Managing political risks in international business
Abstract
International trade has become common in the current society. Investors and governments have established business in different countries to markets products developed at home. Political risks have become common in the market. They affect international business established by investors, governments, and big firms. Political risks affect the productivity and growth of a firm. The risks lead to loose of market, customers and products. To overcome the effects of political risks, one has to establish measures to manage them like diversification. Other measures include integrating political risks in risk management system and analyzing risks before investment. Managers have established ways to manage political risks so as to increase productivity in the business. According to a study carried out by Eurasia and PricewaterhouseCoopers, most businesses do not know how to manage political risks. Few business monitor political risks before investing and continue to monitor them after investment. There are various reasons why businesses do not manage political risks. Businesses have limited finances to manage political risks. Other businesses have in adequate knowledge about political risks and management. Some of the managers in the business make inaccurate decisions about political risks.
Introduction
Political risks are risks incurred by investors, big firms and governments. Political risks are faced by governments and firms that have invested in the global market. Also, investors who have invested in foreign countries face political risks. Political risks result from various issues like changes in political decisions. They also result from changes in politics or governance of a country. Most countries in the world do not have stable forms of governance. Countries have governance issues like political strikes, corruptions and other issues associated with governance like regulations. The issues affect economic status of the country and cause risks to business invested in the country. This paper analyzes how to manage political frisks.
Managing political risks in the international business
Political risks have become common in many countries as the countries do not have good governance (Moran, 2001). Most investors who have invested in foreign countries have incurred a lot of loses that result from political risks. Governments and big firms have experienced different effects caused by political risks. For example, the firms have experienced workforce shortage, low productivity and closure of business. This is because managers in various firms have not established good measures to manage political risks. Political risks result from various issues related to politics (Moran, 2001). They can result from political decisions made by governments and regulations. Also, political issues can result from poor governance and political instability. Most countries in the market do not have stable governments.
This affects business in the country and international market. The political changes affect business objectives established by different business. Political risks result from certain events in the country that affect the stability of the country. Events like terrorism, coup and civil war cause political instability in the country. Other events that cause political instability in the country include riots (Moran, 2001).Managers should establish measures to manage political risks from affecting businesses. There are various measures that can be used to manage political risks in the market (Moran, 2001).First, investors, governments and firms should analyze the environment before investing, and understand the political conditions in the country. They should analyze the risks faced by other business in the country before establishing an investment. Investors can get information about the political environment in the country from the website and any other source.
Analyzing the business and political environment is important for any investor. It helps the investor make wise decisions (Ian, 2009). For example, the investor will decide to invest in the country or not depending on the political environment of the country. He should also analyze the policies and other regulations used by the government. Government regulations affect many businesses established by investors. To overcome risks, one should carry out market research so as to get clear information (Ian, 2009). Market research helps control looses resulting from political risks as investors and other managers are able to make clear decisions. Most companies face looses caused by political risks because they do not assess political risks before establishing any business in a foreign market. Assessing the environment helps the company know the political risks in the country. The company gets clear information on the effects the risks have on the business. Assessing political risks is a major step in managing political risks and companies should utilize it (Ian, 2009).Another method that can be used to manage political risks is diversification.
Diversification involves establishing multiple firms in different locations (Ian, 2009). Diversification is important in any business as it helps overcome risks associated with the businesses. Investors, governments and big firms should use diversification strategy to manage political risks. Investors should establish investments in different countries (Ian, 2009). They should avoid investing in a single country. This is because the political environment of the country can affect the business in the country negatively. Diversification helps investors reduce political risks, and its effect. Having multiple businesses in different countries makes it safe for investors to manage political risks. Thus, investors should encourage diversification when investing (Ian, 2009).Moreover, investors and governments can use systematic monitoring tools to manage political risks. The systematic monitoring tools helps investors identify risks in the country and the effects the risks have on the business (Ian, 2009). This makes it easy for the business to manage political risks. Investors should continue to monitor political risks and the effect they have even after joining the market. This will help the business establish measures to control further effects.
For example, the investors can decide to move the business to other locations or increase measures to manage political risks (Ian, 2009). According to a report released by PricewaterhouseCoopers and Eurasia, most companies having international business do not have systematic monitoring tools. This has made it difficulty for investors to manage political risks in different countries. According to the study, most countries have various types of political risks that affect investments in the countries. The political risks have made it difficulty for investors to make high profits. To overcome political risks, PricewaterhouseCoopers and Eurasia advice companies to use systematic monitoring tools to manage political risks (Ian & Zakaria, 2006).Another strategy that can be used to manage political risks is improving decision making in the organization. Managers are required to communicate political risks with other members in the organization so as to improve decision making. Most organizations have risk managers who identify risk in the organization and how to manage them. The risk managers are required to help manage political risks in the organization (Ian & Zakaria, 2006).
