Global Business Management

Political Risk and Negotiation Strategy

BBA - IV

Dr. M. Imran Malik

Lecture – 31
Date: May 20, 2020
Department of Management Sciences
COMSATS University Islamabad – Attock Campus
 Country Risk Analysis
• It examines the chances of non-market events
(political, social, and economic) causing financial,
strategic, or personnel losses to a firm following FDI in
a specific country market.
• Rather than looking at market, industry, or group of
competitors, country risk analysis tries to predict
macroeconomic and political sources of change that
might undermine a firm’s position in a local market.
• This kind of analysis is used to compare country
markets before making investment decisions
 Generic PEST Analysis
• Examines the political, economic,
sociocultural, and technological conditions in
particular country markets.
– Political
– Economic
– Social
– Technical
– Later on PESTLE (Legal is added)
 Political Risk
• It is the probability that political forces will negatively
affect a multinational’s profit or impede the
attainment of other critical business objectives

• Common example include the election of a

government that is committed to nationalization of
major industries or one that insists on reducing
foreign participation in business ventures
 Types of Political risk
• Macro Political Risk
• Micro Political Risk
 Macro Political Risk
• Macro political risk is a risk that affects all
foreign enterprises in the same way
– Expropriation
– Indigenization laws
• Expropriation - The governmental seizure of
private businesses coupled with little, if any,
compensation to their owners
• Indigenization laws - Laws which require that
nationals hold a majority interest in all
enterprises
 Macro Political Risk
• Macro political risk can also be the result of
political boycotts.
• During the war on Iraq, following 9/11 in the
United States, American consumers boycotted
French imports and avoided holidaying in
France because the French were unsupportive
of the military invasion of Iraq.
• In such case both large and small businesses
feel the impact of the political decision.
 Micro Political Risk
• Micro political risk is a risk that affects
selected sectors of the economy or specific
foreign businesses.
Negotiation Strategies
 Negotiation Strategies
• MNE managers need to evaluate their own
position and that of the other group(s) in
order to determine how the interests of both
can fit together.

• This is basically the bargaining between two

parties (countries)
 Factors effecting Negotiation
• Corruption
• Transparency
 Factors effecting Negotiation
Corruption
• Corruption is the misuse of public power for private benefit

• One of the most difficult aspects of foreign business for

international managers is how to cope with corruption.

• A very large number of firms engage in bribery of various kinds, but

the ethical issues are not straightforward.

• In many cases they argue that to opt out would simply mean they
lose out to less ethically minded competitors. In other cases it is
genuinely difficult to know whether such practices are simply the
accepted local rules of the game.
 Corruption - Examples
• In the UK an extra payment to rail companies buys you a better seat
on the train in a less crowded compartment. This is called “First Class.”

• In India an extra payment may get you onto a train that is already
overbooked (or that you are told is overbooked).

• In India the only difference is that the payment will go straight into the
ticket collector’s pocket, rather than the railway company.

• However, in many places it is accepted that workers in national

industries or officials in government agencies will top-up their incomes
by offering these kinds of “discretionary services.”
 Corruption – Level Example
• There are different levels of corruption, from the
small scale to the very large scale.
• The Indian ticket collector may make a few extra
dollars each month from small-scale bribes.
• One estimate suggests that Mohamed Suharto,
President of Indonesia from 1967 to 1998, built a
personal fortune of between $15 and $35 billion
through embezzlement, in a country with an average
GDP per capita (an indication of average annual
salaries) of $695.
Factors effecting negotiation - Transparency

• Transparency is the clarity and consistency of policies

and legislation applied in the governance of businesses
• It is strongly associated with corruption.
• There is considerable debate about the relative levels
of corruptness and transparency prevalent in
developing and advanced countries.
• The latter do tend to have more governance checks
and balances and arguably more freedom of the press
and leeway for interest groups to reveal and oppose
corrupt practices and transparency problems.
Factors effecting Participants’ role in the
Negotiation
 Cultural differences
• Although the objective of the negotiation
process may be universal (strike as good a deal
as possible), the way in which the process is
carried out will be greatly influenced by the
cultural values and norms of the participants.

• Cultural difference example for agreement an

d negotiation
 Amount of authority
• One of the major differences is the amount of authority that the
negotiator has to approve an agreement. In some societies, such as
the United States and Great Britain, negotiators are given authority
to make deals or at least to express agreement on the basic
arrangement that is being negotiated. This approach works well
when doing business with many Western firms, as well as with
Chinese negotiators. However, it is often of limited value when
dealing with people from other cultures. In fact, the other parties
may not have the authority to give the go-ahead on anything. For
example, Japanese and Russian negotiators are often lower-level
personnel who are not authorized to approve agreements. This can
be frustrating to Americans who feel that they are wasting their
time.
 Language
• Language is also a key factor. When negotiators do not speak
the same language and must use interpreters, there are
more chances for a misinterpretation or misunderstanding to
occur. This problem also exists in written communications.
• For example, when documents are translated from one
language to another and then translated back to check for
accuracy, there are interpretation problems.
• The original translation appears to convey the desired
information, but, when another person is called in to
translate the document back into the original language,
some parts of it are different from that intended initially.
 Bargaining tactics

• Negotiators use a range of bargaining tactics,

including promises, threats, rewards,
commitments, and the use of self-disclosure,
in their drive for a better deal
How to reduce risk of interference in operations in another country?

Integrative and protective/defensive techniques

 Integrative techniques
• The integrative techniques are designed to help the
MNE become a part of the host country’s
infrastructure.
• The objective of an integrative technique is to help
the company blend into the environment and to
become less noticeable as a “foreign” firm.
• One of the simplest ways is to use a name that is
not identified with an overseas company and, if an
acquisition is made, keep the old name in place.
 Protective and defensive techniques
• Strategies designed to discourage a host country from
interfering in multinational operations.
• In contrast to integrative techniques, protective and
defensive measures are aimed at fostering non-
integration of the MNE into the local environment.
• A good example is conducting research and
development (R&D) at other geographic locales and
importing this knowledge as needed. Should the
government suddenly decide to seize the firm’s facilities,
the company’s R&D base would not be threatened.
 Protective and defensive techniques

• Another technique is to raise as much capital

as possible from the host country and local
banks. When this happens, the government is
reluctant to interfere in operations because
this may threaten its own investment and that
of the home-country banks
Thank You