C H A P T E R 1 5
Political risk and negotiation strategy
Chapter objectives
2. Understand how to apply some of the tools and resources that companies can use to measure
and forecast political risk.
4. Review typical strategies and tactics used in negotiating agreements.
Chapter summary
1. Country-risk analysis examines the changes of nonmarket events (political, social, economic
2. Political risk is the probability that political forces will negatively affect a multinational
enterprises (MNEs) profit or impede the attainment of other critical business objectives.
3. There are a number of sources of political risk. Among others, these include the political
4. The MNEs use a number of approaches in managing political risk. One is to forecast this
5. There are two key steps in developing effective negotiating strategies. First, MNE managers
need to evaluate their own position and that of the other group(s) in order to determine how
the interests of both can fit together. Second, they need to understand the modus operandi
6. The MNEs tend to use a combination of integrative and protective/defensive techniques in
minimizing political risk.
Chapter outline
Introduction
Generic PEST analysis
Political risk
Deregulation and political risk
The nature of political risk
Sources of political risk
Country analysis and political risk assessment
Online risk information resources
Negotiation strategies
Behavioral characteristics of the participants in negotiations
Transparency and corruption: politically sensitive political risk
Strategic management and political risk
Use of integrative and protective/defensive techniques
Lecture outline
A. Introduction
1. Country risk analysis examines the chances of nonmarket events (political, social,
economic and technological) causing financial, strategic or personnel losses to a firm
following FDI in a specific country market. Often, firms use the generic PEST
framework to map out particular competitive environments or investment contexts for
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The PEST and PESTLE frameworks provide a good starting point but must also be
B. Political risk
1. Political risk is the probability that political forces will negatively affect an MNEs
profit or impede the attainment of other critical business objectives. The study of
2. A macro political risk is one that affects all foreign enterprises in the same general way.
Expropriation, the governmental seizure of private businesses coupled with little, if any,
3. A micro political risk is one that affects selected sectors of the economy or specific
foreign businesses. These risks are typically a result of government action in the form of
industry regulation, taxes on specific types of business activity and local content laws.
4. Legal/governmental risks are potentially harmful to foreign businesses but are the
C. Country analysis and political risk assessment
1. Some MNEs use an informal approach to assessing risk, while others employ formal,
systematic procedures. In each case, those making the assessment will focus on two
2. An MNE needs to understand the host countrys political system because politics
3. There are a number of consultancy firms such as Business Environment Risk
Intelligence (BERI) and online resources, which can help managers measure the relative
4. Products and operations also face political risk. One example is government restrictions
on local ownership. A related risk is that the joint partner will steal product knowledge
5. Having examined the political system and the risks inherent in going international, an
MNE will try to express this risk in explicit terms. The Weighted Country Risk
6. We can use the Weighted Country Risk Assessment Model as an input into financial
investment planning models. Adjusted Present Value (APV) is a variant of a Net Present
D. Negotiation strategies
1. There are two key steps in developing effective negotiating strategies. First, MNE
managers need to evaluate their own position and that of the other group(s) in order to
2. The first step in negotiating is to evaluate the strengths and needs of all parties. The
strengths of the parties are those assets or benefits that each brings to the bargaining
3. When entering into negotiations with Governments, managers need to understand: (a)
their political, economic and social policy objectives; (b) their levers of power, the
mechanisms by which they can influence the costs and benefits of doing business
(taxes, tariffs, quotas, regulations on capital transfers, local input requirements etc.); (c)
the structures, networks and institutional agencies through which they operate (who has
the power to influence what?) and (d) their negotiation style and tactics.
4. Next, the MNE will examine the negotiating behaviors of the parties. What can be
expected in terms of offers, counteroffers, ploys and other stratagems? For example, the
5. When negotiating an agreement, three areas are of major importance: acceptance zones,
renegotiation and general negotiating behaviors. The success of MNE negotiators will
6. The ethics and the practicalities of bribery and corruption are important sources of risk
7. The Berlin-based organization, Transparency International (TI), produces a number of
reports each year, of which the best known is the Corruption Perceptions Index (CPI).
8. Transparency reflects the clarity and consistency of the policies and legislation applied
in the governance of businesses and is strongly associated with corruption.
