Political Risks Faced by Multicultural Companies - Case Study Example

Political risks faced by multicultural companies s Submitted by s: Introduction In the case of multinational companies, political risks refer to the risks that the host nation will instigate political policies and decisions that will have adverse impacts on the profits of the multinational as well as its objectives (Arrey, 2013, p. 3). Adverse political actions can vary from highly detrimental such as extensive destruction as a consequence of revolution, to those that are characteristically political, like the enactment of legislation that will hinder the movement of capital. Generally, there are two forms of political risks; micro and macro risks where the macro risks refer to adverse actions that affect all the international companies including exploration or revolution (Noordin, Harjito and Hazir, 2006, p. 91). On the other hand, micro risks define the adverse actions that only have an impact on particular industrial sector or business including corruption and actions of prejudice against the firms that originate from foreign nations. Overall, irrespective of the form of political risk that is faced by a multinational company, the usually end up incurring losses in the event that they are not prepared for the adverse circumstances they face (Giddy and Dufey, 2014). For instance, after the Fidel Castro administration took over the control of Cuba, American firms and assets that were worth hundreds of millions of dollars were seized (Alford, 2002). Regrettably, majority of these firms, if not all of them, did not have options for recovering the money they had lost. This essay will be a critical review of various literatures that are concerned with the political risks faced by multinational companies. Political risks faced by multinational companies Originally, the notion of political risks was initially founded on the assumption on an intrinsically antagonistic relationship between businesses and governments and this assumption impelled a need for businesses to clearly assess the potential and actual actions of governments for their adverse impacts on the business environment of the country (Fitzpatrick, 1983, p. 249). The contemporary perception now sees political risks as a wider construct that if grounded in and influenced by numerous environmental dynamics. After all, any nation can face diverse external and internal pressures and this result in actions being instigated that will have an effect on the operations of the business (Henisz, Mansfield and Von Glinow, 2010, p. 561). Through adding the part played by role to the concept as well as easing the restrictive focus on occurrences, it has been recognized that the political risks environment originates from political processes that are affected by environmental variables. Describing political risks in regards to probability estimates of political uncertainty was another significant advancement through lifting the constraint of deterministic relationships between the business and the government (Miller, 1992, p. 312). These newer perceptions and concern to the wider environmental context were integrated in to the definition that considered political risks as the societal or government actions that emanate from within or outside the host nation while affecting a select group or most of the foreign business operations and investments in a negative manner. Some definitions of political risks delineate economic keystones of political risks along with the governmental and social ones that have been developed by previous definitions(Aswathappa, 2010, p. 132). Macro and micro political risks Political risks being separable into two components is an aspect that was initially recognized in the seventies with the macro political risks referring to the nationwide risks that affect majority or all of the companies in the host nation (Bayulgen, 2010, p. 210). On the other hand, the micro political risks were those that were specific to companies and thus affected one firm or particular groups of business activities. This distinction is imperative since political risks have been seen to vary in terms of companies, nations and when considered over a longer period, within the same nation. For instance, industries that are strategically important including finance, banking, natural resources as well as utilities and insurance, have a higher likelihood to be regulated compared to the industries that are considered to have less strategic significance therefore facing more risks that are political. The impact of macro political risks can be intense, for instance, when an economic structure is revolutionized or a government is overthrown (Shim, Siegel and Levine, 1998, p. 253). However, the effects of micro political risks on the company have been found to be significant and impulsive while at the same time being recurrent and prevalent. Even though it does not always result in dramatic changes such as nationalization or exploration, policies that target a particular firms through mandates for domestically sourced contents, restrictions on the number of expatriates employed and price controls among others are typical. The managers of multinational companies are more and more recognizing major changes that are aimed at particular companies, however, focus and attention on the assessment of these risks has continued to be low. Micro and macro political needs are not independent from each other as they share some common characteristics as far as governmental, social and economic contexts are concerned (Butler, 2000, p. 222). Micro political assessments are employed to enhance or adjust the scores associated with macro political risks, which are more general in nature. The companies that have specific sensitivities have higher likelihoods of being affected by some macro risks, therefore, the companies that operate in strategic national industries may high a higher vulnerability in regards to political interventions. For instance, in 2006, there was bipartisan opposition from the US after a company based in the UAE purchased P&O, which is a British company that manages passenger and cargo terminals in various ports on the Atlantic and Gulf coasts. This forced the acquiring company from the UAE to relinquish control of the operations of the ports to a company of American origin. Even in the current credit deprived markets, not all the investments by sovereign wealth funds are warmly embraced. Typically, operations in majority of multinational companies are decentralized, with some components of the process of production being made in various nations and since the value chain of the company is distributed geographically, the benefit of the operations of a specific company in a certain nation may have different exposures to political risks (Alon and Herbert, 2009, p. 129). For instance, Kodak paid more taxes in its initial six months of operation in China compared to what Fuda Co., an acquired Chinese company, paid in fourteen years. The additional contribution of Kodak to the ability of the local economy to generate tax dollars, modernization and employment decreased the political risk exposure of the company. Conversely, McDonald’s restaurants that are seen by many as symbolizing American-led globalization have in some instances been targeted by terrorism as apparent in the 2001 occurrence of a bomb explosion near a McDonald’s restaurant in Xi’an. The existence of retail operations that have little observed benefits to the community have more difficulty guarding themselves against exposures to micro political risks. Even though the retail operations of Kodak and McDonald’s continue to exist in China, the perceived relative contribution by Kodak as