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Chapter 10 - Managing Political Risk, Government Relations, and Alliances
2) It is important to show the recruits that there are career and personal development
opportunities in a new venture. This helps new ventures deal with the reality that many
companies raid the management ranks of others, offering lucrative financial arrangements
to those who are willing to change companies. Starbucks uses this process in China.
3) MNCs are and will be making a host of decisions related to IJVs. Sometimes bureaucratic
governments (i.e., communist and former communist governments) often send mixed
signals to foreign investors.
The World of International Management - Revisited
Questions & Suggested Answers
1. What are two main concerns that MNCs should evaluate when doing business in
Russia?
Answer: Corruption is a significant concern for companies doing business in
Russia. The country is ranked 146th out of 180 countries on Transparency
source of nightmares for companies trying to enforce contracts and agreements.
2. How can MNCs protect themselves from government action?
Answer: There are a number of things that an MNC can do to protect itself from
government action. One is to help the economy by producing much of the output
locally and using in-country suppliers and subcontractors in the process. This
3. What proactive political strategies might help protect MNCs from future changes in
the political environment?
Answer: MNCs can implement a combination of the following proactive political
and public affairs activities such as grassroots campaigning and advertising.
4. How might alliances and joint ventures reduce risk and help relationships with
government actors and other stakeholders?
Answer: Alliances and joint ventures allow for faster entry and payback, cost and
risk sharing, economies of scale and rationalization, complementary technologies
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Chapter 10 - Managing Political Risk, Government Relations, and Alliances
Key Terms
Conglomerate investment―A type of high-risk investment in which goods or services
produced are not similar to those produced at home
Expropriation―The seizure of businesses by a host country with little, if any, compensation
to the owners
Horizontal investment―An MNC investment in foreign operations to produce the same goods
or services as those produced at home
Indigenization laws―Laws that require nationals to hold a majority interest in an operation
Integrative techniques―Techniques that help the overseas operation become a part of the host
country’s infrastructure
Macro political risk analysis―Analysis that reviews major political decisions likely to affect
all enterprises in the country
Micro political risk analysis―Analysis directed toward government policies and actions that
influence selected sectors of the economy or specific foreign businesses in the country
Operational risks―Government policies and procedures that directly constrain management
and performance of local operations
Ownership-control risks―Government policies or actions that inhibit ownership or control of
local operations
Political risk―The unanticipated likelihood that a business’s foreign investment will be
constrained by a host government’s policy
Proactive political strategies―Lobbying, campaign financing, advocacy, and other political
interventions designed to shape and influence the political decisions prior to their impact on
the firm
Protective and defensive techniques―Techniques that discourage the host government from
interfering in operations
Terrorism―The use of force or violence against others to promote political or social views
Transfer risks―Government policies that limit the transfer of capital, payments, production,
people, and technology in and out of the country
Vertical investment―The production of raw materials or intermediate goods that are to be
processed into final products
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Chapter 10 - Managing Political Risk, Government Relations, and Alliances
Review and Discussion Questions
1. What types of political risk would a company entering Russia face? Identify and
describe three. What types of political risk would a company entering France face?
Identify and describe three. How are these risks similar? How are they
different?
Answer: One political risk is the threat of a new government replacing the existing
Russian government. The new government could be much less capitalistic in
nature; this could have an adverse effect on the company. In a country as unstable
on the amount of profit that can be taken out of the country. Finally the company
may be required to pay the French employees a higher wage. The risks in France
would be more of an incremental nature; as a result, they are difficult to assess.
2. Most firms attempt to quantify their political risk, although they do not assign
specific weights to the respective criteria. Why is this approach so popular? Would
the companies be better off assigning weights to each of the risks being assumed?
Defend your answer.
Answer: One reason why a nonquantitative approach may be so popular is the fact
that it is inherently difficult to assign weight to the respective criteria. Risk
assessors are dealing with possible future occurrences without much past history or
data to go by. Therefore, it becomes easy to assign the same weight to each criterion
and hope for the best. It may be advisable for companies to take the extra effort to
carefully assign relative weights to the various criteria because some criteria will
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3. How has terrorism impacted foreign interest in Iran and Saudi Arabia, considering
the vast oil reserves that are there? How have terrorist attacks affected political
relationships between countries such as the United States and Russia?
Answer: The vast oil reserves are certainly attractive to many MNCs; however, if a
country has a high occurrence of terrorist attacks in commercial businesses,
4. If a high-tech firm wanted to set up operations in Iran, what steps might it take to
ensure that the subsidiary would not be expropriated? Identify and describe three
strategies that would be particularly helpful. How might proactive political
strategies help protect firms from future changes in the political environment?
