Political Risks: Analyzing MNCs Investment Decisions & Global Impact

This report examines the critical role of political risk assessment in multinational corporations' (MNCs) investment decisions, highlighting the impact of political factors on business operations in both developing and developed countries. It defines political risk as the potential for political events and decisions to negatively affect a firm's profitability, influenced by macroeconomic factors, social issues, and instability such as terrorism and civil unrest. The report emphasizes that political risks can trigger events like unrest, property policy issues, corruption, and political party conflicts, particularly affecting developing countries characterized by civil unrest, unstable governments, labor issues, and land disputes. It further discusses how anti-globalization movements, poverty, terrorism, and cyber attacks in developing countries can impact MNCs, while political events like Brexit and the Trump election demonstrate the significant effects in developed countries. The report concludes by recommending strategies such as CSR activities, backup channels, job creation, and political risk insurance to mitigate these risks, underscoring the importance of considering political environments for successful global investments.

Running head: POLITICAL RISKS
POLITICAL RISKS
Name of the Student
Name of the University
Author Note

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Introduction
With the advent of technology and the globalization era, the world has become a global
village. This phenomenon has bought various countries closer. Multinational companies are one
of those companies that take the advantage of this and spread their operations in various
countries. However expanding the business operations is not an easy task and it is very important
for the business organization to consider various factors before they make their investment
decisions for the given country. The most undermined factor is the political risk factor. Whether
investing in a developing country or a developed one, considering the political risk should be an
important routine for any Multinational Corporation. The given presentation will discuss why it
is important for the MNCs to consider the political factors before making important investment
decisions.
Political risks
Political Risk can be described as the risk which is faced by the investors, corporations
and governments concerning the various events and political decisions that tend to have an
impact on the profit making ability of the firm. The given risk can be understood and avoided if
it is well reasoned with investment and foresight.
Political risks generally refer to the complications a business has to face as an outcome of
the various political scenarios in the country. These political changes may be brought about by
the macro economic and social factors such as the fiscal, political, monetary and labor decisions
as well as development.
It may also be because of the instability such as terrorism, riots civil wars and
insurrection.

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If the political risks in a country is low then it does not mean that the political freedom is
high, some governments with stable political system are often very authoritative.
Multinational Companies
A multinational company is one which has it business operations and units spread in
various parts of the globe. They are known by various names such as the multinational
enterprise, transnational enterprise, International Corporation among others.
These companies have a global popularity and become one of the biggest brands around
the globe. The multinational companies often like to take advantage of the conditions in the
country and take an advantage of it in order to expand its operations (Cavusgil et al., 2014).
There are various factors that these companies need to be aware of.
A list of some MNCs has been given below:
 Acer
 HCL
 Lenovo
 Samsung
 Apple
 Whirlpool
 Tesco
 Wal-Mart
Investment Decisions

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Before entering a country for business purposes, the business needs to invest in a
particular country in order to carry out the operations smoothly. Investment means putting in
certain amount of funds in a company and before any such investment is made, the companies
need to make certain decisions as to prove the viability of the investment. This kind of decision
is primarily known as an investment decision and they help the top management in assessing
whether the funds invested are worth for the risk undertaken by the organization (Davarzani,
Zanjirani Farahani & Rahmandad, 2015).
Taking investment decisions are not easy and the firm needs to keep in mind various
factors such as Political, Social, Technological and Environment so as to ensure that the firm is
moving towards the right direction.
Political Risks affecting investment decisions
A popular belief is that the primary factors that tend to have an impact on the decisions
made by the company are the financial and economical factors. However this is not true always
and political factors are those factors that also need to be taken care of while considering making
important investment decisions (Shenkar, Luo & Chi, 2014).
The primary reason behind this is that the political risk factors tend to have a direct
impact on the operations of the firm. If the political environment of any country is unstable, it is
advisable that the company should not be investing in the given country.
As stated previously the political risk factors tend to have on the operations of the
company. This means that these factors tend to trigger an event which may then lead to unrest in
the country. This unrest is generally harmful for the firm. The triggers may be raised because of
the following:

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Unrest or Wars- Very often there exists unrest in the country which may often take the
face of civil wars or wars among the countries. These events have a harmful effect on the
business environment which then tends to affect the MNCs
 Property policies- The MNCs will be needing a location to set up their production
facilities and this factor may be a problem for the firms.
 Corruption factors- The corruption status of the country acts as a de-motivator for the
firms as it tends to increase its initial costs.
 Political parties- The political parties often fight amongst themselves which can cause
instability in the country.
Political risk in developing countries
Developing countries can be described as those countries which have a poor economic
status and are still thriving towards the full development of their country. These countries are
governed by a low growth rate and unemployment issues. These countries also have an unstable
political environment (Aharoni, 2015).
Furthermore, these countries are characterized by a large population which the causes
scarcity of resources. There are many developing countries around the globe and some of them
are Pakistan, Philippines Nepal, India, Brazil, Sri Lanka and Bangladesh, The economic
condition of these countries are comparatively very weak.
The given triggering events tend to cause political instability in developing countries:
Civil unrest

