Uncertainty and an unexpected political shift is one way to describe the political risk that Multinational Corporations face today. In an effort to expand and win over competition, MNCs are venturing out into undeveloped third worlds for cheaper labor and resources, as well as expand global use of the firm’s product or service. With any investment however, there are risks that need to be evaluated before a firm can move forward, one being political risk which is evident throughout the globe, even in the US.

When going global, MNCs have to consider political uncertainty and variation, as well as violence and terrorism. They have to look at the foreign government’s policies and regulations, as well as note their alliances with neighboring countries in case of arising conflicts. There are two major categories of analysis which are Micro and Macro analysis focused on political decisions that are like to affect the corporation. Macro analysis focuses on issues like political corruption and chaos, government limits on transferring profits out of the country, and depreciation in currency. Micro analysis looks at prejudice against particular sectors of economy, for example: are imports discouraged by the government while exports encouraged? Do some firms get treated differently than others, and what are the taxes and restrictive laws pertaining to the firm’s specific business?

Political risk can be broken down into three main categories which are Transfer Risk, Operational Risk, and Ownership Control Risk. Transfer risk is the risk of exchange where the government may declare that their currency is non transferable. This makes it impossible for the MNC that’s doing business there to pull out the funds out of the country. Operational risk examines government uncertainty that policies and regulations may constrain how the firm operates in regards to marketing, financing and production. The government may enforce taxes, limits on exports, and price controls that limit the firms operations. Lastly, ownership control risk relates to expropriation, and limits to the firm’s ownership and control. The government may push for local participation in profits as well as confiscate goods and ownership.

Sources:

www.Lloyds.com/360

Sak Onkvisit and John J. Shaw. International Marketing, Analysis and Strategy 2007 edition.