Political Risk Management: Manufacturing Expansion in Venezuela

This case study delves into the political risk management strategies for a manufacturing company contemplating expansion into Venezuela, a country marked by significant political instability. The assignment critically evaluates the CEO's initial inclination towards relying solely on political risk insurance, emphasizing the need for a more comprehensive risk assessment and mitigation approach. It identifies various political risk factors, including political violence, trade barriers, tax implications, legislative changes, administrative delays, and economic instability, all of which can significantly impact the company's operations and financial performance. The study suggests proactive measures such as purchasing political risk insurance, fostering strong relationships with government stakeholders, and implementing social responsibility initiatives to navigate the complex political landscape. Furthermore, it explores different entry modes, including direct and indirect exporting, to determine the most suitable approach for entering the Venezuelan market while minimizing exposure to political risks. The analysis underscores the importance of a robust risk management team capable of evaluating and mitigating potential risks to ensure the success and sustainability of the company's expansion efforts in Venezuela. Desklib provides access to similar case studies and solved assignments for students.

Running head: POLITICAL RISK MANAGEMENT
Political Risk Management
Name of the student:
Name of the university:
Author Note:

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The main scope of the assignment is to deal with the political risk analysis of a
manufacturing company expansion at Venezuela. The political risk may be stated to be said
as a risk, which arises in a company due to some political changes in a country. Because of
these political changes, the return from the investment of the company could be hampered in
various ways (Brink 2017). The instability of a political satire of a country includes the
causes like change of government or the legislature bodies as well as some other foreign
policies that affects the political scenario of the country.
This assignment portrays the picture of a manufacturing company that wants to
expand its market in Venezuela. However, for some unavoidable political scenarios in
Venezuela the CEO of this manufacturing company wants a clear review before the
expansion of the company (Giambona, Graham and Harvey 2017). This report will provide a
clear critical analysis of the risks that are present in the expansion procedure and will suggest
about the possible and probable solutions to mitigate these risks.
The manufacturing company wants to expand the business in Venezuela deals with
the manufacturing of daily usable items like soaps, shampoo, conditioners, toilet cleansers
and many more which are used by common people. This company recently took the decision
to have their business extended in Venezuela (Christensen et al. 2015). However, at this time
the political environment of Venezuela is unstable. Therefore, the company needs to establish
a risk management team for identification as well as to provide a probable solution to
mitigate those risks.
The political risk management is said to be undertaken as a bad approach in the
developing countries that are thriving their foot towards growth. This type of political risks
can significantly affect or put an adverse negative impact on the growth of the country as well
as its business industries. The political risks may be well defined as the complications or

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barriers that are faced by the businesses and the government because of the changes in the
political environment of the country. The political risk can be considered in the operational
risks from the perspective of an organization (Akcaoglu, Wehner and Bolsinger 2018). These
political risks can hamper the outcomes that are expected in business and can alter the
economic action as strategized by the organization. The manufacturing company that wants
to expand the business in Venezuela will face the risk associated to the financial loss and
strategic breakdown of the company’s business. Moreover an organization can implement
many new strategies to cope with the present situation of the country.
This segment will deal with the political risk factors that can put an impact as a barrier
to the organizational goals. Barriers to any kind of risks especially political risks are very
harmful for business growth of an organization which is trying to establish the business
internationally. The first factor that can put an adverse effect in the field of expansion can be
determined as political violence (Haimes 2015). The noted political tension going throughout
Venezuela has put the company is a real thinking that what should be the procedures
undertaken by the company to deal with the current situation of the country. The company
should think about the outcomes of the decrement in the investment returns which will put an
adverse effect in the financial sector of the business.
The business factors like manufacturing of goods, its delivery as well as the
investment procedure puts negative impact on the business by some political decisions. The
decisions that government’s take can affect the industry’s overall economy and their business
(Fiksel 2015). This sectors include the spending on raw materials, the labour wages, the
regulations and laws of the labour as well as taxes and currency valuation for the company.
In this case the manufacturing company is trying to deal with the situation of the
political misbalance of Venezuela. To avoid this type of circumstances the best methodology

