Strategies of Multinational Corporations towards Political Risk
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Publication date: 2004-03-25
GNPJE 2004;190(3):45-57
Political risk of economic activity conducted in international environment is considerably higher than of that conducted within one country. This results from the greater complexity and changeability of the international market. In their strategies, multinational corporations must take into account possibility of unfavourable changes in the government policy, outbreaks of internal violence, external conflicts and consequences of an immature and unstable political, legal, administrative and economic structure in many countries. The risk further intensifies when their activity is of a global nature. On the other hand, thanks to risk distribution among many countries, negative developments in one area can be compensated for by positive ones in another area. Political risk can be avoided by not investing in the countries where the risk is higher than average. However, such an approach deprives a company of a chance to achieve windfall profits. Therefore, companies taking up activities in countries representing a high level of political risk get insured against political risk and take up measures towards its reduction. Such measures include negotiations, government guarantees and lobbying, as well as transfer prices. A large group of measures are involved with the so-called integrative strategies, which involve, inter alia, developing good relations with local authorities, establishment of contacts with local firms, a transparent accounting system, employment of nationals including executive posts in the firm, handing over stakes in the company to local subjects, involvement in charitable activity and sponsoring. Risk can also be minimised by means of applying various defence strategies, which generally mean creating conditions in which actions to the detriment of a multinational corporation would be disadvantageous for the host country.
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