18.104.22.168 Political risks induced bythe government
These risks constitute some laws directed versus foreignfirms. Some government-induced risks are really drastic. There are expropriation,confiscation and domestication.
Expropriation is the seizure offoreign heritage by a government with payment of compensation come the owners. Inother terms, that is involuntary transfer of property, with compensation, native aprivately own firm to a host country government. Expropriation may generatesome funds because that the owners. However, steps to acquire paid native the governmentare sometimes protracted and the final amount remains low. Furthermore, if nocompensation is paid, problems may erupt in between the hold country and also thecountry of the expropriated firm. Because that instance, the relations between U.S. AndCuba identify such situation, because Cuba walk not offer compensation come U.S.firms that have actually their heritage sized.3(*) Also, expropriation deserve to refrain other companies frominvesting in the pertained to country.
Confiscation is another form ofownership risk similar to expropriation, other than compensation. It is involuntarytransfer of property, no compensation, indigenous a privately owned firm to a hostcountry government. In confiscation, firms do not receive any funds fromgovernment. Thereby, it represents a an ext risky situation for international firms.Some sectors are an ext vulnerable come confiscation than others since oftheir prestige to the host countries and their absence of capacity to shiftoperations. Sectors such together mining, energy, windy utilities, and banking havebeen targets that such federal government actions.
Domestication offers to governments asubtle control over the foreign investments. Over there is a partial ownershiptransfer and companies space urged to prioritize regional production and also to retain alarge re-publishing of the benefit within the country. Domestication can negativelyimpact the international marketer activities, and also that the the entirefirm. For example, if foreign companies are compelled to rental nationals asmanagers, negative cooperation and communication deserve to result. If domestication wasimposed in ~ a quick time span, poorly trained and inexperienced localmanagers would certainly head the certain operations with feasible lost of profits.
Other government actions-related risksare much less dangerous but much more common such as boycott, sabotage.When facing shortage of foreign currency, government, sometimes, attempts tocontrol the activity of capital in and out of the country.Often, exchange controls space levied selectively againstcertain products or companies. Exchange controls limit importation of products sothat firms might be faced with difficulties in their continuous transactions.Severe constraints on import deserve to be a motive for foreigncorporate come shut down. Governments may also raise the taxes rate applied toforeign investors in order to manage them and also their capital. Federal government mayimplement a price regulate system. Such regulate uses to derivefrom a sensitive political situation. For example, society pressure may resultin a kind of price standardization for certain sectors like food,transportation, fuel, and also healthcare.
Political threats like eight conflicts, insurrection might affectall this firm in the nation equally. For that factor they are called macropolitical risks. Unlike, nationalization, strikes, expropriation mayaffect only a handful and details firm, they are named micro politicalrisks.
2.2.3. Influence of some political risks
Some an unfavorable effects the political dangers on firm are summarizedin the complying with table.
Table 1. Holistic table summarizing the major politicalrisks and also their effects on firms
impact ON FIRMS
lose of future profits
loss of assets
loss of future profits
Campaigns versus foreign goods
lose of sales
Increased costs of publicly relations initiatives to enhance publicimage
Mandatory labor benefits legislation
raised operating costs
Kidnappings, terrorists threats, and other forms of violence
boosted security costs
raised managerial costs
damage of property
Disruption of production
raised security costs
higher operating costs
inability to move funds freely
lessened value that repatriated earnings
reduced after-tax profits
Source, Ricky W. Griffin, global business, 2005, page73
In long run, and also depending on the severity the the risks,action taken by government may to decrease income and also be detrimental come the hostcountry economy.