INTERNATIONAL FINANCIAL MANAGEMENT ARTICLE

SUPPORTING LECTURER:
Mokhamad Anwar, SE., MSi, Ph.D

Firda Nurul Sulaini

120310203004

MANAGEMENT STUDY PROGRAM

FACULTY OF ECONOMICS AND BUSINESS
PADJADJARAN UNIVERSITY
SEPTEMBER 2022
 Political Risk or Country Risk that could be faced by Multinational Companies

Introduction:
The political and economic environment plays a major role in the business environment of a country,
particularly for multinational corporations in a developing country. Geopolitical risks are the biggest,
especially with COVID-19 disrupting supply chains, the rise of nationalization and protectionism, the hardening
of U.S.-China trade tensions, and increasing confrontations with authoritarian regimes that provoke cycles of
sanctions and retaliatory action (Witold, 2021). Multinational Corporations (MNCs) have studied political
risk management in their dealing with developing countries, mainly focusing on risks that arise from these
countries, particularly due to any actions taken by their own province and other local actors, such as
government regulations, local regulations, etc. Along with the various group of risk, MNCs’ trade and
investment relations with developing countries are being challenged by the more frequent exposure of
economic sanctions with an extraterritorial reach by foreign governments and any international entities for
political purposes on several number governments of non-developed countries for over the last ten years.
Practical strategic implementation by MNCs’ will also involve the summary of different tactics to mitigate
their expected loss impact to avoid the transfer of this risk. Given the current trend of increasing
globalization and political risk, there was need to understand how political risk affects a multinational firm
operating in a host country (Mawanza, 2013)Both investors and the top management of multinational firms
have long understood the importance of understanding political risk. Failing to manage political risk can
have serious consequences for firms, resulting in legal actions, sanctions, or expulsion from a country, as
shown by the challenges faced by Google in China in 2010 (Ahlstrom, et al., 2020). In order to navigate
China – US relations, many global companies are looking forward to their own form of ‘’strategic
autonomy’’. Technology is considered the main battleground of global power rivalry as what Chinese
President Xi Jinping called. Companies must consider how to harness capabilities such as 5G and AI
without falling victim to geopolitically based regulatory or reputational cross fire (Feng, 2021). When their
survival is at stake, some firms will develop innovative strategies aimed at surmounting the challenges they
face, while others will die out. Those that do adapt, however, can survive and even gain a competitive
advantage (Oh & Oetzel, 2017). Technically, risk management in MNCs’ subsidiaries has been considered
to be a country-level issue, however, MNCs’ operating in multiple subnational locations adapted ‘’multi-
regional risk management strategies’’. The findings of this study is aim to contribute to the literature
adoption by MNCs’ subsidiaries of strategies suited in dealing with various type of risk at the subnational
level. Formal elements (policies set by the government), informal elements (attiutudes towards non-locals),
and subnational approach (within-country institutional differences) are combined to see how MNCs’ can
mitigate their socio-political risk in in multiple subnation regions within the market.
Discussion
Start with the board
Many MNCs boards already consider geopolitical risks to one degree or another. But the discussion mainly
focused on a specific investment, project, or market entry or exit. Therefore, they fail to examine the broader
strategic view, full range scenario of risk and consequences, or key decision. Boards can dedicate regular
standing time instead in order to analyze how to respond to the geopolitical risks that their MNCs’ face as
part of a broader effort in building more resilient companies. Assessing the risk that matters the most to a
business is another way to begin a more strategic approach. Materiality tests could apply by the business
board to pinpoint what it should dedicate time to discussing. For example, the trade war between China and
the US has significant regional and global consequences. But it doesn’t mean affects a company’s operation
directly, its board may don’t have to dedicate effort to them. MNEs are exposed to major types of risk in
foreign markets, with cross-cultural risk, country risk, currency risk, and commercial risk being among the
most common strategic considerations (Cavusgil, et al., 2020). On the other side, a range of localized
geopolitical risks on a rolling basis has dealt with most global companies, those risks such as securing
operations, and people amid political instability, ensuring that the company can get along with local
regulations in one market, and staying in line with human rights considerations. Political risk can be
extreme, as in the case of expropriations of foreign assets or ‘grand’ corruption or have more temporary
effects, as with local regulations (Witold & Bennet A., 2005). Although the degree of political risk may
differ from country to country, The literature on extractive industry firms suggests that any conflicts with
communities may be resolved by acquiring a ‘social license to operate’ (SLO), which generally refers to
the “ongoing acceptance or approval from the local community and other stakeholders’’ (Parsons, Lacey,
& Moffat, 2014). Boards can obtain perspective by collecting outside opinions on relevance topics from
business and political leaders, other government agencies, and non-governmental party. By providing
regular forum for a board in purpose to examine pressure points and operating realities from multiple
perspectives not only help improve decision-making but also avoid an organization's exposure from risk.
More importantly, a set of trusted relationships and mutual understanding across the organization which
enables quick and purposeful reactions in a set of priorities when risk scenarios appear

