Political Risks in International Marketing

Assessing the semi semipolitical environment is an important part in on the whole business decision. Laws and regulations passed by either local anesthetic, regional and central politics bodies squeeze out tint foreign firms operations. Also, firms atomic number 18 comfortable assessing the political climates in their denture countries. However, assessing the political climates in otherwise countries is still problematic. Classification and description of political risks When doing international business, the manager whitethorn face several types of financial risks.The major(ip) types of financial risks ar commercial risks, political risks, exchange rate risks, and other such as inflation-related risks. Thus, political risks ar non commercial risks. Political risks are whatsoever changes in the political environment that may adversely affect the value of a firms business activities. Political risks may occur in any nation, but the risks vary considerably between cou ntries. We may denounce two types of classification of political risks. A classification base on the characteristic of political risks and a classification or categorization based on the local establishment actions or carry.Classification based on the characteristics of political risks Characteristics refer to as the facts that are inherent to each political risk. In other terms, their uniqueness or what make them different from one another. there are three types of such characteristics ownership risks, operating risks, and transfer risks. self-command risk In which the property of the firm is exist through expropriation, confiscation or domestication. Ownership risk exposes property and life. The triad will be explained in the second classification. Operating riskIn which there is snag with the firm operations.The ongoing operations of the and/or the safety of its employees are threatened through changes in laws, environmental standards, impose codes, terrorism, armed insu rrection or wars, and so forth. Transfer riskIn which the political sympathies interferes with a firms cleverness to shift funds into and out of the pastoral. Classification based host country actions We can distinguish two types political risks out of the political sympathies take hold and political risk induced by the political relation. Political risks out of government control. thither 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 community frustration and intolerance. All these risks can generate violence, directed towards firms property and employees. We may also give the case ofoutwardly induced financial constraints and externally imposed limits on imports or exports, especially in case of embargoes or any economic sanctions against the host country. Politic al risks induced by the government These risks constitute some laws directed against foreign firms. Some government-induced risks are very drastic.There are expropriation, confiscation and domestication. Expropriationis the seizure of foreign assets by a government with payment of fee to the owners. In other terms, it is spontaneous 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 traffic 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. arrogationis another type of ownership risk 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 importance to the host countries and their lack of efficiency 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 profit at heart 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 wa ge nationals as managers, poor cooperation and communication can result. If domestication was imposed in spite of appearance a short time span, poorly trained and inexperienced local managers would head 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 heavy(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 might be confronted with difficulties in their secureness transactions. Severe restrictions on importcan be a fountain for foreign corporate to shut down. regimens may also raise the tax rate applied 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 pol itical situation. For example, social pressure may result in a kind of price standardization for feature 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 named small political risks. Impact of some political risks Some negative do of political risks on firm are summarized in the following table. tabular array 1. Holistic table summarizing the major political risks and their effects on firms TYPES concern ON FIRMS Expropriation mischief of future profits Confiscation Loss of assets Loss of future profits Campaigns against foreign goods Loss of gross sales Increased cost of public relations efforts to improve public image Mandatory moil benefits legislation Increased operating be Kidnappings, terrorists threats, an d other forms of violence break off production Increased 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 tax income Lower after-tax profits Source, Ricky W. Griffin, International business, 2005, page 73 In languish run, and depending on the severity 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 utilization might be barriers to foreign investment and country prosperity. What is going on in West Africa?