Deck 10: Managing Political Risk, Government Relations, and Alliances

Question 1

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 1

Terrorism is use of force or violence against others. This is done to promote its social, religious or political view. It is done so that the government supports the views of the terrorist.
Terrorism in any country has a significant and direct bang on the MNC. Growing terror attacks on Iran and Saudi Arabia has affected the oil exports. The countries do not share any diplomatic relations with each other post attack. The primary cause for such differences is that both the countries are huge producers of oil and gas. They are the biggest exporters of oil in the world but are having conflicts on energy policy. While Saudi Arabia wants to keep the prices moderate, Iran is keen on keeping the prices high because of its low standard of living. Moreover such pricing issues have not only affected the two countries, but also most of the countries in the world. Every country has become reluctant in investing in these countries due to the risk of terror attacks.
Terror attacks in US have greatly influenced the political and financial state of the country. However the relation between US Russia was a light in the gloom for the country. They whole heartedly supported the decisions taken by US government after the attack. This further helped to improve inter personal relationship of the countries. The armed forces of both the countries also worked together in future alliances. The government of both the countries also joined hands to develop its business relationships and take it to another level. It improved its foreign policy which supported both the countries to develop its business.

Question 2

What are some of the challenges associated with managing alliances? How do host governments affect these?

Answer 2

Not Answer

Question 3

As Russia continues to succeed with a decentralized economy and foreign investors flood in, a Chicago, Illinois- based computer chip manufacturer decides that it may be time to expand operations overseas.The company has a series of patents that provide legal protection and allow it to dominate a small but growing segment of the computer market.Its sales estimates reached $147 million within three years, but it believes that this could rise to $200 million if it was to expand internationally.Adam Smith, CEO of the company, had previously considered China and India for their cheap labor, but decided that their rapid growth and intense international interest would just lead to a higher bidding price.Furthermore, there are far fewer direct competitors expanding in Russia, whereas technological parts and services industries are already pervasive in other emerging countries.Adam recalls a time when Russia experienced high human trafficking, corruption, and general political instability, but he believes that with so much international interest in Russia, these issues must be curbed by this point in time.
Adam is confident that a deal will be accepted by Russia as it continues to welcome foreign investment to maintain economic growth.A state-of-the-art plant could help to reduce unemployment further and provide an inflow of needed capital.However, the banker is concerned that because of the political risks and uncertainty in Eastern Europe in general and Russia in particular, the company may either lose its investment through government expropriation or find itself unable to get profits out of the country.Given that the company will have to invest approximately $20 million, the venture could seriously endanger the company's financial status.
Adam understands these risks but believes that with the help of an international management consultant, he can identify and minimize the problems."I'm determined to push ahead," he told the banker, "and if there is a good chance of making this project a success, I'm going to Russia."
In his negotiations with the Russian government, what suggestions or guidelines would you offer to Adam? Identify and describe two or three.

Answer 3

Negotiation refers to the strategic discussion that takes place between parties wherein the existing issue or disagreement is resolved and a mutually agreed decision is obtained. In negotiation process, there is an exchange of in the form of give and take wherein parties avoid arguments and reach towards an agreement.
Case summary:
A chip-manufacturing firm from Country U is planning to expand overseas in Country R that has become decentralized and is inviting foreign investment. The firm had also considered Country C and Country I before deciding to invest in Country R inspite of the history of human trafficking, corruption, and general political instability taking place in this country. However, looking at the investment of $20 million that the firm would be investing in this deal, if it fails to provide profits, the firm would face huge financial loss.
When negotiating with the government of Country R, the suggestions that could be offered to Person AS are as follows:
• The government of Country R can be asked to provide assurance for complete support and guidance to Person AS's firm in making the investment successful. The government can be made to sign an agreement wherein the firm would be obtaining all the promised benefits throughout the term of the project.
• Person AS should negotiate with the government keeping in mind the corruption that exists in the country. The government should provide proper guidelines using which AS's firm can operate in Country R legally and conforming the provisions and rules.
• Person AS should emphasize on huge transparency in business dealings and should clarify that the firm would not invest anything in bribery and other kinds of corruption practices. This way the government would be made clear about the intentions of AS in doing business transparently, legally, and ethically.
• Person AS should demand for huge political support from the country ensuring that no political agendas would affect the proper functioning of the business. This way AS would obtain a guarantee wherein political uncertainty in the country would not impact the firm's business.