Use a trifocal lens to assess potential risks

Short term-action – by establishing a quick-response unit in order to take lead on identifying potential risks
and developing palliation strategies. (eg, analyze any political events which threaten to disrupt the operation
of the company materially). Midterm action – company can hold regular briefing sessions with the
companys board and top-level management on relevant geopolitical risks is a key actions. Between the
section, the high level stakeholders can discuss the company’s potential exposures to various risks. Long-
term actions – exercises can conduct by a company to assess its response to game-changing scenarios.
Conduct One text by Exploring the conditions in which company may protect their data against cyberattacks
or comply with regulatory requirements

Think critically about the corporate narrative

For both internal and external stakeholders, the geopolitical environment may cause leaders to redefine the
position and objectives of their companies. Including for commercial and strategic reasons, strengthen the
connection to the countries where the company are based. In this age of instant information, the story that
company tells about itself won’t stay in only one market, therefore narrative that works in one market could
prevent market opportunities in another or may create sensitivities among regions. Thus, the importance of
different risks to different industries should create unique risk sensitivities and corresponding needs for
different risk information (Leavy, 1984)

Deploy refreshed risk frameworks and guidelines

Companies can create market-specific evaluations or "compacts" that combine business strategy with risk
management if they operate in areas that are high risk due to political unrest or the prospect of international
sanctions. Such a compact should be very explicit about an organization's interests in the high-risk market,
the standards to be used to evaluate and manage risks, and the best manner to apply the standards so that
they support operational and performance objectives. The risks that need to be evaluated may be monetary,
dangerous to human safety, legal, political, or reputational. A traffic-light-style warning system with red,
yellow, and green lights that reflect growing risk levels might be included in a compact. The warning system
might be used by a business to inform the industries in which it works. It might also apply the method to
the organizations with whom it transacts business, classifying them into those with which a local office can
cooperate without further authorization, those with whom it requires risk authorization, and those with
whom it ought to never cooperate. Before choosing what to include in market compacts, companies may
wish to get input from both internal and external sources. They might consult embassy representatives,
foreign financial institutions, nonprofit groups, and peer organizations for advice or guidance. An company
may retain keen situational awareness by cultivating such a local risk-management network with important
stakeholders and sources who have insights into crucial issues. Compacts offer strategic direction for
cooperating inside a nation. Effective cross-border management of geopolitical risk necessitates this
knowledge as well. The need for instruction on a variety of other subjects, such as how to properly convey
geopolitically sensitive subjects in publications or speeches and how to show contested borders on maps,
may result from this.
Conclusion
Geopolitics is an individual matter. A large corporation is likely to include stakeholders with different
cultural frames of reference and viewpoints on things like privacy and human rights. And conflicts about
risk and strategy might result from differences. People can be concerned that a corporation would hold itself
to various standards in various locations. Such circumstances will inevitably worsen in a world where
nationalism is on the increase, no country dominates, and norms and rules are dispersing. All level
management of MNCs should frequently take a break from attending to the pressing requirements of their
working surroundings so they may learn about, adjust to, and get ready for, pressures and shocks from both
the inside and the outside
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