Political Risk Essay

Political Risk: is what happens when a company or companies face a series of political changes that could threaten its situation in a country. †¢Political Threat: is a situation when a company would eventually suffer a series of bad conditions on a certain market. †¢Political Changes: are a series of changes within the government of a country. †¢Micro Risk: a type of political risk that threatens the activities of a certain industry. Macro Risk: a type of political risk that threatens all the industries. †¢Violent Situations: Situations that risk the integrity of the people, the infrastructure, the economy among others in the country. †¢National Requirements: when a country forces a company to modify its circumstances to stay in the market. Introduction We studied the influence of political risk in business all around the world analyzing its definition through it. It is important to take into account that in business it is crucial to know about the political situation of a country because political risk is not always presented in the same way, it depends on the characteristics of the countries involved in the problem. We had a previous knowledge given by the teacher and we also had information obtained from the news we are constantly reading, but we did not have many examples of that because all the cases that could be examples of political risk took place in Latin America; all of them were extremely valid and onsonant with the definition we had of political risk, however we concluded that it could be less inspiring for our classmates because those cases are very well-known. That is the main reason we had to search cases that were not part of the public domain in the Colombian context and we decided to focus on cases from different parts of the world and in that order of ideas we could understand how companies face political risk. This study w ill help us to improve our knowledge in business and politics. Arguments First of all is very important to understand the definition of political risk. It is what happens when a company or companies face a series of political changes that could threaten its situation in a country. Any company could be affected by political changes, as well as any country could be affected by political risk situations derivative of political changes. The factors that lead to political risk are revolutions, wars, general elections, political reforms, among others. There are two types of risks that could affect a company, a market or an industry. Macro risk and micro risk; the first is the one that affects every company in every industry, and the second is the one that affects a specific industry and its companies. Another factor that threatens the development of an industry within a country is violence; it could be classified in three different kinds: terrorism, open-war and kidnapping. The national requirements are also a reason for political risk; this is when a country has a very high and strong protectionism or when the government forces companies to have a determined number of local products. When companies are victims of political risk there are some ways to fight it. If the company has security problems, the solution would be to contract a security agency and also an insurance agency; if the problem is because of the local or national requirements, the company should get a partner from that region or country; and the last one would be to create political pressure to fight the political problems. The first study case we found is about a Ukrainian company that was affected by political risk in Russia. Ukrainian iron and steel company Azovstal made its debut in the international bond markets this week, successfully selling $175m of bonds in loan participation note format yesterday (Thursday) through joint leads ING and Russia’s Moscow Narodny But while the company wanted to raise up to $200m in five year funds, Ukraine’s political volatility and the threat of further disputes with Russia over gas put paid to those ambitions as investors shied away from buying that typo and length of risk without a concession. (Ukraine’s Azovstal overcomes politics to sell $175m. (2006). Euroweek, 1-1. Retrieved from http://search. proquest. com/docview/231056813? accountid=45662) This Company was the third largest steel producer in Ukraine by the year 2006, it had plans for expansion into the international market beginning with Russia. When Azovstal finally entered into the Russian market it had to face many problems from Moscow and Kiev. Both nations reached one of its worst moments in their relations during that time. Viktor Pynzenyk, then the finance minister resigned as a protest over the decision of Kiev to pay $95 per 1000 cubic meters of gas to Russia when they used to pay $50. That decision was made very close to the parliamentary election of that month and it was very bad for the then president of Ukraine Viktor Yushchenco. This crisis, at its worst moment, generated the worst threat from the Russian government to not sell more gas to Ukraine. Here we can see the Macro risk situation that Azovstal went through because the lack of gas supply could totally affect every Ukrainian company. Azovstal, which had already planned to convert its machinery to use coal, decided to anticipate it to prevent itself of shortage; after many weeks both governments reached an agreement, even so, Azovstal had to make many reforms, it had to modify its internationalization plans that were based on the entrance into the Slavic countries because of the frequent diplomatic conflicts that it had with Belarus; finally they decided to enter into the Middle East market. The second study case we found was about a Chinese company; when it tried to enter into the Vietnamese market it had to face a prices war, very high tariffs and the lack of help from the government and people. â€Å"The Lifan Group would particularly welcome new opportunities. Competition in motorcycles has become intense, and profit margins are falling. The group has a big share of the export market to Vietnam, but there too it faces rapidly growing competition and vicious price wars. (Business: The communist entrepreneur; face value. (2003, Mar 29). The Economist, 366(8317), 74-62. Retrieved from http://search. proquest. com/docview/224030774? accountid=45662). Lifan Group entered into the Vietnamese market in the late 90’s but it had to face very bad conditions because it was a foreign company, besides this, Hanoi implemented very strong protectionist politics to prevent the national industry to be affected by foreign companies; this is a Macro risk situation against Vietn amese politics. Another fact that did not help too much was that Lifan was a Chinese company and the relations between Beijing and Hanoi were not the best. To face this situation Lifan company countered by two fronts; in first instance it allied with a Vietnamese company for assembling cars in Vietnam, they do that in a direct way in order to improve their situation and they obtained good results because it reduced the high tariffs and the negative influence from the ones who don’t trust in China. If the cars were assembled in Vietnam it would help more to Hanoi than if they imported them. The second fact that helped Lifan Group to face this situation of political risk was the gain of political influence in the original China when the directives of Lifan reached positions in the Chinese communist party, they ensure the Chinese help in case of any misfortune. Conclusion As future business people we know the importance to keep in touch with the daily information of the world. Political Risk rates in a country are an essential part of a business, by them we could know if it is feasible to invest in a country or in a company in a determined country, also if the debut of a company in another country will be successful or not and if the people in that foreign country will accept the company and its products or services based on their politics or government.