The Political Risk that Shell Faces in Nigeria - Case Study Example

? In what ways can political risk impact on the operations of an international company? With reference to a company of your choice, evaluate the different methods for quantifying the level of political risk that the company might face. 1. Introduction The development of business activities in the international market is related to a series of risks. Firms that operate globally need to take a series of measures in order to ensure that no major threats will appear in regard to their activities in one or more host countries. Political risk is a common threat of this type. In accordance with Daft (2008) political risk is a common problem for international companies. As in its context, political risk is described as ‘the risk of loss of assets, earning power or managerial control due to politically based events or actions by host governments’ (Daft 116). From a similar view, Sharan (2011) notes that political risk is a term used in order to show the response of international companies to ‘political scenarios developed in host countries’ (Sharan 229). The aspects of political risk that international companies are likely to face are presented and analyzed in this paper. Reference is made to a specific company, Shell, which is well established in the global market. The political risk that Shell faces in Nigeria is used as an example in order to show that the specific type of risk is inevitable for firms operating around the world. Moreover, under certain terms this risk can severely threaten organizational activities in the host country, unless appropriate measures are developed in advance. 2. Political risk as a factor influencing the operations of international companies The political environment of a particular country can highly affect business operations in all its industries. Foreign firms operating in this country are also likely to be influenced by changes or turbulences in the local political environment. The exposure of the firm to such risk is often difficult to be controlled, especially in countries where political instability and social conflicts are common phenomena. Daft and Marcic (2010) refer to a specific type of political risk: the political instability caused by ‘riots, revolutions and civil disorders’ (Daft and Marcic 88). Moreover, there are countries, which are most likely to face such problems, compared to others where political instability is rather low. For example, in ‘Indonesia and Sri Lanka’ (Daft and Marcic 88) social conflicts are quite common, increasing the political risk for foreign firms operating in these countries. Moreover, Aswathappa (2010) notes that political risk can affect business activities ‘in different ways’ (Aswathappa 131). For example, in the context of political risk, an international firm may have to face the following problems: ‘a) expropriation of its assets, b) barriers to repatriation of profits, c) loss of technology, d) campaigns against foreign goods’ (Aswathappa 131). The above risks are described as macro – risks, being differentiated from micro – political risks, such as: a) ‘the kidnappings of employees, the increase of taxation or terrorism’ (Aswathappa 131). Moreover, Aswathappa (2010) notes that political risk can affect business activities ‘in different ways’ (Aswathappa 131). For example, in the context of political risk, an international firm may have to face the following problems: ‘a) expropriation of its assets, b) barriers to repatriation of profits, c) loss of technology, d) campaigns against foreign goods’ (Aswathappa 131). The above risks are described as macro – risks, being differentiated from micro – political risks, such as: a) ‘the kidnappings of employees, the increase of taxation or terrorism’ (Aswathappa 131). On the other hand, Mckellar (2010) notes that important information on the political environment of a particular country can be retrieved through the international organizations, usually non-for-profit organizations, operating within this country. In any case, political risk can highly affect the activities of international companies. For this reason, the assessment of a country’s political environment is considered as of key importance for the international firm that is interested in entering the above country. The assessment of political risk may have various forms; usually a series of factors are used as the basis for evaluating the level of political risk involved in a particular country. Such factors are: ‘government stability, socioeconomic conditions, internal conflicts, regulatory environment, quality of infrastructure and corruption’ (Neelankavil 14). Using these factors, managers of international companies can develop a country – risk analysis that reveals the perspectives for foreign firms that are interested in entering the specific country. Valuable tools for assessing the political risk involved in a particular country are the following: a) the ‘Index of Economic Freedom’ (Daft and Vershinina 135), which shows the level at which political environment is likely to affect the business activities within a specific country, b) the ‘Corruption Perception Index’ (Daft and Vershinina 135), a list that shows the status of 91 countries worldwide in terms of corruption. In addition, an international company can buy ‘a political risk insurance’ (Daft and Vershinina 135), eliminating, or just controlling, its losses in case of changes or turbulences in the political environment of the host country, in which the specific company operates. Punnett (2009) notes that the policies developed by international firms for assessing political risk are likely to be differentiated, in accordance with the local political conditions, the resources available and the firm’s strategic plan as of the payback of the particular project, i.e. the entrance of the firm in a host country. This trend is reflected in the practices followed by international firms for assessing political risk: a) in Xerox, ‘an informal quarterly report’ (Punnett 66) has been used for showing the factors that are most likely to influence the political environment in the countries where the firm operates, b) the Banking of Canada has introduced ‘a ranking method, based on economic, political and social criteria’ (Punnett 67), c) managers in Chemical Bank use a series of ‘political spreadsheets’ (Punnett 67) which are based on the characteristics of the political environment of each country. 