Explain the four classes of political risks that MNC’s must consider and its possible impact on

their international operations: Systemic, Procedural, Distributive, Catastrophic.

Answer:
1. Systemic Political Risk - Systemic risks do not necessarily reduce potential profits. In fact, elections
and policy shifts can create opportunities for foreign investors. Investors who accepted the risk of a
public policy reversal and pursued the emerging opportunities prospered as freer markets developed in
these countries. Political trends encouraged pro-market reforms that reduced risks and created
opportunities. Still, taking advantage of such opportunities, whether in China or elsewhere, calls for
tough-minded analysis of the risk-return relationship.
2. Procedural Political Risk - Procedural political risk is a micro risk—that is, it affects some but not
all companies. Monitoring industry developments, minding the relative contribution of their firms to
the local economy, and promoting solid citizenship help MNEs manage their exposure.
3. Distributive Political Risk - Distributive political risk is another risk factor that MNCs can face
abroad. Distributive political risk involves a government using their power to dilute the profits a MNC
earned in their jurisdiction via taxation and regulation. An example of an MNC experiencing
distributive risk would be a mining company that has the royalties it pays a government raised due to
the government’s desire for a greater share of the mine’s profits. Distributive risk is progressive process
that intends to slowly tap into a MNC’s cash flow for a government’s benefit.
4. Catastrophic Political Risk - risk includes political developments that adversely affect the operations
of every firm in a country. It typically arises from macro flashpoints—ethnic discord, illegal regime
change, civil disorder, insurrection—that disrupt society.

Evaluate the economic and non-economic reasons why governments intervene in international
trade.
Answer:
Economic reasons:
>Fighting Unemployment - There’s probably no more effective pressure group than the unemployed;
no other group has more time and incentive to protest publicly and contact government representatives.
Workers displaced because of imports are often the least able to find alternative work, such as the fairly
unskilled catfish workers in depressed regions. When they do, they generally earn less than before.
Moreover, they often need to spend their unemployment benefits to survive in the short term, and they
put off retraining because they hope to be recalled to their old jobs. When they do seek retraining, many
workers, especially older ones, lack the educational background needed to gain required skills, or they
train for jobs that do not materialize.
>Protecting infant industries - holds that a government should shield an emerging industry from foreign
competition by guaranteeing it a large share of the domestic market until it can compete on its own.
Many developing countries use this argument to justify their protectionist policies, especially if entry
barriers are high and foreign competition is formidable.
>Promoting industrialization - Countries with a large manufacturing base generally have higher per
capita GDPs than those that do not. Some, such as the United States and Japan, developed an industrial
base while largely restricting imports. Many developing countries try to emulate this strategy, using
trade protection to spur local industrialization. Specifically, they operate under the following set of
assumptions:
1. Surplus workers can increase manufacturing output more easily than agricultural output.
2. Inflows of foreign investment in the industrial sector promote sustainable growth.
3. Prices and sales of agricultural products and raw materials fluctuate widely, which is a detriment to
economies that depend heavily on just one or a few commodities.
4. Markets for industrial products grow faster than markets for commodities.
5. Industrial growth reduces imports and/or promotes exports.
6. Industrial activity helps the nation-building process.
>Improving comparative position- Every nation monitors its absolute economic welfare, compares its
performance to that of other countries, and enacts practices aimed at improving its relative position.

Non-economic reasons:
>Maintaining essential industries - Governments apply trade restrictions to protect essential domestic
industries during peacetime so the country is not dependent on foreign supplies during war. This is
called the essential-industry argument.
>Promoting acceptable practices abroad - Governments use national defense arguments to prevent the
export, even to friendly countries, of strategic goods that might fall into the hands of potential enemies.
They also limit trade to promote changes in a foreign country’s policies or capabilities. The rationale
is to weaken the foreign country’s economy by decreasing its earnings from foreign sales or limiting
its access to needed products so that it amends the externally unpopular policies.
>Maintaining or extending spheres of influence - Governments also use trade to support their spheres
of influence—giving aid and credits to, and encouraging imports from, countries that join a political
alliance or vote a preferred way within international bodies.
>Preserving national culture - Countries are held together partly through a unifying sense of identity
that sets their citizens apart from those in other nations. To sustain this collective identity, they prohibit
exports of art and historical items that they deem to be part of their national heritage. In addition, they
limit imports of certain foreign products and services that may either conflict with their dominant
values, such as morality, or replace domestic sources of production that uphold these traditional values.
The relevance of culture has been confirmed through several UNESCO conventions aimed at
preserving cultural diversity, and the concern has been largely focused, but not entirely, on media (print,
visual, and audio).
Discuss the following concepts on how MNC’s adjust or deal with cultural differences in their
international operations: Host society acceptance, Degree of cultural differences, Ability to adjust
to cultural shock, Company management and orientation, and Strategies for instituting change.
Answer:
1. Host society acceptance - Although our opening case illustrates the advantages of adjusting to a host
country’s culture, international companies sometimes succeed in introducing new products,
technologies, and operating procedures with relatively little alteration. They pull it off either because
what they’re introducing does not run counter to deep-seated attitudes or because the host culture is
willing to accept the foreign product or practice as an agreeable trade-off.
2. Degree of cultural differences - some countries are much like others, usually because they share
many characteristics such as language, religion, geographic location, ethnicity, and level of economic
development.
3. Ability to adjust to cultural shock - Some people working in a culture significantly different from
their own may pass through certain adjustment stages. At first, much like tourists, they’re delighted
with quaint differences. Later, however, they grow depressed and confused (the culture shock phase),
so their effectiveness in the foreign environment suffers. Fortunately for most people, culture shock
begins to ebb after a month or two as they grow more comfortable. In fact, some people experience
reverse culture shock when they go back home, having become partial to aspects of life abroad that are
not options back home.
4. Company management and orientation - Whether and how a company and its managers adapt abroad
depends not only on the host-country culture but also on their own attitudes. three such attitudes or
orientations: A polycentric organization tends to believe that its business units abroad should act like
local companies. Ethnocentrism reflects the conviction that one’s own culture is superior to that of other
countries. Geocentrism requires companies to balance informed knowledge of their own organizational
cultures with home- and host-country needs, capabilities, and constraints.

