Question

List some forms of political risk other than a takeover of a subsidiary by the host government, and briefly elaborate on how each factor can affect the risk to the MNC.Identify common financial factors for an MNC to consider when assessing country risk. Briefly elaborate on how each factor can affect the risk to the MNC.

Answer 1

Answer with Explanation:

The political risk are the risk that the investors and corporation bears who are affected by the political decisions of government. The adverse impact of political decision making is reduction in earnings, abandoning of operations, government interventions, etc.

Here are some of the political risks that has adverse impact on the operations of Multinational Corporations:

• Blocked funds will result in loosing potential investments in other countries due to shortage of fund created by the blockage in movement of funds from one country to other. This blockage is as a result of regulations passed to restrict the use of money generated in a country.
• Changing tax laws will result in the decrease in earnings for the shareholders and retained earnings for the corporations
• Public revolt against the firm which was to abandon the use of fair treatment like in the case of PIA-Pakistan International Airlines. The company is struggling to lower its losses by rewarding the right person and firing employees who are working as per set standards. The employees has revolted against the firm which has severe impact on the share value in the stock market. The revolt continued for the whole month.
• Changing Interest rates would result in increase in interest cost to MNC which is also because of government interventions.
• Attitude of the host government towards MNC is political risk if the host government is willing to tighten controls which includes environmental related regulations, worker's right act, etc. This would increase the cost to the multinational corporations.
• Corruption and rule of Law effect the most to the corporations because the fraudulent activities can not be stopped if there is no rule of law. It also depends on how long does a legal case takes to be resolved.

The Financial factors includes inflation rate, Exchange rate, GDP growth rate, interest rates, electricity cost, corporation taxes, labor costs, industry specific policies, etc. These factors can result in acceptance or rejections of projects in the country because these are the main financial factors that has tendency to alter the decision of the investors and corporations.

• Corporation Taxes and interest rates are discussed above.
• All the cost related items which includes electricity costs, inflation rates, labor costs, etc are very important element as they are almost more than 50% of total cost of the project. Hence these are the financial factors that has immense importance when assessing country risks and considering potential investment opportunities.
• Exchange rate are another important element that helps in assessing the country risk of the company. If the investment was profitable but the currency deflated against the MNC's home country then it was not a good decision. The exchange rate fluctuations will also be an important financial factor while making business decisions.
• GDP growth rate is also one of the significant factor to consider because significant investment value grows if the Gross Domestic Production is growing with great pace and vice versa.