Question 4

After three centuries under the rule of Portugal, Brazil became an independent nation in 1822.By far the largest and most populous country in South America, Brazil has overcome more than a half century of military intervention in the governance of the country to pursue industrial and agricultural growth and the development of the interior.
After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41.5 billion IMF-led international support program in November 1998.In January 1999, the Brazilian Central Bank announced that the real would no longer be pegged to the U.S.dollar.The consequent devaluation helped moderate the downturn in economic growth in 1999, and the country posted moderate GDP growth in 2000.Economic growth slowed considerably in 2001-2003-to less than 2 percent-because of a slowdown in major markets and the hiking of interest rates by the Central Bank to combat inflationary pressures.President Luiz Inácio Lula da Silva, who took office on January 1, 2003, gave high priority to reforming the complex tax code, trimming the overblown civil service pension system, and continuing the fight against inflation.By exploiting vast natural resources and a large labor pool, Brazil is today South America's leading economic power and a regional bellwether as it continues toward a free-market society.
After winning a landslide victory in 2002 on a campaign to revamp the economy and battle for the poor, President Lula da Silva reassured worried investors when he continued his predecessor's plan of strict financial austerity.Instead of catching the jitters as predicted, the country's bond and stock markets enjoyed stellar returns in 2003 and are still going strong.But within a year, pressure was mounting on Lula da Silva to keep true to his populist roots.After riding a wave of popular support through his first year, Lula da Silva faced some criticism from within his own Workers' Party and governing coalition as well as from ordinary voters.Lula has also gained a reputation for being thin-skinned when it comes to criticism; he expelled a foreign journalist critical of his policies.Although Lula's popularity dipped through this period, da Silva was reelected in 2006, and received more votes than any other Brazilian elected president.During his second term, Brazil continued its progress in modernization and da Silva's support gained steam again.In 2010, da Silva entered the final year of his second four-year term as one of the most popular Brazilian politicians of all time.But in Latin America, any change in leadership is always met with nervousness from financial markets because it creates uncertainty and reminds business of previous transitions that have been disruptive.
Brazil's economy rebounded sharply from the global economic recession in 2009, with GDP growth of 5.5 percent expected in 2010.According to The Economist, Brazil is likely to become the world's fifth largest economy, overtaking Britain and France before 2025.Brazil's progress in fighting poverty has been one of the most impressive of any developing country.Brazil boasts a number of world class companies, including Embraer, the global leader in shortand mid-range jet aircraft.In addition, Brazil will be host to the World Cup soccer match in 2014 and Rio will host the summer Olympic games in 2016.Substantial infrastructure investment is expected in advance of these two events.Brazil announced in early 2007 the discovery of the Tupi and Carioca oil fields off the coast of Rio de Janeiro.The oil reserves in these fields are conservatively estimated at between 30 billion and 80 billion barrels, which would put Brazil in the top ten countries in the world by reserves.In May of 2010, Brazil announced another large discovery in the Santos Basin.Output from the existing Campos Basin and the discovery of the new fields could make Brazil a significant oil exporter by 2015.Brazil's national oil company, Petrobras, is one of the largest in the world.The government has created a new state-owned company called Petrosal to manage licensing in the new fields.This new company will award some exploration and production rights straight to Petrobras without options for foreign firms.Also, by mandate, it will award over half of the shallow-water contracts to locally owned Oil Service Companies (LOSCs).In deeper and more challenging waters beyond the capacity of local companies, foreign companies will be invited to bid.Those pledging to incorporate Brazilian "content" would be more likely to succeed.Higher taxes and fees are expected as well.Nonetheless, this sector is likely to create substantial new opportunities for foreign firms in Brazil.
How should BellSouth, AES, and other companies address concerns about government policies in Brazil?

