Political Risks in International Marketing

Assessing the policy-making environment is an important part in any business decision. Laws and regulations passed by either local, regional and commutation organization bodies clear affect foreign firms operations. Also, firms ar comfortable assessing the political climates in their home countries. However, assessing the political climates in some other countries is still problematic. Classification and description of political gambles When doing international business, the manager whitethorn pillowcase several figures of financial risks.The major types of financial risks are commercial risks, political risks, exchange rate risks, and other such as inflation-related risks. Thus, political risks are non commercial risks. Political risks are any changes in the political environment that may adversely affect the value of a firms business activities. Political risks may give-up the ghost in any nation, except the risks vary considerably surrounded by countries. We may disti nguish two types of categorisation of political risks. A classification based on the characteristic of political risks and a classification or categorization based on the local organization actions or catch.Classification based on the characteristics of political risks Characteristics adduce to as the facts that are inherent to each political risk. In other terms, their uniqueness or what have them different from one another. There are three types of such characteristics self-command risks, operational risks, and transfer risks. self-control risk In which the property of the firm is threatened through expropriation, confiscation or vapidity. Ownership risk exposes property and life. The triad will be explained in the second classification. Operating riskIn which there is interference with the firm operations.The ongoing operations of the and/or the safety of its employees are threatened through changes in laws, environmental standards, tax codes, terrorism, armed tumult o r wars, and so forth. Transfer riskIn which the government interferes with a firms ability to shift pecuniary resource into and out of the orbit. Classification based host country actions We arse distinguish two types political risks out of the government control and political risk induced by the government. Political risks out of government control. There are risks or events arise from nongovernmental actions, factors that are outside the government responsibility.There arewars, revolution, coup detat, terrorism, strikes, extortion, and kidnappings. They all derived from some unstable social situation, with population frustration and intolerance. All these risks can generate violence, directed towards firms property and employees. We may also have the case ofexternally induced financial constraints and externally imposed limits on imports or exports, especially in case of embargoes or any sparing sanctions against the host country. Political risks induced by the government The se risks constitute some laws directed against foreign firms. near government-induced risks are very drastic.There are expropriation, confiscation and domestication. Expropriationis the seizure of foreign assets by a government with stipend of earnings to the owners. In other terms, it is involuntary transfer of property, with compensation, from a privately owned firm to a host country government. Expropriation may generate some funds for the owners. However, procedures to get paid from the government are sometimes protracted and the final amount remains low. Furthermore, if no compensation is paid, conflicts may erupt between the host country and the country of the expropriated firm.For instance, the relations between U. S. and Cuba acknowledge such situation, since Cuba does not offer compensation to U. S. firms that have their assets sized. 3(*)Also, expropriation can refrain other companies from investing in the concerned country. Confiscationis another type of ownership ris k similar to expropriation, except compensation. It is involuntary transfer of property, no compensation, from a privately owned firm to a host country government. In confiscation, firms do not receive any funds from government. Thereby, it represents a more risky situation for foreign firms.Some industries are more vulnerable to confiscation than others because of their splendour to the host countries and their lack of ability to shift operations. Sectors such as mining, energy, public utilities, and banking have been targets of such government actions. Domesticationoffers to governments a subtle control over the foreign investments. There is a partial ownership transfer and companies are urged to prioritize local production and to retain a large share of the return within the country. Domestication can negatively impact the international marketer activities, as well as that of the entire firm.For example, if foreign companies are forced to hire nationals as managers, poor cooper ation and communication can answer. If domestication was imposed within a short time span, poorly trained and inexperienced local managers would lead the firm operations with possible lost of profits. Other government actions-related risksare less dangerous but more common such asboycott, sabotage. When facing shortage of foreign currency, government, sometimes, attempts tocontrol the movement of great(p)in and out of the country. Often,exchange controlsare levied selectively against certain products or companies.Exchange controls limit importation of goods so that firms tycoon be confronted with difficulties in their regular transactions. Severe restrictions on importcan be a motive for foreign corporate to shut down. Governments may also raise the tax rate employ to foreign investors in order to control them and their capital. Government may implement aprice control system. Such control uses to derive from a sensitive political situation. For example, social pressure may resu lt in a kind of price standardization for particular sectors like food, transportation, fuel, and healthcare.Political risks like arms conflicts, insurrection may affect all firms in the country equally. For that reason they are calledmacro political risks. Unlike, nationalization, strikes, expropriation may affect only a handful and specific firm, they are namedmicro political risks. Impact of some political risks Some negative effects of political risks on firm are summarized in the pursual table. Table 1. Holistic table summarizing the major political risks and their effects on firms TYPES IMPACT ON FIRMS Expropriation prejudice of future profits Confiscation Loss of assets Loss of future profits Campaigns against foreign goods Loss of gross sales change magnitude cost of public relations efforts to improve public image Mandatory labor benefits rule Increased operating costs Kidnappings, terrorists threats, and other forms of violence Disrupted production Increase d security costs Increased managerial costs Lower productivity Civil wars Destruction of property Lost sales Disruption of production Increased security costs Lower productivity Inflation Higher operating costs Repatriation Inability to transfer funds freely Currency devaluations Reduced value of repatriated earnings Increased taxation Lower after-tax profits Source, Ricky W. Griffin, International business, 2005, page 73 In long run, and depending on the asperity of the risks, action taken by government may decrease income and be detrimental to the host country economy. Strong political risks that are deeply rooted in the country governance habit might be barriers to foreign investment and country prosperity. What is going on in West Africa?