Transcript Document

Slide 12.1
Course structure
Classes 1-4
International business environment
Regional vs. global
Triad and IB activities
Politics, culture, trade and finance
Classes 5-9
Firm-specific advantages and firm management
Organization
Production
Marketing
International HRM
Political risk management
International financial management
Class 10
Country-specific advantages
Classes 11-14
Locational choice and regional management
European Union, North
and International
Emerging
Markets
AlanAmerica,
M Rugman andJapan,
Simon Collinson,
Business,
5 Edition, © Pearson Education Limited 2009
th
Slide 12.2
Political risk

Political risk: The probability that political forces will
negatively affect a multinational’s profit or impede
the attainment of other critical business objectives.
A very recent example:
“Negotiations for a major free-trade agreement between the European
Union and the U.S. have been postponed after Washington expressed its
inability to continue them because of the partial government shutdown.
Officials from EU member-states and the U.S. were scheduled to meet in
Brussels next week to discuss the Transatlantic Trade and Investment
Partnership, or TTIP, which upon its successful conclusion would be the
world’s largest free-trade pact. However, U.S. Trade Representative
Michael Froman informed EU officials Friday that the federal government
shutdown has made it impossible to send a negotiating team to Brussels
as scheduled.”
Source: International Business Times, October 10, 2013, 3:12PM EDT. http://www.ibtimes.com/usgovernment-shutdown-hits-free-trade-pact-talks-eu-1415360
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.3
Political risk
Unstable political forces (e.g., government, legal system, etc.)
Some examples:
Expropriation (with/without compensation)
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Indigenization laws
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e.g., in Oct 2010, Venezuelan president Hugo Chavez’s forced takeover of Agroislena, a Spanish vendor
of agricultural products that has operated in Venezuela for more than 50 years.
e.g., on March 9, 2008, Zimbabwe’s President Robert Mugabe signed the Indigenization and Economic
Empowerment Bill into Law. The bill gives indigenous Zimbabweans the right to take over and control over
many foreign owned companies, where an indigenous Zimbabwean is defined as “any person who
before the 18th of April 1980 was disadvantaged by unfair discrimination on the grounds of his or her
race, and any descendent of such person”.
Restriction of operating freedom, e.g., hiring and production
Breach of contracts
Damage to property and/or personnel from terrorism, riots, etc.
Loss of financial freedom
Increased taxes and other financial penalties
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.4
Levels of political risk
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Macro political risk: a risk that affects all foreign
enterprises in the same way.
Micro political risk: a risk that affects selected
sectors of the economy or specific foreign businesses.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.5
Types of political risk
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Legal/governmental risks: are potentially harmful to
foreign businesses but are the product of, or
permissible within, the existing political, economic and
legislative system.
Non-legal or extra-governmental risks: lie outside
the system and are a violation of existing laws.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.6
Types and levels of political risk
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.7
Recent evidence in aluminum industry
Source: Jo Jakobsen (2010). Old problems remain, new ones crop up: Political risk in the 21st century. Business Horizon, 53, 481-190.
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Guinea: in April 2007, when the former civilian government moved to withdraw the
agreement it had made with Russian aluminum giant Rusal, allegedly as part of a
planned review of mineral contracts in general.
Micro & legal/governmental
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.8
Recent evidence in aluminum industry (cont’d)
Source: Jo Jakobsen (2010). Old problems remain, new ones crop up: Political risk in the 21st century. Business Horizon, 53, 481-190.
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Azerbaijan: in March 2006, the government moved to terminate the 25-year
contract it held with Dutch company Fondel for management of the Azeralumnium
smelter, opting instead to take over management of the plant itself. To avoid a
blatant case of breach of contract, the government contended that certain aspects
of the contract were “against Azerbaijan’s interests”
Micro & legal/governmental
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.9
Recent evidence in aluminum industry (cont’d)
Source: Jo Jakobsen (2010). Old problems remain, new ones crop up: Political risk in the 21st century. Business Horizon, 53, 481-190.
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The Dominican Republic: in October 2008, U.S. bauxite miner Sierra
Bauxita Dominicana had to leave the country because of Dominican
government’s expropriation of the firm’s bauxite deposite at a port
in the Caribbean country without compensation.
Micro & legal/governmental
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.10
Recent evidence in aluminum industry
Source: Jo Jakobsen (2010). Old problems remain, new ones crop up: Political risk in the 21st century. Business Horizon, 53, 481-190.
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Guinea: In November 2008, aluminum majors Rusal, Alcoa, and Alcan were forced
to stop production and evacuate employees because of several social unrest.
Macro & non-legal/extra-governmental
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.11
Recent evidence in aluminum industry (cont’d)
Source: Jo Jakobsen (2010). Old problems remain, new ones crop up: Political risk in the 21st century. Business Horizon, 53, 481-190.
