Essay On Political Risk

According to Aswathappa (2008, p. 118), a political risk is „any government action or politically motivated event that could adversely affect the long-term profitability or value of a company“. Correspondingly, the political risk encompasses all changes in a political environment that could negatively affect the business operations of the companies. The political risk, also, may be a result of some changes in government regulations, civil unrest, war or politically motivated terrorism. Table 3 shows the most common examples of political risk that multinational companies may face when operating in a certain host country.

The intensity of the political risk differs between countries. However, the political risk is most commonly associated with developing countries in Latin America, Africa, and Asia, but there are many examples of the presence of political risk in the USA, Canada, and Australia and Western European countries. Also, the political risk is more present in business sectors and

When they decide to invest in a certain country, multinational companies have various measures to minimize exposure to political risk. Companies can reduce their financial exposure by decreasing net investment in the local subsidiary, mostly with the repatriation of the subsidiary's profits, paying dividends, selling subsidiary's shares to the locals and renting of equipment instead of buying. Also, the multinational companies can take further steps, such as purchasing inputs from local suppliers, appointing host country citizens on top managerial and administrative positions as well as supporting local charity organizations (Katsioloudes & Hadjidakis, (2011). Also, multinational companies may find protection from the political risk in the host country by buying political risk insurance. Thus the company focuses on assessing the political risk and managing its impacts (Pickford,