Communicating political risks, and their effect will help develop the right measures to manage the risks. Big firms have employed professionals to act as chief risk officers unlike small firms (Ian & Zakaria, 2006). The main duty of the chief risk officer is to identify political risks like unfavorable political climate, changes in regulations in a country. Also, the chief risk officer is responsible for analyzing changes in currency, and any other political aspects. Small companies do not have professionals who act like chief risk officers, the companies employ chief finical officer. This makes it difficulty for the company to analyze, and monitor the political environment. Examination of the political environment and analysis of the impact of the risks to the business is the best method to avoid political risks (Ian & Zakaria, 2006). This is because the company is always aware of any political change and takes necessary steps to prevent political risks. The business is able to pull out of a market that is risk, and move to an environment that is good for investment. Evaluating political risks is important as it improves decision making in the organization. Managers should views political risks important like other risks that affect the business.
This will help them see how political issues affect business. Managers should be able to monitor political risks globally (Ian & Zakaria, 2006).In addition to using communication political risks and using systematic monitoring tool, investors should use insurance to manage political risks. Investors can get political insurance from an insurance agency. Political risks insurance is used to manage political risks at the micro level and macro level. Most countries have political risks insurance that provides insurance covers for investments in the country (Ian, 2007). The political insurance policies are important to the investor as they manage the effects of political risks on the investment. For example, an investor can get insurance for any damage caused to investment after political instability like terrorism. The investor gets his or her property back after insurance (Ian, 2007). The investor should know the difference between micro political risks and macro political risks so as to get the right insurance. Political risk insurances are mostly used to manage political risks at the micro level. Thus, the investor and business managers should know the different between micro level and macro level. It is difficulty to get political risk insurance to manage risks at the macro level (Ian, 2007).Managers should integrate political risks into a risk management system. This will help manage political risks an organization (Ian, 2007).
The risk management system helps organizations manage political risks by evaluating the risks in the country like evaluation of currencies and political instability. Managers analyze the effects of the risks and develop strategies to manage the risks. According to the report released by PricewaterhouseCoopers and Eurasia, most companies did not have risk management systems to manage political risks after investment (Ian, 2007). This made it difficulty for companies to monitor the political environment in the country. Also, the countries did not know the effects of political risks on the future of the company. A risk management system helps companies collect information about the political environment, analyzed it and establish strategies to control the risks (Ilan, Mitchell, Gurumoorthy etal, 2006).Investors should know the difference between micro level risks and macro level risks and the effects they have on the company and the economy. There are two types of political risks. That is macro level political risks and micro level political risks. Macro level political risks are connected with non project risks (Ilan, Mitchell, Gurumoorthy etal, 2006).
Macro level political risks affect all the people in the country. Micro political risks can have effect on international trade. So managers should take time to evaluate macro level risks. Managers in the organization can quantify macro level risks and develop them like other risks. This will help find measures to prevent micro level political risks.Micro level political risks have negative effects on projects in a country. Micro level political risks include changes in climate of the country. The investor should identify micro level political risks by analyzing the political environment. This will help make a wise decision (Ilan, Mitchell, Gurumoorthy etal, 2006).Lastly, managers should design an emergency response system to monitor markets in different countries. Developing countries are more vulnerable to political risks than developed countries. The countries face political issues like civil riots. The political issues prevent workers from coming to worker and this affects productivity in the firm. The business should use design emergency system to overcome disruption like workforce shortage. Workers should be able to work from various places (Ilan, Mitchell, Gurumoorthy etal, 2006).
Conclusion
Political risks are common in many countries. The political risks have adverse effects on the productivity and growth of a company. Political risks affect the future expansion of a company. There are various types of political risks in the country. Examples of the political risks are political instability that results from terrorism, civil and labor riots. Other political risks include change in the governance of a country, political climate and change in regulation, and currencies in a country. The risks affect many businesses. Most business do not how to manage political risks. There are various strategies that business can use to manage political risks. For example, business can use diversification strategy to manage political risks. Diversification strategy allows investors to have different investments in different countries. This lowers the effect of political risks on the investment. Another strategy is analyzing the political environment of the country before investing. Investors should analyze the political environment like changes in regulations, currencies, governance of a country. This will make it easy for the investor to make wise decisions. Also, managers should integrate political risks into the risk management system in the organization. This will help the company to evaluate the political risks and analyze them. Investors should get political insurance policies to cater for any risks resulting from the political environment. The political insurance will make it easy for the investor to reclaim his investment incase of looses. Lastly, business should evaluate political risks and share information with other members in the organization. The chief risk officer should identify political risks and find strategies to overcome them. The strategies above will help the company manage political risks and prevents looses.
Reference
Ian B. (2009). Political Risk: Countering the Impact on Your Business, QFinance, November
Ian B. (2007).How to Calculate Political Risk,” Inc. Magazine, page 101
Ian, B., & Zakaria, F. (2006). Hedging Political Risk in China, Harvard Business Review 84, no. 11
Ilan, A., Mitchell, M., Gurumoorthy, R., &Steen, R (2006), Managing Micro-Political Risk: A Cross Sectional Study, Thunderbird International Business Review 48 (5), page 623-642.
Moran, T.H. (2001). International Political Risk Management: Exploring New Frontiers (IBRD: Washington, page 213-214
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