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Nigeria: in June 2007, six Russian workers employed by Rusal were kidnapped,
and their Nigerian driver killed, by gunmen entering Rusal’s residential compound
in Ikot Abasi, Nigeria. The abductees spent over 2 months in captivity, before being
released physically unharmed in August.
Micro & non-legal/extra-governmental
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.12
Recent evidence in aluminum industry (cont’d)
Source: Jo Jakobsen (2010). Old problems remain, new ones crop up: Political risk in the 21st century. Business Horizon, 53, 481-190.
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Brazil: in 2004, local environmentalists and protests, who are afraid of being
resettled, succeeded in delaying a $400 million hydroelectric power project in
Brazil – a project whose purpose was to secure access to cheap energy used in
primary aluminum production. The project consortium, led by Alcoa, eventually had
to agree to a substantial compensation package and to increase its spending on
environmental measures.
Micro & non-legal/extra-governmental
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.13
Does (why does) political risk deter FDI?
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Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.14
Does (why does) political risk will deter FDI?
Empirical evidence.
Logarithm of (FDI stock)
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.15
Country analysis and political risk assessment
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.16
Quantifying risk vulnerability
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All risk is relative.
The political/legal, economic, socio-cultural and
technological environment of a foreign country has
different implications depending on the type of
international business that a firm is evaluating.
For example: export restrictions are more important if
a firm is seeking to set up a plant to produce goods
for exports than if the products are for the local
market.
 Weighted Country Risk Assessment Model

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.17
The Weighted Country Risk Assessment Model
Sources: The approach and the items in the table draw from prior risk assessment models and studies, including D. W. Conklin, “Analyzing and Managing Country Risks,” Ivey
Business Journal, vol. 66, no. 3 (January/February 2002), pp. 36–42; S. T. Cavusgil, “Measuring the Potential of Emerging Markets: An Indexing Approach,” Business Horizons, vol.
40, no. 1 (1997); A. I. J. Dyck, Country Analysis (Boston, MA: Harvard Business School Press, 1997); E. Dichtl and H. G. Köglmayr, “Country Risk Ratings,” Management International
Review, vol. 26, no. 4 (1986), pp. 4–12
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.18
The Weighted Country Risk Assessment Model (Continued)
Sources: The approach and the items in the table draw from prior risk assessment models and studies, including D. W. Conklin, “Analyzing and Managing Country Risks,” Ivey
Business Journal, vol. 66, no. 3 (January/February 2002), pp. 36–42; S. T. Cavusgil, “Measuring the Potential of Emerging Markets: An Indexing Approach,” Business Horizons, vol.
40, no. 1 (1997); A. I. J. Dyck, Country Analysis (Boston, MA: Harvard Business School Press, 1997); E. Dichtl and H. G. Köglmayr, “Country Risk Ratings,” Management International
Review, vol. 26, no. 4 (1986), pp. 4–12
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.19
Political risk protection
• Indirect approach
• A priori analysis
• Risk transfer (e.g., sell out the politically risky assets)
• Risk insurance (e.g., purchase a political risk insurance policy)
• Direct approach: negotiation with the host government
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.20
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Negotiation for political risk mitigation
Host Country Has:
MNE Wants:
Access to raw materials
Cheaper
products/manufacturing base
Access to technology/expertise
Market access
Investment in growing firms
(including equity in privatized
firms)
Natural resources
Physical infrastructure
Labor costs
Human capital – productivity
Support industries/services
Science and technology infrastructure
Domestic market-size of market: Per
capita GDP (buying power) + potential
future growth
Policies toward FDI: openness;
liberalization + incentives to attract FDI
Economic stability
Political stability: risk
Host Government Wants:
Employment
Technology transfer + training
(knowledge transfer)
Capital investment
Local multipliers
Increased exports (forex
earnings)
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
New theories and practices
Two of my research papers in 2013
Case Study 1:
Political risk management through business-government negotiation
Mining MNEs in Tanzania
Summarized from Jing Li, Aloysius Newenham-Kahindi, Daniel M. Shapiro, and Victor Zitian Chen
(2013). “Bargaining model revisited: Theory and evidence from China’s natural resource
investments in Africa”. Global Strategy Journal, forthcoming.
