Political Risk and Negotiation Strategies

OHT 13.
Chapter 13
Political Risk and

Negotiation Strategies
Rugman, Hodgetts: International Business, Third edition © Pearson Education Limited 2003
OHT 13.2
Political Risk and

Negotiation Strategies
• Objectives
• Introduction
• The nature of political risk
• Forecasting and managing political risk
• Negotiation strategies
• Strategic management and political risk
OHT 13.3
Objectives
• Examine the nature of political risk
• Discuss some of the most common ways that
multinationals go about managing their
political risk
• Review typical negotiation strategies and
tactics used in “hammering out” agreements
• Present some of the strategies used by MNEs
to protect their overseas investments
OHT 13.4
Introduction
• Political risk: the probability that political
forces will negatively affect an MNE’s profit or
impede the attainment of other critical
business objectives
OHT 13.5
The nature of political risk
OHT 13.6
• Macro political risk: A risk that affects all

foreign enterprises in the same way.
• Examples
• tightening controls on flow of foreign currency
• bureaucratic legal systems
• requiring foreign investors to establish joint ventures
with local partners
OHT 13.7
• Micro political risk: A risk that affects

selected sectors of the economy or specific
foreign businesses .e.g..
• industry regulation
• taxes on specific types of business activity
• restrictive local taxes
OHT 13.8
Political Risks
 Transfer Risks - policies that limit the transfer of
capital, payments, production, people, and
technology in or out of a country
– tariffs on exports or imports
 operational Risks - policies that constrain the
management and performance of local operations
– price controls and financing restrictions
 Ownership control risks - polices that inhibit
ownership or control of local operations
– foreign ownership limitations
10-8
OHT 13.9
OHT 13.10
Forecasting and managing political risk
OHT 13.11
• Forecasting political risk:

– Informal approaches for assessing risk
– Formal systematic procedures for assessing risk
• ad hoc groups, standing committees
• Focus of assessment:
– the political system in which the company will be doing
business
– the goods to be produced and the operations to be
carried out
• Quantifying risk vulnerability
OHT 13.12
Negotiation strategies
OHT 13.13
• There are two key steps in developing

effective negotiating strategies
– The MNE will evaluate its own position and
that of the other group(s) in order to determine
how the interests of both can fit together
• Strengths and needs
– The company will examine the behavioral
characteristics of the other parties in order to
understand their style of negotiating
• Cultural differences
OHT 13.14
Negotiating an agreement
• Acceptance zone: An area within which a
party is willing to negotiate
Figure 13.1 Zones of acceptance in the negotiating process (in millions of US $)
OHT 13.15
• Renegotiation: Many MNEs’ negotiations

with an individual or group will be repeated in
the future
• Negotiating behaviors and tactics: Vary
across countries
OHT 13.16
Strategic management and political risk
OHT 13.17
Use of integrative and protective/defensive

techniques
• Integrative techniques: Strategies designed to help
a multinational become a part of the host country’s
infrastructure.
• Examples
 developing good relations with host government
 producing products locally
 creating joint venture
 participating in local research and development
OHT 13.18
Use of integrative and protective/defensive

techniques
• Protective and defensive techniques: Strategies
designed to discourage a host country from
interfering in multinational operations.
• Examples
• doing little local manufacturing
• conducting little local research and development
• limiting responsibility of local personnel
• diversifying production in a number of countries
• Combination strategies: A combination of
integrative and protective/defensive techniques
OHT 13.19
Figure 13.2 Select examples of the use of integrative and protective/defensive

techniques
OHT 13.20
Strategic use of joint venture and partnerships
• Some MNEs deal with political risk by using

joint ventures and partnerships that are
approved by the local government
– Minimizing failure of cooperative efforts
• compatibility of firm specific advantages
• safeguards against unethical behavior
OHT 13.21
• Firm specific
advantages
(FSAs): The
strengths or benefits
specific to the firm
that each partner
brings to a joint
venture or
ownership
arrangement
Figure 13.3 Ensuring the success of a joint
venture or an ownership agreement

Political Risk and Negotiation Strategies

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OHT 13.

Political Risk and

Political Risk and

The nature of political risk

• Macro political risk: A risk that affects all

• Micro political risk: A risk that affects

Forecasting and managing political risk

• Forecasting political risk:

• There are two key steps in developing

Figure 13.1 Zones of acceptance in the negotiating process (in millions of US $)

• Renegotiation: Many MNEs’ negotiations

Strategic management and political risk

Use of integrative and protective/defensive

 creating joint venture

 participating in local research and development

Use of integrative and protective/defensive

Figure 13.2 Select examples of the use of integrative and protective/defensive

Strategic use of joint venture and partnerships

• Some MNEs deal with political risk by using

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