2.1. General context
Assessing the political environment is an important part in
any business decision. Laws and regulations passed by either local, regional
and central government bodies can affect foreign firms' operations. Also, firms
are comfortable assessing the political climates in their home countries.
However, assessing the political climates in other countries is still
problematic.
2.2. Classification and description of political
risks
When doing international business, the manager may face
several types of financial risks. The major types of financial risks are
commercial risks, political risks, exchange rate risks, and other such as
inflation-related risks. Thus, political risks are non commercial risks.
Political risks are any changes in the political environment that may adversely
affect the value of a firm's business activities. Political risks may occur in
any nation, but the risks vary considerably between countries. We may
distinguish two types of classification of political risks. A classification
based on the characteristic of political risks and a classification or
categorization based on the local government actions or control.
2.2.1 Classification based on the characteristics of
political risks
Characteristics refer to as the facts that are inherent to
each political risk. In other terms, their uniqueness or what make them
different from one another. There are three types of such characteristics:
ownership risks, operating risks, and transfer risks.
2.2.1.1. Ownership risk
In which the property of the
firm is threatened through expropriation,
confiscation or domestication.
Ownership risk exposes property and life.
The triad will be explained in
the second classification.
2.2.1.2 Operating risk
In which
there is interference with the firm operations. The ongoing operations of the
and/or the safety of its employees are threatened through changes in laws,
environmental standards, tax codes, terrorism, armed insurrection or wars, and
so forth.
2.2.1.3 Transfer risk
In which
the government interferes with a firm's ability to shift funds into and out of
the country.
2.2.2 Classification based host country
actions
We can distinguish two types: political risks out of the
government control and political risk induced by the government.
2.2.2.1 Political risks out of
government control.
There are risks or events arise from nongovernmental actions,
factors that are outside the government responsibility. There are wars,
revolution, coup d'etat, terrorism, strikes, extortion, and
kidnappings. They all derived from some unstable social situation,
with population frustration and intolerance. All these risks can generate
violence, directed towards firms' property and employees. We may also have the
case of externally induced financial constraints and externally imposed
limits on imports or exports, especially in case of embargoes or any
economic sanctions against the host country.
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