3. Evaluation of the different methods for quantifying the level of political risk that a company might face – the case of Shell in Nigeria In accordance with Keillor and Vijay (2011), ‘kidnapping can be a common cost of doing business in Nigeria’ (Keillor and Vijay 107). It is explained that political risk for international firms that are interested in entering the specific county are mostly related to violence and social conflicts. The case of Shell is considered as a common example of the potential effects of political risk on international firms entering a host country. However, these effects have not severely affect the profitability of Shell in the particular country, a fact showing that the power of political risk on corporate activities can be effectively controlled even in countries where this risk is extremely high. Shell operates in Nigeria for about 50 years (Bremmer and Preston 2009). The performance of the company in the specific country can be characterized as quite successful. In fact, today the oil extracted in Nigeria represents ‘the 16% of the firm’s production – on a daily basis – worldwide’ (Bremmer and Preston 193). Three are the most common political risks that the firm had to face during its operation in Nigeria: ‘the lack of the government’s willingness to fund the firm’s joint ventures, the continuous social conflicts and the political instability’ (Bremmer and Preston 193). Shell has managed to face these risks by ‘turning them into competitive advantage’ (Bremmer and Preston 193). As explained above, different methods for assessing political risk are available to international firms that are interested in entering a host country. Certain of these methods are indicatively described above. In practice, the effects of these methods on the strategic choices of international firms can be differentiated. Shell, a well – known international firm has chosen to enter Nigeria despite the country’s high political risk. In the case of Nigeria, Shell managed to keep the losses related to the country’s high political risk low, using the following strategy: efforts for high profits were made, so that any losses from social conflicts and turbulences are controlled (Jensen 48). At the same time, the firm promoted the development of barriers for all foreign firms that are interested in entering the Nigerian oil market (Jensen 48). It is assumed that the firm has, primarily, estimated the political risks involved in the Nigerian market. In other words, managers in Shell have been aware for the high political risks related to the firm’s operations in Nigeria. However, because the prospects for high profits were significant, they chose to support the firm’s operations within the specific country, trying to cover the losses through the profits achieved. On the other hand, Rosenau (2009) notes that social conflicts and violence in Nigerian Delta has prevented many multinationals from entering the country. In this case, the high level of political risk has been considered as a critical factor for avoiding the entrance in the host country, despite the prospects for high profit. Shell, as explained above, has tried to keep a balance between political risks and profits and for this reason, in order to keep its operational unit in Nigeria. The use of additional methods for the assessment of the political risks related to Nigeria could possibly help the firm to improve its potentials in the Nigerian market. 4. Conclusion In accordance with the issues discussed above, the assessment of the political risk related to business activities in countries worldwide is not standardized, meaning that different approaches are available for developing such task. This means that managers in each international company can assess the political risk involved in a host country using a strategic tool, which is more feasible, in terms of the employees’ skills, the resources available and the information available. In Shell, the use of such tools for assessing the political risk involved in the country’s activities in Nigeria, could help the reduce the exposure of the firm to social and political turbulences, as explained above. On the other hand, even if the political risk involved in a host country is assessed, still the performance of an international company in the specific country cannot be guaranteed. This view is based on the fact that the events leading to political risk may appear suddenly, with no prior indication of such problem. From this point of view, the assessment of a country’s political risk should be characterized as an initiative that can limit the challenges that an international company may face in a host country; these challenges cannot be eliminated even if the political risk is fully assessed. Works Cited Aswathappa, K. International Business. New Delhi: Tata McGraw-Hill Education, 2010. Bremmer, Ian, and Preston, Keat. The fat tail: the power of political knowledge for strategic investing. Oxford: Oxford University Press, 2009. Daft, Kendrick, and Vershinina. N. Management-International Edition. Belmont: Cengage Learning, 2010. Daft, Richard, and Dorothy, Marcic. Understanding Management. Belmont: Cengage Learning, 2010. Daft, Richard. New era of management. Belmont: Cengage Learning, 2008. Jensen, Nathan. Nation-States and the Multinational Corporation: A Political Economy of Foreign Direct Investment. New Jersey: Princeton University Press, 2008. Keillor, Bruce, and Vijay, Kannan. International Business in the 21st Century. California: ABC-CLIO, 2011. Mckellar, Robert. A Short Guide to Political Risk. Surrey: Gower Publishing, Ltd., 2010. Neelankavil, James. International business research. New York: M.E. Sharpe, 2007. Punnett, Betty. International Perspectives on Organizational Behavior and Human Resource Management. New York: M.E. Sharpe, 2009. Rosenau, William. Corporations and counterinsurgency. Santa Monica: Rand Corporation, 2009. Sharan, Vyuptakesh. International Business: Concepts, Environment and Strategy. New Delhi: Pearson Education India, 2011. Smart, Scott, and William, Megginson. Introduction to corporate finance. Belmont: Cengage Learning, 2008. Read More