Question 5

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?

Question 6

What are some of the challenges associated with managing alliances? How do host governments affect these?

Question 7

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.

Question 8

What are two main concerns that MNCs should evaluate when doing business in Russia?

Question 9

In your opinion, why is there still political uncertainty in Brazil?

Question 10

After three centuries under the rule of Portugal, Brazil became an independent nation in 1822.By far the largest and most populous country in South America, Brazil has overcome more than a half century of military intervention in the governance of the country to pursue industrial and agricultural growth and the development of the interior.
After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41.5 billion IMF-led international support program in November 1998.In January 1999, the Brazilian Central Bank announced that the real would no longer be pegged to the U.S.dollar.The consequent devaluation helped moderate the downturn in economic growth in 1999, and the country posted moderate GDP growth in 2000.Economic growth slowed considerably in 2001-2003-to less than 2 percent-because of a slowdown in major markets and the hiking of interest rates by the Central Bank to combat inflationary pressures.President Luiz Inácio Lula da Silva, who took office on January 1, 2003, gave high priority to reforming the complex tax code, trimming the overblown civil service pension system, and continuing the fight against inflation.By exploiting vast natural resources and a large labor pool, Brazil is today South America's leading economic power and a regional bellwether as it continues toward a free-market society.
After winning a landslide victory in 2002 on a campaign to revamp the economy and battle for the poor, President Lula da Silva reassured worried investors when he continued his predecessor's plan of strict financial austerity.Instead of catching the jitters as predicted, the country's bond and stock markets enjoyed stellar returns in 2003 and are still going strong.But within a year, pressure was mounting on Lula da Silva to keep true to his populist roots.After riding a wave of popular support through his first year, Lula da Silva faced some criticism from within his own Workers' Party and governing coalition as well as from ordinary voters.Lula has also gained a reputation for being thin-skinned when it comes to criticism; he expelled a foreign journalist critical of his policies.Although Lula's popularity dipped through this period, da Silva was reelected in 2006, and received more votes than any other Brazilian elected president.During his second term, Brazil continued its progress in modernization and da Silva's support gained steam again.In 2010, da Silva entered the final year of his second four-year term as one of the most popular Brazilian politicians of all time.But in Latin America, any change in leadership is always met with nervousness from financial markets because it creates uncertainty and reminds business of previous transitions that have been disruptive.
Brazil's economy rebounded sharply from the global economic recession in 2009, with GDP growth of 5.5 percent expected in 2010.According to The Economist, Brazil is likely to become the world's fifth largest economy, overtaking Britain and France before 2025.Brazil's progress in fighting poverty has been one of the most impressive of any developing country.Brazil boasts a number of world class companies, including Embraer, the global leader in shortand mid-range jet aircraft.In addition, Brazil will be host to the World Cup soccer match in 2014 and Rio will host the summer Olympic games in 2016.Substantial infrastructure investment is expected in advance of these two events.Brazil announced in early 2007 the discovery of the Tupi and Carioca oil fields off the coast of Rio de Janeiro.The oil reserves in these fields are conservatively estimated at between 30 billion and 80 billion barrels, which would put Brazil in the top ten countries in the world by reserves.In May of 2010, Brazil announced another large discovery in the Santos Basin.Output from the existing Campos Basin and the discovery of the new fields could make Brazil a significant oil exporter by 2015.Brazil's national oil company, Petrobras, is one of the largest in the world.The government has created a new state-owned company called Petrosal to manage licensing in the new fields.This new company will award some exploration and production rights straight to Petrobras without options for foreign firms.Also, by mandate, it will award over half of the shallow-water contracts to locally owned Oil Service Companies (LOSCs).In deeper and more challenging waters beyond the capacity of local companies, foreign companies will be invited to bid.Those pledging to incorporate Brazilian "content" would be more likely to succeed.Higher taxes and fees are expected as well.Nonetheless, this sector is likely to create substantial new opportunities for foreign firms in Brazil.
In your opinion, is there still political uncertainty in Brazil?