well as its mode of operation decreases the probability of political intervention. Micro risks (company specific risks) From the multinational company’s perspective, assessment of the political stability of the host nation should be the initial step since the main goal is anticipating the impact of any political changes on the operations of a particular company (Gooderham, Grøgaard and Nordhaug, 2013, p. 101). Undeniably, different foreign companies with operations in the same nation may have varying levels of vulnerability to changes in the regulations and policies of their hosting nations. For instance, it is highly unlikely that the KFC franchise will face the same risks that are faced by Ford manufacturing plants. A need for political risk analyses that are particular to companies has resulted in a demand for relevant studies, which are undertaken internally by professional analysts in political risks. This demand is further intensified by the thought that external professional risk analysts seldom settle on the level of macro political risks existing in any combination of nations (Alkhafaji and Nelson, 2013, p. 155). Internal political risk analysts connect the macro risk factors of particular nations to the precise vulnerabilities and characteristics of their client companies. Multinational banks, global hotel chains, private insurance carriers, mineral and manufacturing companies all have essentially different levels of exposure to restrictions that are politically inspired. Even with the finest company specific analysis, multinational companies cannot be assured that the economic or political situation will remain the same and this makes it necessary to develop protective measures well in advance in order to decrease the risks from unforeseen changes (De Kluyver, 2010, p. 20). Macro risks (nation specific risks) Analysis of macro political risks is still an emerging field of study with political scientists in various disciplines studying nation risk for the benefit of multinational companies, defense planners as well as decision makers of the foreign policies of governments (Christiansen, 2014, p. 24). Studies in political risks typically include analysis of the historical capacity of the nation being studies, indication of the current turmoil, signs of economic stability and developments in in religious and cultural activities (Graham, Smart and Megginson, 2012, p. 569). Data is often collected through reading the local printed press, watching and listening to broadcasts, consulting publications from diplomatic sources, exploiting the awareness of expert consultants, consulting with other people who have recently conducted business in the host nations and conducting visits to various sites. Notwithstanding this notable list of activities, the prediction records of businesses, diplomatic services as well as the military have remained spotty (Frenkel, Karmann and Scholtens, 2004, p. 5). When tendencies are analyzed, whether in economics or policies, the trend is to forecast an extension of the same tendencies in the future and it is exceptionally rare for forecasters to be able to predict cataclysmic changes in directions. For instance, it would have been difficult to predict the fall of communism in the Soviet or the 2004 fall of Saddam Hussein. Regardless of the challenges associated with predicting risks in a nation, multinational companies should try to predict the risks so that they can adequately prepare themselves for the unknown. Political risks faced by multinational companies The multinational companies with operations in the developing nations have a higher likelihood of facing political risks as their relative lacking in technological and economic development, strong cultural and national affiliations and impulsiveness in legislative and political changes differentiates these nations (Hallberg, 2006, p. 71; Lehmann and Mody, 2004, p. 11). A number of the risks that are involved in these occurrences include: Increased potential for asset losses through war or nationalization The international context is greatly tense with differing ideas, political unrest and civil wars, which are developments that result in an insecure environment that rationalizes the unwillingness of numerous multination corporations to take preventable risks. Numerous businesses lost their assets when Cuba came under the rule of the communist while all the assets of the Kennecott Copper Company were lost in Chile when it briefly became a communist nation (Sanderson, 2013, p. 189). Most Indians also lost their businesses in Kuwait when Iraq invaded the nation as the gulf war progressed (Hertog, Luciani and Valeri, 2013, p. 86). Changes in political structure or parties Even in the event that the host nation has a form of government that is democratic, the party that is in power may lose the elections and a different party may alter the industrial policies that may have a negative effect on the interests of the multinational firm (Katsioloudes and Hadjidakis, 2007, p. 184). A case instance of this is the winding up of operations of the Coca Cola Company in India when the opposition party came into power in 1977 bringing changes to some of the policies that had a negative effect on the operations of the company in India (Baisya, 2010, p. 32; Ghosh, 2011, p. 317; (Chitkara, 2001, p. 41). Potential backlash by the citizens of the host nation The citizens of the host nation may develop the feeling that they are being exploited so that the foreign company can benefit and this hostility may develop as a result of some sincere national concern (Paul and Kapoor, 2008, p. 132). For instance, in the course of the tragedy that was experienced in Bhopal, India in a Union Carbide plant, numerous people held the opinion that the events would never have taken place in America. This implies that the safety and standards of operation were not as stringent in the operation plants in the developing nations compared to those in the developed nations as a result of the low premium that is placed on lives of individual in the developing nations. Challenges in retrieving earnings Some nations have stringent legislations governing foreign exchange, which may change from time to time subject to the situation of foreign exchange reserves as well as global equilibrium of payment status (Neelankavil, 2007, p. 14). The host nations may obligate that the earnings should be spent within the nation and are not supposed to be transmitted back to the host nation. Conclusion Similar to any other business, multinational companies experience numerous risks in their operation and even though some of the risks are endemic to all the companies, organizations that operate across national borders experience more and exceptional challenges (Neelankavil and Rai, 2015, p. 106). Market liberalization and globalization present more opportunities for companies to grow into new areas abroad. Nonetheless, the companies must come up with measures that will assist them to expand while at the same time managing the additional threats to their operations. Political risks may come in various shapes through policy actions from national governments including regulatory initiatives that may have severe effects on the bottom line and objectives of the company. There might be war in the host nation or civil strife that may result in detrimental political decisions like laws that prevent the movement of capital (Schaffer, Earle and Agusti, 2014, p. 501). In order to decrease the exposure of multinational companies to these risks through conducting comprehensive research prior to setting up their business. Bibliography Alford, R. P., "On War as Hell" 2002, Scholarly Works. 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