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is used by the management team of the company that is to insure the company about the
political risks. Therefore the company will buy the political insurance policy which will help
the company to mitigate the political risks arising in the country (Glendon and Clarke 2015).
This policy will allow the management to concentrate on the fundamentals of business
simultaneously having a report of the political risks that are to be avoided.
Since Venezuela’s situation of politics is deteriorating day by day many companies
has skipped the plan for extension of its branches in the country. There is an increase in the
poor form of the contract enforcement as well as trespassing of the private property had
become very common by the government (Oliva 2016). For this reason the investment from
the foreign investors has likely gone down in the country. The country’s political satire is so
much depressing that the trust of the foreign investors is getting hampered. The political
stability of Venezuela is getting worse from time to time which is decreasing the interests of
investors to expand their companies in Venezuela.
According to the stated figure the political risk summary of Venezuela is provided in
correspondence to the risk summary of the other countries in the world. The level of risks is

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provided in the range of 0 to 5 where 0 being the lowest risk factor and 5 being the highest
risk factor. According to the level of risks, it must be analysed and possible solutions are to
be provided for mitigating those risks.
The types of political risks that put a negative impact in the field of manufacturing
companies are stated as follows.
Trade Barriers: The trade barrier mainly deals with the company’s cost to decline the
margins of the foreign investments in the market (Deuchars 2017). By this decrease in
margins of investment, the company’s economic as well as financial growth is hampered.
This can enhance the initiation of trade wars among the countries.
Taxes: The change in government can implicitly come up with a change in the
taxation structure of the industries which will lead in the reduction of the profitability rates of
the business (Cagliano, Grimaldi and Rafele 2015). They can also put an adverse effect in the
price of the stocks as well as assets of the company.
Legislation: The cost compliance of the company is well effected by the new
legislative changes if made by the government because due to the legislative changes the
company also needs to change their operational modules as well as their business or products
procedures (Haggerty 2019).
Administration: The change in government or political issues going through the
government in a country could result in the delay of administrative decisions. These
administrative delays include the permits that are necessary for a business organization to be
taken by the government such as building permits, vehicle permits, distributing permits and
many more (Beazer and Blake 2018).
Political Instability: The instability in a political satire of a country such as riots,
insurrection, terrorism as well as civil war can derange the operations of business in the

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country for a large period of time (Holcomb 2016). This will hamper the business operations
and as a result will put a negative aspect in the company’s financial growth.
Economics: The manufacturing company will face a great loss of economy due to the
new decisions on interest rates (Ho et al. 2015). This is due to the factor that the political
risks will impact in the prices of the assets as well as in the costs of the business.
To mitigate these above stated risks the company should come up with the purchase
of the political risk insurance policy which can restrict the risks from arising in the
organization. The political risk insurance may be stated as an insurance policy that are
adapted by the business organizations to revive the structure as well as the economic
conditions of the business when the company faces any type of political risks.
The issue related to the political risks are not all exempted with the insurance policy
as adapted by the company (Aye et al. 2018). So the risk manager and the risk management
team should be capable of evaluating the risks beforehand by the analysis of the market in the
country of expansion. For that reason the inter-relation between the business organization and
the government officials should be enhanced so that the business does not gets effected by the
political risks of the country.
The company could come up with some social responsibilities to maintain a political
relationship with the government stakeholders so that the business could run in a smooth way
when the political risk arises.
The company should also deal with the political interventions of the government in
the business scenario in such a way that there will be no issues regarding the flow of the
business. The social relations of the company should be headed by an expertise personnel
who will duly take care of the socio-political relationship of the company to deal with the
upcoming political risks in the organization.

