Memoire Online - Impact of political risks in international marketing: the case of West Africa

These risks constitute some laws directed against foreign firms. Some government-induced risks are very drastic. There are expropriation, confiscation and domestication.

Expropriation is the seizure of foreign assets by a government with payment of compensation to the owners. In other terms, it is involuntary transfer of property, with compensation, from a privately owned firm to a host country government. Expropriation may generate some funds for the owners. However, procedures to get paid from the government are sometimes protracted and the final amount remains low. Furthermore, if no compensation is paid, conflicts may erupt between the host country and the country of the expropriated firm. For instance, the relations between U.S. and Cuba acknowledge such situation, since Cuba does not offer compensation to U.S. firms that have their assets sized.^3(*) Also, expropriation can refrain other companies from investing in the concerned country.

Confiscation is another type of ownership risk similar to expropriation, except compensation. It is involuntary transfer of property, no compensation, from a privately owned firm to a host country government. In confiscation, firms do not receive any funds from government. Thereby, it represents a more risky situation for foreign firms. Some industries are more vulnerable to confiscation than others because of their importance to the host countries and their lack of ability to shift operations. Sectors such as mining, energy, public utilities, and banking have been targets of such government actions.

Domestication offers to governments a subtle control over the foreign investments. There is a partial ownership transfer and companies are urged to prioritize local production and to retain a large share of the profit within the country. Domestication can negatively impact the international marketer activities, as well as that of the entire firm. For example, if foreign companies are forced to hire nationals as managers, poor cooperation and communication can result. If domestication was imposed within a short time span, poorly trained and inexperienced local managers would head the firm operations with possible lost of profits.

Other government actions-related risks are less dangerous but more common such as boycott, sabotage. When facing shortage of foreign currency, government, sometimes, attempts to control the movement of capital in and out of the country. Often, exchange controls are levied selectively against certain products or companies. Exchange controls limit importation of goods so that firms might be confronted with difficulties in their regular transactions. Severe restrictions on import can be a motive for foreign corporate to shut down. Governments may also raise the tax rate applied to foreign investors in order to control them and their capital. Government may implement a price control system. Such control uses to derive from a sensitive political situation. For example, social pressure may result in a kind of price standardization for particular sectors like food, transportation, fuel, and healthcare.

Political risks like arms conflicts, insurrection may affect all firms in the country equally. For that reason they are called macro political risks. Unlike, nationalization, strikes, expropriation may affect only a handful and specific firm, they are named micro political risks.

Some negative effects of political risks on firm are summarized in the following table.

Table 1. Holistic table summarizing the major political risks and their effects on firms

TYPES	IMPACT ON FIRMS
Expropriation	Loss of future profits

Confiscation	Loss of assets
Confiscation	Loss of future profits

Campaigns against foreign goods	Loss of sales
Campaigns against foreign goods	Increased costs of public relations efforts to improve public image

Mandatory labor benefits legislation	Increased operating costs

Kidnappings, terrorists threats, and other forms of violence	Disrupted production
	Increased security costs
	Increased managerial costs
	Lower productivity

Civil wars	Destruction of property
	Lost sales
	Disruption of production
	Increased security costs
	Lower productivity

Inflation	Higher operating costs

Repatriation	Inability to transfer funds freely

Currency devaluations	Reduced value of repatriated earnings

Increased taxation	Lower after-tax profits

In long run, and depending on the severity of the risks, action taken by government may decrease income and be detrimental to the host country economy. Strong political risks that are deeply rooted in the country governance habit might be barriers to foreign investment and country prosperity. What is going on in West Africa?

Impact of political risks in international marketing: the case of West Africa

2.2.2.2 Political risks induced by the government