Question 11

Using Figure 10-3 what strategy would you recommend that the firm use? Why?

Question 12

Asia still offers great opportunities for multinational firms.However, given the slowdown that has occurred in this region in recent years, there are also great risks associated with doing business there.The large Finnish-based MNC, Nokia, has determined that the opportunities are worth the risk and has staked a large claim in China and is determined to be a major player in the emerging Asian market.Visit its website at www.nokia.com and focus your attention on what this well-known MNC is now doing in Asia.Drawing from specific information obtained from the website, this chapter, and your reading of the current news, answer these questions: What political risks does Nokia face in Asia, particularly China? How can Nokia manage these risks? How can effective international negotiating skills be of value to the firm in reducing its political risk and increasing its competitive advantage in this area of the world?

Question 13

How can MNCs protect themselves from government action?

Question 14

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?

Question 15

What strategy would be the most useful to companies interested in Brazilian investment?

Question 16

As Russia continues to succeed with a decentralized economy and foreign investors flood in, a Chicago, Illinois- based computer chip manufacturer decides that it may be time to expand operations overseas.The company has a series of patents that provide legal protection and allow it to dominate a small but growing segment of the computer market.Its sales estimates reached $147 million within three years, but it believes that this could rise to $200 million if it was to expand internationally.Adam Smith, CEO of the company, had previously considered China and India for their cheap labor, but decided that their rapid growth and intense international interest would just lead to a higher bidding price.Furthermore, there are far fewer direct competitors expanding in Russia, whereas technological parts and services industries are already pervasive in other emerging countries.Adam recalls a time when Russia experienced high human trafficking, corruption, and general political instability, but he believes that with so much international interest in Russia, these issues must be curbed by this point in time.
Adam is confident that a deal will be accepted by Russia as it continues to welcome foreign investment to maintain economic growth.A state-of-the-art plant could help to reduce unemployment further and provide an inflow of needed capital.However, the banker is concerned that because of the political risks and uncertainty in Eastern Europe in general and Russia in particular, the company may either lose its investment through government expropriation or find itself unable to get profits out of the country.Given that the company will have to invest approximately $20 million, the venture could seriously endanger the company's financial status.
Adam understands these risks but believes that with the help of an international management consultant, he can identify and minimize the problems."I'm determined to push ahead," he told the banker, "and if there is a good chance of making this project a success, I'm going to Russia."
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.

Question 17

In his negotiations with the Russian government, what suggestions or guidelines would you offer to Adam? Identify and describe two or three.