Answer: One thing the firm could do would be to bring in some local Iranian
partners. This would cause the government to look more favorably upon the
business. Second, the firm could limit the use of high technology in the business,
thereby making it less lucrative for the Iranian government to expropriate (since
Proactive strategies allow MNCs to establish stronger relations with governments
and various stakeholders before conflicts arise, which gives them a negotiation edge
should political uncertainty causes changes to arise.
5. What are some of the challenges associated with managing alliances? How do host
governments affect these?
Answer: Three primary challenges associated with managing alliances are inter-
firm negotiations, managing operations with partners from different national
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Chapter 10 - Managing Political Risk, Government Relations, and Alliances
Internet Exercise: Nokia in China
Suggestion for Using the Exercise
1. In addition to the assigned material, ask your students to visit the China site in the
CIA World Fact book at {https://www.cia.gov/library/publications/the-world-
factbook/index.html}. This site provides a comprehensive overview of the political
and economic environment in China. Ask your students to browse through the site,
and determine if the information provided changes their impressions of the viability
of a Western firm successfully doing business in China.
In The International Spotlight: Brazil
Questions & Suggested Answers
1. In your opinion, is there still political uncertainty in Brazil?
Answer: Answers will vary. Brazil is the largest and most populous country in
South America. The South American country is also still fairly young, gaining its
independence from Portugal in 1822. In 2002, Brazil elected President Lula da
Silva, who had popular support through his first year. However, Lula da Silva later
2. What strategy would be the most useful to companies interested in Brazilian
investment?
Answer: Government policies can have a significant impact on business activities
and many governments face competing pressures from a range of stakeholders.
Therefore, corporations interested in Brazilian investment must adopt various
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3. Considering the economic and political environment, what types of companies
would benefit the most by expanding operations to Brazil?
Answer: Political risks persist, especially in the emerging economies of the world,
such as Brazil. MNCs must adjust their strategies and practices to accommodate the
new perspectives and actual requirements. Companies that will benefit the most by
expanding to Brazil will be those who can adapt to the culture and the variety of
4. How should BellSouth, AES, and other companies address concerns about
government policies in Brazil?
Answer: Pulling out of Brazil does not seem to be the most effective solution.
Brazil’s struggles should have been expected and planned for, as is the case with
any operations in a developing or emerging economies. High risks are expected,
and so are the high returns and long term potential. Brazil offers lots of
opportunities, particularly in terms of market size and expansion potential through
access to neighboring South American countries. Moreover, it may be relatively
that are in line with the needs of the people of Brazil can also enhance the image of
the organization and support its presence and operations. Most importantly, MNCs
operating in Brazil can employ viable micro approaches to enhance their own
operations through selecting and implementing effective, culturally-relevant human
resource management practices that can enhance motivation, satisfaction, and
commitment within their company’s operations, giving them a competitive
advantage, even in a generally unstable region.
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Chapter 10 - Managing Political Risk, Government Relations, and Alliances
You Be the International Consultant: Rushing into Russia
Questions & Suggested Answers
1. What are some of the political risks that Adam’s firm will face if he decides to go
ahead with this venture? Identify and describe two or three.
Answer: Adam’s firm is facing multiple political risks in this venture. On a macro
level, there is an unstable political situation. The danger of expropriation is very
real in this venture. The high-tech nature of Smith’s business and the still
2. Using Figure 10–3, what strategy would you recommend that the firm use? Why?
Answer: Assuming Adam will go ahead with the Russia venture, he should develop
a strategy based on a risk framework. All three political risks―transfer, operation,
and ownership control―are high. The general investment risk is horizontal and low
since the company would be producing the same computer chips as produced in its
3. In his negotiations with the Russian government, what suggestions or guidelines
would you offer to Adam? Identify and describe two or three.
Answer: Adam must remember that he is American and that negotiation patterns
will not be the same. The Russian negotiators will likely be similar to those of other
Central and Eastern European countries. Although things have definitely opened up,
they will still probably have limited authority to formalize an agreement, may make
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Chapter 10 - Managing Political Risk, Government Relations, and Alliances
International Management in Action: Sometimes It’s All Politics
Summary
1. One of the biggest problems in doing business internationally is that yesterday’s
agreement with a government may be canceled or delayed by today’s politicians
who disagree with that earlier decision. The demise of Enron, which ran into
multiple problems in India, is a prime example. Russia also offers its share of jitters
to investors. There is little that foreign joint-venture firms doing business in high-
risk countries can do except try to negotiate with their partners. Economic
considerations tend to be the main reason why firms seek international partners, but
sometimes it seems that everything boils down to politics and the risks associated
with politics.
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