Slide 12.23
Interviews
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A case study on mining firms’ investment in Tanzania, a
politically risky country
Time of the interviews:
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May-Jun 2010
Jul-Aug 2011
Sample organizations interviewed:
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4 Western (2 Canadian, 1 Australian, and 1 British)
2 Tanzanian government officials
5 Chinese (3 state-owned and 2 privately owned) *
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* we suspect that Chinese firms/government are different.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.24
One-Tier Bargaining Model (Traditional)
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Based on developed-market MNEs with firm-specific
advantages (FSAs)
Host-Country
Government
MNEs
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.25
Findings: Two-Tier Bargaining Model (US, UK, Germany, Australia)
HomeCountry
Government
Official
development
assistance
General
information
Friendly FDI
environments
Tier-1
Bargaining
Host-Country
Government
Investment
opportunities
Community
modernization
Each MNE
Tier-2
Bargaining
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.26
Findings: The Modified One-Tier Bargaining Model (Chinese)
Host-Country
Government
HomeCountry
Government
Consortia of
Each MNE
MNEs
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.27
Findings: The Modified One-Tier Bargaining Model (Chinese)
Host-Country
Government
Friendly FDI environments
Investment opportunities
Official development assistance
Infrastructure improvement
Multiple purpose projects
HomeCountry
Government
Investment opportunities
Collaboration opportunities
Infrastructure support
Financial resources
Promise executers
Consortia of
MNEs
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Case Study 2:
Political risk management through creative strategy
International private equity/venture capital (PE/VC) in China
Summarized from Sunny Li Sun, Victor Zitian Chen, Mike W. Peng, and Liang Hao (2013). The
process of international institutional entrepreneurship: Transfer of equity ratchet in China.
working paper.
Slide 12.29
Political risks facing international PE/VC in China
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Required political environment for PE/VC
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Strong rule of law that enforces contracts specifying the rules of forming and
transferring equity ownership before it’s actually listed in the capital market
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Strong property-rights defining and protecting the possession and transfer of
equity ownership
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Strong credit system that tracks and sanctions credit history
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Strong capital market allows capital exit through initial public offerings (IPOs)
Corrupt legal-political system and market failures in China
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Weak rule of law featured by weak legal enforcement
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De facto lack of property-rights regime
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Nonexistence of credit system (no sanctions on credit default)
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Non-fluent capital market
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.30
Successful international PE/VCs in China
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A consortium of Morgan Stanley (US), CDH Investment
(Hong Kong), and ACTIS (UK) invested in Chinese Mengniu,
a dairy products manufacturer and retailer, in October
2002 and October 2003 and successfully cashed in HK$
2.61 billion via Mengniu’s IPO in Hong Kong.
A consortium of Morgan Stanley (US) and CDH Investment
(Hong Kong) invested in Chinese Yongle, an electronics and
appliances retailer, in January 2005 and cashed in
HK$0.84 billion via Yongle’s IPO in Hong Kong.
Morgan Stanley (US) invested in Chinese Dongxiang, a
sportswear manufacturer and retailer, in May 2005 and
cashed in more than HK$2.5 billion in Dongxiang’s IPO in
Hong Kong.
A consortium of Deutsche Securities Nominees (HK), Baytree
Investment (Mauritius), and Indopark Holdings (US) invested
in Evergrande, a Chinese real estate company, in 2007 and
cashed in via Evergrande’s IPO in Hong Kong.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.31
Strategy 1: creation of a flexible deal
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Introduced a new practice into China which focuses
on monetary motivation and flexibility under
uncertainty
 Equity ratchet
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a contingent contract between an PE/VC investor and
an investee (e.g., entrepreneur, top management of a
private company, etc.)
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Benchmarking the performance of a firm to a future
target (e.g., IPO, stock price at IPO, growth rate,
profitability, etc.)
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Grants VC/PE a higher ownership from the management if the
management underperforms the target
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Grants the management a higher ownership from the VC/PE if the
management overperforms the target
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Expires without exercise if the management simply meets the target
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.32
Strategy 2: locational choice at the sub-national level
• Three coastal economic centers (Bohai Gulf, Yangtze River Delta, and Pearl
River Delta) are less politically risky.
• More transparent governments
• More effective legal enforcement
• More advanced market development (capital markets in both Shanghai and
Shenzhen)
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.33
Strategy 2: locational choice at the sub-national level
Dongxiang @Beijing
Yongle @Shanghai
Evergrande @Guangzhou
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.34
Strategy 3: careful partner selection
The underlying theory: when formal institutions such as
political system do not work stably and effectively,
business has to rely on the prevailing informal
institutions such as cultures and norms to enforce
cooperation and transactions.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 12.35
Strategy 3: careful partner selection (cont’d)
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Carefully selected Chinese investees
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Strong informal institutions in China (recall the Google
case)
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Political connections
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Chen Xiao, CEO of Yongle, was a former VP of Yongle Appliance
Company, a large scaled state-owned enterprise (SOE)
Social trust and “face/image” reputation
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Gengsheng Niu, CEO of Mengniu, was a former VP of Yili
Group, the largest and one of the oldest dairy company in
China, and had a high public recognition in social responsibility
Dongxiang’s long-time franchise relationship with Kappa, a
popular Japanese brandname
Xu Jiayin, a famous Chinese philanthropist
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009