Political Risks

The three main concerns facing by any

international business entity are political
stability, the Govt¶s orientation and
nationalism.
‡ Political Risks: It is the vulnerability of
returns of a project to the political acts of a
sovereign government.
 Types of Risks
‡ Blockage of Funds: It refers to the fact that
although a business entity may own the funds and
still holds the property rights, it can not export its
earning for investment purposes.

‡ Domestication: It refers to the transfer of control

of foreign investment to national ownership to
bring firms¶ activities in the line of national
interest.
‡ Expropriation: It refers to the
government confiscation of property
with or without proper reimbursement.
 ëssessment of Political Risk
‡ Recognize the existence of political risk and
its accompanying consequences.
‡ Develop plans and policies in advance to
cope with such risk.
‡ Maximize compensation in the event of
expropriation.
 Pre Investment Planning
‡ ëvoidance: ëvoiding the political risk by not
understanding any foreign investment.
‡ Insurance: Several business entities have come up
which under write the insurance of political risk
‡ Negotiating: ërrangement drawn up between the
company and the ruling government.
‡ Structuring of Investment: Diversification of
investment so that it is not concentrated in any one
country.
 Post Investment Planning
‡ Planned Divestment: Divestment of assets in the
foreign country over a fixed period of time so as to
minimize the risk involved.
‡ Short term profit maximization: Sacrifice long
term goals in favour of short term objectives.
‡ Develop local stakeholders: Local stakeholders
will protect the firm for their own interest.
‡ ëdaptation: Profits can also be earned through
management contracts.