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There are various minority and social groups present in the given developing countries
which are often at war with one another and this causes a situation of political instability in a
business environment which may impact the operations of the MNC.
Unstable government
The government in the developing countries is often changing and the political parties
often tend to fight among themselves to gain the seats available. This often causes riots and
rallies which tend to affect the operations of the MNCs.
Labor
There are various politicized trade unions present in the developing nations which cause
problems when the MNCs enter the country. They believe that these MNCs will lead to an
employment problem in the country and thus they oppose to their existence.
Land issues
Although the developing countries have a high population, the land in these nations is
generally quite limited. This is the reason why the tribal population, rural population and other
people who are displaced because of the companies tend to oppose and pose as a risk.
Given below are certain reasons why the MNCs are concerned about the political risks in
the developing countries:
Political instability has the capability of providing inconvenience of the business
organizations. If there is political unrest in the country the MNC might be forced to shut down its
business operations and this may have an impact on the profitability of the firm.

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If the political party of the government or of the country is against a particular company
then the followers if the party may chose to oppose against the firm which may then form a
barrier against the firm
The unstable government in the developing countries may impact an MNC because
changing governments tend to have changing policies which may not be suitable for the firm at
all times.
The change in the regulations and the legislative policies are also dependent on the
political parties. If the political parties change after an election, then that may have an impact on
the business of the MNC because the company might have been used to a previous policy which
would be more beneficial for them and for this reason, a new policy by a new government may
harm the operations.
Slide 11
The given figure provides the different political risks that the investors are affected by in
the developing countries. It states that around 58% of the political risks arise from the regulatory
changes that are a result of the political instability
Secondly around 43% risks come from restrictions in the business environment. In the
same manner, around 45% are affected by the breach of contract. In a similar manner 13% are
associated with terrorism, 7% with war and 33% with civil disturbance.
The main risks that affect the multinational company in the developing countries
and the primary reasons why the MNCs give importance to these in the developing
countries are given as follows:

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Anti globalization movement
Many political entities and government in lieu of promoting the economy of the given
developing company and hence they influence the locals to avoid using their products. Such a
scenario may affect the investment decisions of the firm as they may not want to bear the losses
of associating with the firm.
Poverty
There exists wide range poverty in the given developing countries and for this reason;
they are very often unable to purchase the product which may then lead to problems for the firm.
Terrorism
Terrorism is a common phenomenon in the developing countries. Due to terrorism, the
financial as well as social environment of the business is affected which may not be beneficial
for the firm, and then they may have to consider their investment in the developing countries.
Cyber attacks
Cyber attacks are very common in the developing countries and no company would like it
if their operations are affected and their information leaked.
Political Risks in Developed Countries
Developed countries are although in a better position than that of the position of the
developing countries, they are also affected by certain economic crises which then have an
impact on the political scenario of the countries. This political unrest might pose as an

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unfavorable situation in the country which then might have an impact on the operations of the
business organization or the MNC.
In the given scenario, the example of the European Nation can be used, whereby the
political instability with respect to the Brexit has impacted the financial stock market and the
condition of the business or the multinational companies in the given continent.
Due to these financial conditions, the employment and financial stability falters which
then further dissatisfies the voters and then creates a sense of doom for the MNCs.
It is important for the multinational companies to consider the business environment
especially the political risks of the develop countries as well because the tripling effect of the
politics of the developed country has a profound effect on all the organizations around the globe
(Perlmutter, 2017). Their magnitude of effect is much higher than that of the effects of the
developing countries.
The two biggest examples of such a political scenario are the Trump election in the
United States and the Brexit in Europe. These events have disrupted the scenario for business in
the given countries as well as the political conditions in the other countries as well.
Recommendations
To minimize the risks, the companies may take various steps such as:
Engaging in CSR Activities
If the company engages in sufficient CSR Activities, then the company may be successful
in appealing to the countries that its intentions are beneficial and then it may not face severe
political risks.

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The alternate backup channels must always be kept as an option in cases if the
environment in a country gets risky, the company can still continue its operations and work
towards the welfare of the firm.
If the MNCs are able to create more job opportunities for the people in the countries ten it
might achieve success. They can also invest in political risk insurance to ensure that the risk
effects are minimized.
Conclusion
Therefore, from the analysis it can be concluded that the kind of country does not matter,
as the politics environment of all types of country are changing and unstable. Hence, a
multinational company needs to consider these political factors seriously.
The multinational corporations pay a special attention to the developing countries
because the political instability is high in these countries as when compared to the OECD ones.
However, MNCs also need to be wary of the conditions in the developed countries as they are
equally important and have a tripling effect.

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References
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Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L.
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Davarzani, H., Zanjirani Farahani, R., & Rahmandad, H. (2015). Understanding econo-political
risks: impact of sanctions on an automotive supply chain. International Journal of
Operations & Production Management, 35(11), 1567-1591.
Perlmutter, H. V. (2017). The tortuous evolution of the multinational corporation.
In International Business (pp. 117-126). Routledge.
Shenkar, O., Luo, Y., & Chi, T. (2014). International business. (pp. 90-105) Routledge.

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