After assessing the potential political risk of investing or maintaining current operations in a country, managers face perplexing decisions on how to manage that risk. On one level, they can decide to suspend their firms dealings with a certain country at a given point-either by the avoidance of investment or by the withdrawal of current investment (by selling or abandoning plants and assets). On another level, if they decide that the risk is relatively low in a particular country or that a high-risk environment is worth the potential returns, they may choose to start (or maintain) operations there and to accommodate that risk through adaptation to the political regulatory environment. That adaptation can take many forms, each designed to respond to the concerns of a given local area. Some means of adaptation suggested by Taoka and Beeman are given here:
1. Equity sharing includes the initiation of joint ventures with nationals (individuals or those in firms, labor unions, or government) to reduce political
risks.
2. Participative management requires that the firm actively involve nationals, including those in labor organizations or government, in the management of the subsidiary.
3. Localization of the operation includes the modification of the subsidiarys name, management style, and so forth, to suit local tastes. Localization seeks to transform the subsidiary from a foreign firm to a national firm
4. Development assistance includes the firms active involvement in infrastructure development (foreign-exchange generation, local sourcing of materials or parts, management training, technology transfer, securing external debt, and so forth).
In addition to avoidance and adaptation, two other means of risk reduction available to managers are dependency and hedging. Some means that managers might use to maintain dependency-keeping the subsidiary and the host nation dependent on the parent corporation-are listed here:
1. Input control means that the firm maintains control over key inputs, such as raw materials, components, technology, and know-how.
2. Market control requires that the firm keep control of the means of distribution (for instance, by only manufacturing components for the parent firm or legally blocking sales outside the host country).
3. Position control involves keeping certain key subsidiary management positions in the hands of expatriate or home-office managers.
4. Staged contribution strategies mean that the firm plans to increase, in each successive year, the subsidiarys contributions to the host nation (in the form
of tax revenues, jobs, infrastructure development, hard-currency generation, and so forth). For this strategy to be most effective, the firm must inform the host nation of these projected contributions as an incentive.
Finally, even if the company cannot diminish or change political risks, it can minimize the losses associated with these events by hedging. Some means of hedging are as follows:
1. Political risk insurance is offered by most industrialized countries. In the United States, the Overseas Private Investment Corporation (OPIC)
provides coverage for new investments in projects in friendly, less developed countries. Insurance minimizes losses arising from specific risks- such as the inability to repatriate profits, expropriation, nationalization, or confiscation-and from damage as a result of war, terrorism, and so forth. The Foreign Credit Insurance Association (FCIA) also covers political risks caused by war, revolution, currency inconvertibility, and the cancellation of import or export licenses. However, political risk insurance only covers the loss of a firms assets, not the loss of revenue resulting from expropriation.
2. Local debt financing (money borrowed in the host country), where available, helps a firm hedge against being forced out of operation without adequate compensation. In such instances, the firm withholds debt repayment in lieu of sufficient compensation for its business losses.
Multinational corporations also manage political risk through their global strategic choices. Many large companies diversify their operations both by investing in many countries and by operating through joint ventures with a local firm or government or through local licensees. By involving local people, companies, and agencies, firms minimize the risk of negative outcomes due to political events. (We discuss these and other global strategies in Chapters 6 and 7.)
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