E. Strategic management and political risk
1. The MNEs take many steps to ensure that their strategies are not upset by unexpected
2. The MNEs employ a variety of stratagems to reduce risk. Some are collectively known
as integrative techniques. These are designed to help an MNE become a part of the host
3. Protective and defensive techniques are strategies designed to discourage a host country
from interfering in multinational operations. In contrast to integrative techniques,
protective and defensive measures are aimed at fostering nonintegration of the MNE
into the local environment. A good example is conducting research and development
4. The MNEs often use a combination of integration and protective/defensive techniques
to reduce and manage their political risk. Figure 15.6 provides an example of how
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Answers to review and discussion questions
1. How can a country risk analysis help an international manager making decisions
about which countries to invest in?
2. How can we make a simple PEST analysis more robust, accurate and useful?
3. What is meant by the term political risk? Is there political risk in every country of the
world? Explain.
4. Show, with an example, how the process of deregulation and liberalization is opening
up opportunities for foreign investment in emerging markets.
5. How does macro political risk differ from micro political risk? Compare and contrast
the two.
Macro political risk affects all foreign enterprises in the same way. For example, if the US
government were to announce that all foreign businesses must register with the Department of
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6. What are some factors that help to determine the degree of micro political risk?
Identify and describe three of them.
One factor that helps determines the degree of micro political risk is the dominance of foreign
firms. As their number and strength increase, attention is drawn to them and the likelihood of
7. What resources are available online for comparing political risk in two or more
countries? Give two examples and say how their measures and rankings differ.
8. What difficulties would a manager face compiling an accurate Weighted Risk
Assessment Model for two emerging market countries?
The first problem a manager might face compiling an accurate Weighted Risk Assessment
Model is that (s)he has to be able to determine the relative importance of each factor to the
type(s) of business his/her company is considering undertaking. Note that while some factors
9. What is an adjusted present value calculation? Give examples of the kinds of country
risks that could be incorporated into an APV calculated for a manufacturing
investment in a less developed country.
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10. When predicting political risk, why will an MNE be interested in examining the
economic development agenda and policies of the government?
11. Choose a well-known MNE and describe the kinds of power resources or bargaining
chips it could use in FDI negotiations with a country government.
Answers will vary.
12. Why does corruption tend to be more prevalent in poorer countries?
13. Describe one method for comparing the levels of corruption to be expected in two
different countries.
The CPI by Transparency International measures the frequency and value of corrupt payments
14. Why is improving transparency important for investors and for local populations in
less developed countries?
The global corruption report by TI shows a clear correlation between corruption and income.
Poorer countries (like Bangladesh) tend to have the highest incidence of corruption. In low
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15. Why will an MNE be interested in the behavioral characteristics of the participants in
a negotiation? How can such information help to improve its negotiating position?
An MNE will be interested in the behavioral characteristics of the participants because this will
help the firm anticipate negotiating tactics. For example, will the other party wait until the end
16. In a negotiation, why would an MNE be interested in the acceptance zone of the other
party?
17. What are some bargaining tactics that are used in international negotiating? Identify
and describe three of them.
One common bargaining tactic is to learn the time limits of the other party. If the group has to
be back in Asia within five days and wants to complete the deal before leaving, this tells the
18. How do MNEs use integrative techniques in order to reduce their political risk?
Describe an example.
The MNEs use integrative techniques to reduce their political risk by making decisions that help
them blend into the local environment. An example is the development of good relations with
19. How do MNEs use protective/defensive techniques in order to reduce their political
risk? Describe an example.
Protective and defensive techniques are designed to discourage a host country from interfering
in multinational operations. The purpose of this strategy is to promote nonintegration of the
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Answers to real cases
Yukos and the Russian oligarchs
1. What political risks do MNEs face in Russia? Identify and describe three of them.
2. What strengths would a foreign oil or energy firm bring to the country? What Russian
needs would it help to meet?
3. How could this firm employ integrative or protective/defensive techniques in the
country? Identify and describe one approach that could be used for each.
The firm could use integrative techniques by hiring local residents, thus increasing employment.
It could also work very closely with the government to ensure that the objectives of both groups
Problems with ports
1. What are the main differences in the barriers and risks faced by foreign firms in the
Japanese port system compared to Kenyas Mombasa?
Japans port system is very expensive to foreign firms because it is controlled by one individual
who oversees a series of organizations that comprise a cartel. It takes 3 to 4 days to clear
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2. Why is it difficult for foreign firms to challenge these unfair practices in either Kenya
or Japan?
3. How could a manager looking to use these ports minimize the risk and uncertainty
created by local ways of doing things?
In the Japanese case, there seems to be no way of minimizing the costs created by the port