Discuss the three major reasons why companies engage in international business.
Answer:
1. Expanding sales - additional sales from abroad may enable a company to reduce its per-unit costs
by covering its fixed costs—say, up-front research costs—over a larger number of sales. Because of
lower unit costs, it can boost sales even more. So increased sales are a major motive for expanding into
international markets, and many of the world’s largest companies derive more than half their sales
outside their home countries.
2. Acquiring resources - Sometimes firms gain competitive advantage by improving product quality or
differentiating their products from those of competitors; in both cases, they’re potentially increasing
market share and profits. Most automobile manufacturers, for example, hire design companies in
northern Italy to help with styling. Many companies establish foreign R&D facilities to tap additional
scientific resources. They also learn while operating abroad, and they acquire product knowledge for
entering new markets at home, such as what PepsiCo is doing in order to enter the fast-growth U.S.
yogurt market. Further, the diversity of employees and operations bring companies new perspectives.
3. Reducing risk - Operating in countries with different business cycles can minimize swings in sales
and profits. The key is the fact that sales decrease or grow more slowly in a country that’s in a recession
and increase or grow more rapidly in one that’s expanding economically. Moreover, by obtaining
supplies of products or components both domestically and internationally, companies may be able to
soften the impact of price swings or shortages in any one country. Finally, companies often go
international for defensive reasons. Perhaps they want to counter competitors’ advantages in foreign
markets that might hurt them elsewhere.

Explain the following economic indicators in analyzing the potentials of a host country for the
MNC’s international business operations: inflation, unemployment, debt, income distribution,
poverty, and the balance of payments.
Answer:
1. Inflation is the sustained rise in prices measured against a standard level of purchasing power. We
estimate it by comparing two sets of products at two points in time and then computing the increase in
cost that is not due to quality improvement. Mainstream economics holds that inflation results when
aggregate demand grows faster than aggregate supply—essentially, too many people try to buy too few
goods, thereby creating demand that exceeds supply that makes prices rise faster than incomes.
2. unemployment rate is the share of out-of-work citizens seeking employment for pay relative to the
total civilian labor force. Countries that cannot create jobs suffer sluggish growth, social pressures, and
political instability. The proportion of employed workers in a country shows how well it productively
uses its human resources. People gainfully employed testify to the competency of policymakers to
sustain a productive economy. Persistent unemployment harshly spotlights government ineptitude.
3. Debt, the total of a government’s financial obligations, measures what the state borrows from its
citizens, foreign organizations, foreign governments, and international institutions. The larger the total
debt, the more uncertain an economy’s performance and potential are. Interest expenses divert
resources from more productive uses. More insidiously, future worries about the ability of coming
generations to repay the debt saps consumer confidence and constrains government flexibility.
4. Income distribution often defines a market’s performance and potential. GNI, even when adjusted
for population size or purchasing power, can misestimate the relative wealth of a nation’s citizens. That
is, GNI per capita reports how much income the average person earns. However, because not everyone
is average, we cannot determine what share of income goes to what segments of the population.
5. Poverty is a multidimensional condition whereby a person or community lacks the essentials for a
minimum standard of well-being and life. These essentials can be life-sustaining resources such as food,
clean water, and shelter; they may be social resources such as access to information, education, and
healthcare; they may be the opportunity to sustain extended families or connect with people to build
communities.
6. Balance of payments (BOP) officially known as the Statement of International Transactions, reports
its trade and financial transactions (as conducted by individuals, businesses, and government agencies)
with the rest of the world.137 The BOP tracks two different kinds of transactions: the current account,
which tracks cross-border payments for goods and services and the capital account, which tracks loans
for cross-border payments for assets.