The Impact of Political Risks on Investment

This presentation discusses the impact of political risks on investment decisions of multinational companies. It explains the reasons why MNCs pay attention to political risks in developing and developed countries. The presentation also covers the political risks affecting investment decisions, political risks in developing and developed countries, and recommendations to minimize political risk exposure.

The impact of
political risks on
Investment
Name of the Student

Introduction
• Multinational companies are required to spread their
operations in different countries.
• For this, there are various factors which are to be
considered.
• One of the most important factors is the political factor.
• The multinational companies need to consider the
political scenario and factors of developing countries
and developed both.
• The presentation throws light on the reason why MNCs
pay attention to such factors in the developing countries
and reasons why considering OCED`s political scenario
is important.

Political Risks
• Political risk can be defined as the risks that are generally
faced by the corporations, governments which primarily
refer to those political decisions or confusions will have
the capability to have an impact on the profitability of the
business or its success in the long run (Lehkonen &
Heimonen, 2015).
• These risks are generally related to Macroeconomic factors
and social policies. They also relate to political instability
problems

Multinational Companies
• A multinational company is an
organization which owns and controls the
manufacturing process in a country which
is other than the country it got established
in or its Home country (Cao & Zhang,
2015).
• They seek opportunities and make suitable
investments.
• Examples: Samsung, Microsoft, Mc
Donald's and others

Investment decisions
• Investment decisions can be described as
those decisions which are made by the
investors who are in the top level due to
the high amount of funds involved due to
the deployment of the opportunities of
investment
• There are several factors that affect
decisions like Political, Social,
Economical, Technological and
Environmental.

Political risks affecting
investment decisions
• It is generally believed
that primarily that
financial an economical
decisions have an impact
on the investment
decision.
• However, political risks
have one of the biggest
impacts of such decisions
by multinationals
(Boddewyn, 2015). These
risks often affect the
business operations. The political risk
components of a country.
Source: (Lehkonen &
Heimonen, 2015).

• The multinational companies enter a country with an
aim to establish their long term operations and this is
only possible if the policies of the government and
legal aspects are in the right positions..
• While investing they tend to consider various political
factors which exist in the business environment
• The multinational companies are greatly affected by
the following:
• Corruption in the country
• Policies regarding business
• Ease of doing business
• The labor condition (Deng, Pheng, & Zhao, 2014).
• Political stability
• Unrest an Wars
• The property factors
• The patents and permission as granted by the
government.

Political risk in
developing countries
• Developing countries are countries
that have a dominant agricultural
economy seeking to become more
advanced in future.
• Many developing countries have a
large population and the
government system is generally
complex (Brink, 2017).
• Pakistan, Philippines, Nepal,
Brazil , India, Sri Lanka, Bangladesh
and others.

Triggering events that cause political
instability and indirectly a risky
situation for the MNCs.
• Civil Unrest
• Unstable government
• Labor Problems
• Land issues

Reason why MNCs are bothered about
political risks in developing countries
• MNCs tend to pay attention to political risks in the
developing countries because of the following
reasons:
• Political instability may bring about inconvenience to the
business.
• The choice of the consumer market is greatly determined
under political influence.
• The political system in developing countries is generally
volatile (Xiaopeng & Pheng, 2013).
• The political system and scenario of a country tends to
bring a change in the regulation or legislation shifts which
might have an effect on the company. Example , change in
tax rates and others.

Source: (Cao & Zhang, 2015).

• Political risks tend to have an impact on the multi national
companies at corporate level in developing countries because:
• Anti globalization movement
• Poverty
• Terrorism
• Cyber attacks Source:
(Brink,2017)

Political risk in
developed nations
• Certain economic crisis in the developed
countries tend to have an impact on the
political uncertainty of developed
countries.
• For instance, the series of political unrest
in Europe has bought about huge impact
on companies
• Unemployment and deep financial
repercussions tend to drive unrest among
the voters

• Multinational companies need to consider
the political risks in the developed countries
because the developed countries have trade
relations that tend to have an impact on the
developing countries as well.
• Events like Trump election and Brexit has
had an impact on stock markets around the
globe.
• The risks in the OECD counties have a
tripling affect and thus, it is important for
the MNCs to consider them.

Recommendations
• To minimize the political risk
exposure, companies can indulge in
the following:
• Invest in political risk insurance
• Alternate backup channels
• Engaging in CSR Activities
• Creating employment

Conclusion
• Therefore, it can be stated that whether a
developing country or a developed one, MNCs need
to be aware about the political risks at all times as
it influences the decision making of the
corporations and thus they should keep these
factors in mind before taking investment decisions.
• The companies often pay special attention to the
developing countries because they are more prone
to instability. The companies need to be wary about
the political scenario in the developed countries
because of their wide spread tripling effect.

References
Boddewyn, J. J. (2015). Political aspects of MNE theory. In The Eclectic
Paradigm (pp. 85-110). Palgrave Macmillan, London.
Brink, C. H. (2017). Measuring political risk: risks to foreign investment.
( pp.85-87)Routledge.
Cao, S., & Zhang, J. (2015). Political risks arising from the impacts of large-
scale afforestation on water resources of the Tibetan Plateau. Gondwana
Research, 28(2), 898-903.
Deng, X., Pheng, L. S., & Zhao, X. (2014). Project system vulnerability to
political risks in international construction projects: The case of Chinese
contractors. Project Management Journal, 45(2), 20-33.
Lehkonen, H., & Heimonen, K. (2015). Democracy, political risks and stock
market performance. Journal of International Money and Finance, 59, 77-99.
Xiaopeng, D., & Pheng, L. S. (2013). Understanding the critical variables
affecting the level of political risks in international construction
projects. KSCE Journal of Civil Engineering, 17(5), 895-907.

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