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International Management 9th Edition by Helen Deresky
Edition 9ISBN: 978-9332584730International Management 9th Edition by Helen Deresky
Edition 9ISBN: 978-9332584730 Exercise 1
Can political risk be "managed" If so, what methods can be used to manage such risk, and how effective are they Discuss the lengths to which you would go to manage political risk relative to the kinds of returns you would expect to gain.
Explanation
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Political "risks" can be managed to a large extent. Higher the risks, higher the rewards. Very few corporates take decisions to suspend their firm's dealings with a certain country and totally withdraw from the country. Some of the ways political "risks" can be managed are:
• Many multinationals may initially be interested in selling their products or services in a country. Instead of having their own subsidiary, they would appoint a local agency to market their products or services manufactured elsewhere. The risks are minimal and at the same time the local country market is available. This arrangement may not always be possible, as there could be situations when a country imposes restrictions on imports of goods or services. Some countries also insist on the extent of local content in the product or services. Some other countries may impose prohibitive import duties which will raise the final prices. To illustrate, well known liquor brands such as Chivas Regal are not produced in India. The import duties are very high which raise the final prices of the whisky limiting the market size !
• Some multinationals license their technology or knowhow to local manufacturers and in return they get knowhow fees and royalty payments at rates varying from 2% to 5% of the final prices of the products. Some key or core components may be imported from the principals. TATA Motors, a well known vehicle manufacturer in India had this kind of arrangement for the manufacture of commercial vehicles with the German vehicle producer Mercedes Benz, till recently. There were hardly any financial outlays from Mercedes Benz and therefore the risks were low.
• Investment through joint ventures, which includes equal equity investment from the multinational as well as the local partner reduces the risk. The local partner brings to the table, the knowledge of local conditions including knowhow to manage the political "risk". An example of this type of arrangement which worked for some time, is the operations in India of WALMART, the well known retailer.
• Localization of operations and the development of local sources for components reduces the political risk such as policy changes in import duties, exchange rate fluctuations, local content stipulations and so on. Suzuki, the well known Japanese vehicle manufacturer has a very successful automobile joint venture in India, where except for the gear box, most other components are locally produced/sourced.
• Some of the multinationals try to reduce the political risk by providing development assistance, infrastructural development and involvement in activities for the betterment of local communities where they operate the business. Pepsico which operates the well known Fritolay snackfood division, has done considerable work in improving the farming practices for agriculture products such as potato and tomato in India. This kind of activities improves the company's image and helps in reducing the political "risk".
• Many MNCs also choose to locate their business in multiple countries so that the "political risks" are spread to more countries. The fortunes of the company are not tied up with one country alone.
The "risk-reward" ratio or the "cost-benefit" ratio decides the lengths to which companies would go to manage the political risk.
Pepsi started the operations in India much before their competitor Coca Cola. They are enjoying their first mover advantage because of all the development work they carried out in the late 1980s in India.
• Many multinationals may initially be interested in selling their products or services in a country. Instead of having their own subsidiary, they would appoint a local agency to market their products or services manufactured elsewhere. The risks are minimal and at the same time the local country market is available. This arrangement may not always be possible, as there could be situations when a country imposes restrictions on imports of goods or services. Some countries also insist on the extent of local content in the product or services. Some other countries may impose prohibitive import duties which will raise the final prices. To illustrate, well known liquor brands such as Chivas Regal are not produced in India. The import duties are very high which raise the final prices of the whisky limiting the market size !
• Some multinationals license their technology or knowhow to local manufacturers and in return they get knowhow fees and royalty payments at rates varying from 2% to 5% of the final prices of the products. Some key or core components may be imported from the principals. TATA Motors, a well known vehicle manufacturer in India had this kind of arrangement for the manufacture of commercial vehicles with the German vehicle producer Mercedes Benz, till recently. There were hardly any financial outlays from Mercedes Benz and therefore the risks were low.
• Investment through joint ventures, which includes equal equity investment from the multinational as well as the local partner reduces the risk. The local partner brings to the table, the knowledge of local conditions including knowhow to manage the political "risk". An example of this type of arrangement which worked for some time, is the operations in India of WALMART, the well known retailer.
• Localization of operations and the development of local sources for components reduces the political risk such as policy changes in import duties, exchange rate fluctuations, local content stipulations and so on. Suzuki, the well known Japanese vehicle manufacturer has a very successful automobile joint venture in India, where except for the gear box, most other components are locally produced/sourced.
• Some of the multinationals try to reduce the political risk by providing development assistance, infrastructural development and involvement in activities for the betterment of local communities where they operate the business. Pepsico which operates the well known Fritolay snackfood division, has done considerable work in improving the farming practices for agriculture products such as potato and tomato in India. This kind of activities improves the company's image and helps in reducing the political "risk".
• Many MNCs also choose to locate their business in multiple countries so that the "political risks" are spread to more countries. The fortunes of the company are not tied up with one country alone.
The "risk-reward" ratio or the "cost-benefit" ratio decides the lengths to which companies would go to manage the political risk.
Pepsi started the operations in India much before their competitor Coca Cola. They are enjoying their first mover advantage because of all the development work they carried out in the late 1980s in India.
International Management 9th Edition by Helen Deresky
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