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In case of the manufacturing company the insurance policy must cover the specific
parts to avoid the vulnerabilities of the risk arising in the marketplace. The risks should be
critically analysed by the risk management team of the manufacturing company and then the
specifications of the insurance policy is to be determined (Dixon and Ginsburg 2018). Based
on the political scenario of Venezuela the company should purchase a good quality of
insurance risk policy.
The entry modes that are taken in consideration by the manufacturing company to
start or expand their business in Venezuela depends on the risk levels present in the country.
Exporting is one of the procedure to sell the goods as well services to the country.
This feature can be subdivided into to modes, one being the direct form of export and the
other one being the indirect form of the export.
Direct Export will include the basic mode of export that is taken in consideration by a
company to export services and goods by enhancing the scale of economy with the
production in the country and this method also enhances the control in the distribution sector.
The direct export will include the sales representatives that deals with the distribution of the
end products. These representatives provide support to the local companies regarding the
advertisements locally, the presentations with the local sales, the formalities regarding the
clearance of customs as well as the legal requirements (Meyer 2018). The business benefits
of the organization mainly comes from the sales representation part. Another sector that is
included in the direct export category that is the importing distributors. These distributors
purchases the product in accordance to the own responsibility of buying and selling of the
products both in the wholesaler as well as retailer market. So the manufacturing company
should come up with some good marketing strategy to gain an entry to the Venezuelan
market.

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The advantages of the direct export is that it deals with the control of the overall
foreign selection of markets as well as the representative companies. This will develop a
better relationship of the company with the buyers as well as maintains the goodwill and the
reputation of the company in the international market (Fischer 2017). However, the process
requires greater information to deal with the direct export in the international market.
Indirect exports is said to be the procedure of exporting goods and services with the
help of domestically based intermediaries of export. In this case the exporter does not have
any control over the products based on the foreign market. The indirect export will include
the export trading companies, the export management companies, merchants of export,
confirming houses as well as the non-confirming houses.
The advantages of this type of export facility is that it has the access to the market
very fast as well as it maintains the concentration towards production of resources. In this
type of export facility the risks associated is very low as compared to the direct export
facility. However, there is very low or no control is there regarding the distribution of
products or services as well as in the sales and the marketing sectors as they are quite evenly
done in case of direct export.
The political risk is also associated with the licensing problems of the products that
are distributed in the market. As the political satire of the noted country is unstable the
licensing of the products could be a serious issue. This is because the products that are
distributed in the market should be licensed by the specific government. If the licensing
procedure is done in a well manner then the scope of political risks gets decreased (Franklin
2018). By the help of licensing the products that are restricted in trade could be retained in
the established markets. However the licensing factor has some disadvantages too. It can
lower down the income in comparison with the other entry modes of the company in the

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country. It can lose the control over the licensing of the manufactured products which in
future can downgrade the quality of the products. After the licensing is done it can have a risk
of losing the trademark as well as reputation of the company in the international market.
Another way of establishment of products in the international market can be done
through franchising. The franchising system works in such a way that the small owners of
business can pay a small amount of fees or loyalty to the new company to gain the facility of
selling the products of the new company. By this mode the small company can achieve the
right to get an identification in the market, sharing the reputation of the big company as well
as in some cases use the business system and format that is in use by the bigger company.
The advantages of this include the decrement of the political risks followed by lowering
down the cost of the products (Iftinchi and Hurduzeu 2016). The franchising could help a
business to lay down the entry of in many parts of the world simultaneously at the same time.
However, there are certain disadvantages of franchising which includes maintaining of
control of the franchisees will be very difficult as they are widespread all over the world. The
conflict between the franchisees are very often to come which will include legal disputes.
Thus it can be said that the manufacturing company which is trying to expand its
business at Venezuela will be facing a number of political risks which should be analysed
beforehand and accurate political risk policy should be purchased by the company so that the
risks could be mitigated. The political risks as analysed above can put an adverse effect to the
expansion of business in the international framework. Moreover the entry mode as described
above the manufacturing company at Venezuela should take the approach of direct export to
establish their business at the politically unstable place. The risk factors are quite low in case
of direct export. Therefore it can be concluded that the political risk policy is a great
framework that is meant to protect the business from the political risks arising in the country.
The key issue points as well as their solutions are provided in the assignment which will

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develop a clear idea about the political risks as well as what steps could be adapted by the
manufacturing company to avoid the risks associated with the expansion of the business at
Venezuela.

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