Question 18

After three centuries under the rule of Portugal, Brazil became an independent nation in 1822.By far the largest and most populous country in South America, Brazil has overcome more than a half century of military intervention in the governance of the country to pursue industrial and agricultural growth and the development of the interior.
After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41.5 billion IMF-led international support program in November 1998.In January 1999, the Brazilian Central Bank announced that the real would no longer be pegged to the U.S.dollar.The consequent devaluation helped moderate the downturn in economic growth in 1999, and the country posted moderate GDP growth in 2000.Economic growth slowed considerably in 2001-2003-to less than 2 percent-because of a slowdown in major markets and the hiking of interest rates by the Central Bank to combat inflationary pressures.President Luiz Inácio Lula da Silva, who took office on January 1, 2003, gave high priority to reforming the complex tax code, trimming the overblown civil service pension system, and continuing the fight against inflation.By exploiting vast natural resources and a large labor pool, Brazil is today South America's leading economic power and a regional bellwether as it continues toward a free-market society.
After winning a landslide victory in 2002 on a campaign to revamp the economy and battle for the poor, President Lula da Silva reassured worried investors when he continued his predecessor's plan of strict financial austerity.Instead of catching the jitters as predicted, the country's bond and stock markets enjoyed stellar returns in 2003 and are still going strong.But within a year, pressure was mounting on Lula da Silva to keep true to his populist roots.After riding a wave of popular support through his first year, Lula da Silva faced some criticism from within his own Workers' Party and governing coalition as well as from ordinary voters.Lula has also gained a reputation for being thin-skinned when it comes to criticism; he expelled a foreign journalist critical of his policies.Although Lula's popularity dipped through this period, da Silva was reelected in 2006, and received more votes than any other Brazilian elected president.During his second term, Brazil continued its progress in modernization and da Silva's support gained steam again.In 2010, da Silva entered the final year of his second four-year term as one of the most popular Brazilian politicians of all time.But in Latin America, any change in leadership is always met with nervousness from financial markets because it creates uncertainty and reminds business of previous transitions that have been disruptive.
Brazil's economy rebounded sharply from the global economic recession in 2009, with GDP growth of 5.5 percent expected in 2010.According to The Economist, Brazil is likely to become the world's fifth largest economy, overtaking Britain and France before 2025.Brazil's progress in fighting poverty has been one of the most impressive of any developing country.Brazil boasts a number of world class companies, including Embraer, the global leader in shortand mid-range jet aircraft.In addition, Brazil will be host to the World Cup soccer match in 2014 and Rio will host the summer Olympic games in 2016.Substantial infrastructure investment is expected in advance of these two events.Brazil announced in early 2007 the discovery of the Tupi and Carioca oil fields off the coast of Rio de Janeiro.The oil reserves in these fields are conservatively estimated at between 30 billion and 80 billion barrels, which would put Brazil in the top ten countries in the world by reserves.In May of 2010, Brazil announced another large discovery in the Santos Basin.Output from the existing Campos Basin and the discovery of the new fields could make Brazil a significant oil exporter by 2015.Brazil's national oil company, Petrobras, is one of the largest in the world.The government has created a new state-owned company called Petrosal to manage licensing in the new fields.This new company will award some exploration and production rights straight to Petrobras without options for foreign firms.Also, by mandate, it will award over half of the shallow-water contracts to locally owned Oil Service Companies (LOSCs).In deeper and more challenging waters beyond the capacity of local companies, foreign companies will be invited to bid.Those pledging to incorporate Brazilian "content" would be more likely to succeed.Higher taxes and fees are expected as well.Nonetheless, this sector is likely to create substantial new opportunities for foreign firms in Brazil.
What strategy would be the most useful to companies interested in Brazilian investment?

Question 19

What proactive political strategies might help protect MNCs from future changes in the political environment?

Question 20

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.

Question 21

Considering the economic and political environment, what types of companies would benefit the most by expanding operations to Brazil?

Question 22

As Russia continues to succeed with a decentralized economy and foreign investors flood in, a Chicago, Illinois- based computer chip manufacturer decides that it may be time to expand operations overseas.The company has a series of patents that provide legal protection and allow it to dominate a small but growing segment of the computer market.Its sales estimates reached $147 million within three years, but it believes that this could rise to $200 million if it was to expand internationally.Adam Smith, CEO of the company, had previously considered China and India for their cheap labor, but decided that their rapid growth and intense international interest would just lead to a higher bidding price.Furthermore, there are far fewer direct competitors expanding in Russia, whereas technological parts and services industries are already pervasive in other emerging countries.Adam recalls a time when Russia experienced high human trafficking, corruption, and general political instability, but he believes that with so much international interest in Russia, these issues must be curbed by this point in time.
Adam is confident that a deal will be accepted by Russia as it continues to welcome foreign investment to maintain economic growth.A state-of-the-art plant could help to reduce unemployment further and provide an inflow of needed capital.However, the banker is concerned that because of the political risks and uncertainty in Eastern Europe in general and Russia in particular, the company may either lose its investment through government expropriation or find itself unable to get profits out of the country.Given that the company will have to invest approximately $20 million, the venture could seriously endanger the company's financial status.
Adam understands these risks but believes that with the help of an international management consultant, he can identify and minimize the problems."I'm determined to push ahead," he told the banker, "and if there is a good chance of making this project a success, I'm going to Russia."
Using Figure 10-3, what strategy would you recommend that the firm use? Why?

