreign investor. The availability of an investor is mostly regarded by the development requiring host country as a specific foreign location sought by an investor. Both parties are always with alternatives and create room for appropriate bargaining. The investment agreement should have clear policies on managerial and financial issues with inclusion of the following:

• The manner that funds flow, for instance, dividends, royalties, management fees, loan repayments and patent fees.
• The authority of exporting to third country markets.
• Basis on setting of the transfer prices.
• Methods that are used in taxation include the means and type of which the rate base is to be determined.
• Permission to capital markets for the host country mostly on long term borrowing
• Controlling of price if any that is to be applicable on the market of the host country
• Requirements of import of raw materials and components versus the local manner of sourcing
• Provision of disputes arbitration

Guarantees and Investment Insurance

Investors to some extent make transfers of political risks to the home country public agents using the guarantee program and investment insurance. Such programs are used by many of the developing countries for the protection of the investments by the nationals in countries that are developing. The insurance coverage on the political risks has its own definitions on insurance purposes:

• Inconvertibility is the type of risk that investors cannot change to profits, income or fees, royalties.
• Expropriation being a type of risk that the host country takes a step in a year that prevents the investor from having full control of the usage of the property.
• Business income provides compensation for the loss income to the business that results from political violence that will directly cause damage on assets of the foreign investor.
• Insurrection, revolution and civil strife that apply to the damage of the actual physical property of the insured, though, inability of foreign subsidiaries to make loan repayment due to war can be covered.

Operation strategies after an Agreement

The essence of adaptations is keenness of the host country’s priorities and activities of the firm with continued value to the host country (De-Jong, 2010). Such approaches have assumptions that the host government is acting rationally to seek its self-interest based on ideas that the firm should reduce conflicts on their goals. The future position of bargaining is enhanced by the consideration on policies of logistics, marketing, production, finance and the organization.

Local sourcing

The host country requires that foreign firms should purchase components and raw materials from the locals as a way of increasing employment opportunities and maximize country’s inputs.

Facility location

To minimize risk, the production facilities are given locations. The natural geographical location on different phases of production can be market oriented, foot loose or resources oriented (Al-Wahbi, Aldakhil, Al- Turki, Al-Kohlani, El-Kayali, & Al-Showmer, 2016). For instance, oil is drilled around Saudi Arabia; there is no choice that exists as to where the activity will occur. They have reduced financial exposure and political risk for aiming at higher refining and transportation costs.

The control of the transportation means

These limits on transportation are an important way of reducing the political risk. Oil pipelines, cross oil tankers, national frontiers, refrigerated ships and railroads are controlled sometimes for the influence of bargaining powers of companies and countries.

Technology control

The controlling of the processes and key patents helps in political risk reduction. The technology controls work well when the foreign firms are consistently enhancing its technology.

Control of the Markets

It is a common strategy that helps in increasing the bargaining power for the firm. The investors prefers to serve markets in the globe from its own choice but basing the actual decisions on the considerations of transportation cost, tariff barriers, competition and political risk exposure (Malik, Sandholzer, Khan, & Akbar, 2014).

Equity Base

Foreign subsidiaries have financing with a large proportion for local debts and a thinner equity base. Local creditors are endangered if the debts from banks that are locally owned weaken the financial viability of the host government.

Blocking funds

Based on the size of shortages of foreign exchange, Saudi Arabia might consider to be making approval on all funds transfers that are done to the UK and this will preserve the right of setting priorities on the usage of limited foreign exchanges favoring necessities as compared to luxuries (Marshall, Ojiako, & Chipulu, 2014). The investment will react on the blocked funds in three phases:

• Before the actual investment, analyzing of the blocked funds will be affected by the investment expected return, optimal connections with subsidiaries and accepted local financial structure.
• The investment firm can attempt to make movement of funds based on repositioning techniques
• Funds not movable are to be reinvested in Saudi Arabia in a way that will minimize deterioration of the real value regarding depreciation or inflation.

Ownership Structure

Several countries have required that the investment firms should share their ownership with the local citizens or firms. To operate in Saudi Arabia, the investment company should act as a joint venture

Human Resource Norms

The investments are mostly directed by many countries to make employment to of the local rather than importing experts from the foreign countries. It is difficult to fire employees who are showing productivity in the investment due to the hosts union contracts and labor laws. The cultural difference will limit the investment staffing policies.

The Religious Heritage

The current hostile environment that surrounds Saudi Arabia and Middle Eastern countries is being ruled by some clerics who are religious extremist (Alzahrani, Abaalkhail, & Ramadan, 2016). The root cause of this conflict is based on religious fervors to some and politics against others.

Corruption and Nepotism

Investments have to deal with corruption and nepotism for a relative number of foreign investments localities. Bribery is not limited with the emerging investments on Oil markets since it is a common problem even to industrialized countries.

Intellectual Property Rights

Rights of investments and individuals have been with infringements cases to rogue businesses in host countries. The exclusive copyrighted creative materials and all countries do not observe the patented technology. Investors have to make rightful protections on every intellectual property by the legal process. Complication of this matter remains to be seen whether host governments have the strength of enforcement in the host’s country or the rules and regulations are manipulated.

Protectionism

This are the attempts made by national governments in protecting certain industries to be away from foreign investments? The protection is usually based on agriculture, defense and the “infant industries”

War and Terrorism

Saudi Arabia is neighbored to with Afghanistan and Iraq, countries that have literally affected every individual on earth. Many of the terrorism acts are expected to continue in the future.

Crisis Planning

Investments are subject to damages by being on the harm’s way. Nearly every year, Saudi Arabia has to experience outright war with other countries, ethnic strife or terrorism (Bohlaiga, 2014). Resolving of the ethnic strife and war will never be achieved with investment countries. Crisis planning is a major activity for investment at both the parent level firms and the foreign subsidiaries. Crisis planning involves the training and education given to employee and management on how to deal with different scenarios of violence.

Environmental Concerns

Investors are accused of exporting environmental issues to other countries; the investments that are frustrated with pollution in their own countries are relocating these issues to countries that have a weaker control mechanism. This is dependent on the government to address measure of controlling pollution that is in its country.

Cyber attacks

The immense growth of the internet is fostering a new scam of cranks and artist that are disrupting the value of the World Wide Web. It is both an international and domestic issue because of the complexity and visibility on the internal information systems.

Conclusion

The political risk factors that impact the investment of UK in Saudi Arabia are significant. The investment in Saudi Arabia will have many challenges that are not to be assumed. Based on the location of Saudi Arabia and its political leadership are the major factors to consider. As a religion, Muslims have different ways of operation in their working areas and have leaders that they listen too for management. A larger of part of the investment portrays that investment is likely to have more negative impacts in comparison with positive impacts based on the political risk factors.