Navigating Political Risks in Multinational Enterprises

Political Risks in Multinational Enterprises

Political risks can be classified on three levels:

• Firm-specific risks: Also known as micro risks, these affect the MNE at the project or corporate level.
• Country-specific risks: Also known as macro risks, these also affect the MNE at the project or corporate level but originate at the country level.
• Global-specific risks: These affect the MNE at the project or corporate level but originate at the global level.

Firm-Specific Risks: Governance Risk

The main firm-specific risk is governance risk, which is the ability to exercise control over the MNE as a whole, globally, and within a specific country’s legal and political environment on the individual subsidiary level. The most important type of governance risk arises from a goal conflict between bona fide objectives of governments and private firms.

The main tools used to manage goal conflict are to negotiate an investment agreement, purchase investment insurance and guarantees, and to modify operating strategies in production, logistics, marketing, finance, organization, and personnel.

Country-Specific Risks

The main country-specific risks are transfer risk (blocked funds) and certain cultural and institutional risks. Blocked funds can be managed by at least five different strategies.

Cultural and Institutional Risks

Cultural and institutional risks emanate from host country policies with respect to ownership structure, human resource norms, religious heritage, nepotism and corruption, intellectual property rights, and protectionism. Managing cultural and institutional risks requires the MNE to understand the differences, take legal actions in host country courts, support worldwide treaties to protect intellectual property rights, and support government efforts to create regional markets.

Global-Specific Risks

The main global-specific risks MNEs are currently facing are caused by terrorism and war, the anti-globalization movement, environmental concerns, poverty, and cyberattacks.

MNEs need to adopt a crisis plan to protect itself, its employees, and property in the face of such threats.