Question 23

How might alliances and joint ventures reduce risk and help relationships with government actors and other stakeholders?

Question 24

After three centuries under the rule of Portugal, Brazil became an independent nation in 1822.By far the largest and most populous country in South America, Brazil has overcome more than a half century of military intervention in the governance of the country to pursue industrial and agricultural growth and the development of the interior.
After crafting a fiscal adjustment program and pledging progress on structural reform, Brazil received a $41.5 billion IMF-led international support program in November 1998.In January 1999, the Brazilian Central Bank announced that the real would no longer be pegged to the U.S.dollar.The consequent devaluation helped moderate the downturn in economic growth in 1999, and the country posted moderate GDP growth in 2000.Economic growth slowed considerably in 2001-2003-to less than 2 percent-because of a slowdown in major markets and the hiking of interest rates by the Central Bank to combat inflationary pressures.President Luiz Inácio Lula da Silva, who took office on January 1, 2003, gave high priority to reforming the complex tax code, trimming the overblown civil service pension system, and continuing the fight against inflation.By exploiting vast natural resources and a large labor pool, Brazil is today South America's leading economic power and a regional bellwether as it continues toward a free-market society.
After winning a landslide victory in 2002 on a campaign to revamp the economy and battle for the poor, President Lula da Silva reassured worried investors when he continued his predecessor's plan of strict financial austerity.Instead of catching the jitters as predicted, the country's bond and stock markets enjoyed stellar returns in 2003 and are still going strong.But within a year, pressure was mounting on Lula da Silva to keep true to his populist roots.After riding a wave of popular support through his first year, Lula da Silva faced some criticism from within his own Workers' Party and governing coalition as well as from ordinary voters.Lula has also gained a reputation for being thin-skinned when it comes to criticism; he expelled a foreign journalist critical of his policies.Although Lula's popularity dipped through this period, da Silva was reelected in 2006, and received more votes than any other Brazilian elected president.During his second term, Brazil continued its progress in modernization and da Silva's support gained steam again.In 2010, da Silva entered the final year of his second four-year term as one of the most popular Brazilian politicians of all time.But in Latin America, any change in leadership is always met with nervousness from financial markets because it creates uncertainty and reminds business of previous transitions that have been disruptive.
Brazil's economy rebounded sharply from the global economic recession in 2009, with GDP growth of 5.5 percent expected in 2010.According to The Economist, Brazil is likely to become the world's fifth largest economy, overtaking Britain and France before 2025.Brazil's progress in fighting poverty has been one of the most impressive of any developing country.Brazil boasts a number of world class companies, including Embraer, the global leader in shortand mid-range jet aircraft.In addition, Brazil will be host to the World Cup soccer match in 2014 and Rio will host the summer Olympic games in 2016.Substantial infrastructure investment is expected in advance of these two events.Brazil announced in early 2007 the discovery of the Tupi and Carioca oil fields off the coast of Rio de Janeiro.The oil reserves in these fields are conservatively estimated at between 30 billion and 80 billion barrels, which would put Brazil in the top ten countries in the world by reserves.In May of 2010, Brazil announced another large discovery in the Santos Basin.Output from the existing Campos Basin and the discovery of the new fields could make Brazil a significant oil exporter by 2015.Brazil's national oil company, Petrobras, is one of the largest in the world.The government has created a new state-owned company called Petrosal to manage licensing in the new fields.This new company will award some exploration and production rights straight to Petrobras without options for foreign firms.Also, by mandate, it will award over half of the shallow-water contracts to locally owned Oil Service Companies (LOSCs).In deeper and more challenging waters beyond the capacity of local companies, foreign companies will be invited to bid.Those pledging to incorporate Brazilian "content" would be more likely to succeed.Higher taxes and fees are expected as well.Nonetheless, this sector is likely to create substantial new opportunities for foreign firms in Brazil.
Considering the economic and political environment, what types of companies would benefit the most by expanding operations to Brazil?

Question 25

How should BellSouth, AES, and other companies address concerns about government policies in Brazil?