Political risk

- In 2012, 25 politicians were found guilty of corruption, bribery and money laundering - Construction firms payed bribes to the national oil company (Petrobas) to secure contracts - Some were politicians - Inflated contracts that cost 3% more than their real cost

- Fake companies to make payments - Two former Brazilian companies were also linked with the scandal - The country entered a period of recession

Political risk in Brazil

- Corruption at an endemic level - political connections - Government officials that demand bribes to award government contracts - Brazil ranks 135thout of 144 countries when it comes to the proper use of public funds

- Putin recently mentioned that if someone managed to successfully register a business in Russia deserves a medal - There are examples of independently owned businesses having their assets seized by the government (Yukos) after false allegations e.g. Motorola, issues with Ukraine decided to close half of MCdonalds in Russia and do not favour PwC

- Deputy chairman of the central bank was assassinated when trying to clean up the banking sector - Background checks of employees include criminal record - Uncertainty in political environment and legal systems deter FDI

Closing a business (bankruptcy)

- If you want to close your business it is easier in Hong Kong (4-8 months) and its less costly (1-10% assets). In Indonesia and Vietnam is slow (takes 4 to 8 years) and it is expensive (50% of assets) - India doesn't have clear bankruptcy laws - uncertainty about market - HP in France - wanted to close down due to inefficiency about 2000 employees president did not allow it as firing 2000 people would have been a disaster - solution is to hire part time, temporary contracts as there is less protection over jobs

Political risk in Russia

- Paying in bribes appears to be a normal part of doing business in Russia ($100k) - Counterfeiting is also a problem (pirate software, movies, products) - minimum police intervention (percentage of sales goes to corrupt officers)

Strategic Concerns - Long Time

- Product Regulation - Product Safety and Liability - Legal Jurisdiction - Property rights - Intellectual Property

Operational Concerns - short term concerns

- Starting a business - Making and enforcing contracts - Employing workers (hiring and firing employees) - Closing a business

what is a systemic risk?

- risk that is the result of changes in public policy (increase in corporate taxation, program to nationalize some (not all) foreign firms in a specific industry (oil in Venezuela) - - Changes can also lead to opportunities in foreign countries (deregulation of the state-owned telecommunication industry in Latin American countries)

Mixed systems

A mix of the preceding types. Bangladesh and Pakistan use a mix of common and theocratic law; Indonesia and Oman a mix of theocratic and civil laws; South Africa and Philippines follow a blend of civil and common law

Theocratic law

Based on religious doctrine beliefs. All aspects of law are based on the interpretation of a sacred text. Church, government, law is one (e.g. some Muslim countries adopt Islamic law - variations exist Turkey, Kuwait, Iran)

Civil law

Based on the interpretation and application of detailed laws organised into codes - what happened in the past does not necessarily influence the future. Notaries to validate contracts and certificates (Japan, Germany, France) - application of law

Common Law

Decision making is based on post cases (established case law) - what happened in the past should determine what will happen in the future (US, UK, Australia) - of course tailored to specific circumstances - interpretation of law

Employing workers (hiring and firing employees)

Determined by local labour law. US, New Zealand and China have flexible laws. Other nations are more strict especially when it comes to firing (France, Paraguay) - Very expensive to fire someone in Mexico (8 times than Brazil) - India had 60 labour laws plus 150 more from different states - Governmental permission to fire people - India

which types of political risk are macro?

Distributive Catastrophic

Product Regulation (Strategic concern)

Governments set rules about products depending on the country of origin label. Security concerns can be an issue (US and Canadian government banned Huawei and ZTW from governmental contracts) - Some regulations are designed to protect local jobs, please voters and increase tax revenue - Government try to persuade foreign MNEs to manufacture as much of a product as possible locally (Brazil increases tax by 30% on cars with less than 65% local content)

Starting a business example of operational concern

In Brazil it took 5 months to get the appropriate licenses and permits from 7 ministries - US it took 1 month, Canada requires 2 procedures that cover tax, labour and administrative issues

Product Safety and Liability Regulation (Strategic concern)

Product safety laws and further testing can delay, make more expensive and force a company to change a product - Developed nations have more strict processes - EU's product liability directive is the global standard (Lego having factories in Mexico and East Europe)

property rights (structural concern)

Property rights refer to the legal rights to use different resources (by holding legal title) in order to generate revenue. Sometimes property rights are violated - Private action: Theft, blackmail, piracy and organised crime (Russia Mafia, Italian Mafia, US Mafia, Yakuza, Mexico, Brazil) - difficult to deal with them if there is a weak legal system Public action: 1. Legally: Extort income through taxation, expensive licesnses and permits, nationalise resources (including tangible assets) without compensation to the owners 2. Not-Legally: Demanding bribes (Philippines, Indonesia) - Extent varies by country and by legal system - $400 billion just to secure contracts - Transparency Intenrational - Significantly reduces FDI, local investment and economic growth

which types of political risk are micro?

Systemic Procedural

Types of political risk

Systemic Procedural Distributive Catastrophic

Intellectual property (Strategic concern)

The ownership of creative ideas, innovative expertise or intangible insights that result in a. competitive advantage (innovation) or a firm and therefore a nation - intellectual property rights refer to control and derive the benefits from writing inventions No 'global patents'

Making and enforcing contracts

Variation across different legal systems Common law: Precise, detailed contracts - need to account for eventuality - based on previous cases therefore need to be more detailed because no detailed written law to protect you so must try to be as covered as possible Civil law: less exact agreements (already covered) United Nations Convention of Contracts for the International Sale of Goods (CISG) - 83 nations International court of arbitration

Legal Jurisdiction (Strategic concern)

foreign MNEs would like to settle disputes in their own country, host country firms would prefer to be dealt with locally (set conditions in contracts - choice of law clause) - International Court of Arbitration - Dispute - each country will want to use their own court for more chance of ruling in favour of their country - Condition in contract - choice of the law clause - allows non-host country to settle disputes in home court - in any other case it will be the host court whereby disputes aer

What is catastrophic risk?

includes random political developments that adversely affect the operations of every company in a country. Typically, it arises from specific flash points, such as ethnic discord, illegal regime change, civil disorder, or insurrection. It disrupts the business environment in a way that affects every firm in the country. If such disruptions spiral out of control, they devastate companies and nations.

what is distributive risk?

is a result of the profits generated by foreign companies in the local economy. If the host country questions the distributive justice of the rewards of operating in its market, it may wonder whether, as the business grows more - Government changes its mind when it comes to how much they gain from foreign MNEs (e.g. silver mining in Bolivia). Gradual increase in taxation to capture more of MNE's profits o MNEs tend to diversify operations (Japanese MNEs in China) or decrease the value of factories (Chrysler in Peru) àcar parts built in different countries o Chinese companies don't like it when Japanese MNEs operate in China due to previous conflict - but they still operate due to low labour costs and from there are able to export to other countries - shadow factories in Indonesia, Malaysia, Philippines so if Chinese operations are effected then they have back up factories which can operate at full amount o Assets are nationalised if the factory is fully functional without being reliant on anything else - MNE's know this so they try reduce this risk by gaining access to other markets e.g. Peru has access to Brazil

what is procedural risk?

refers to the risk evolving from the daily movement of people, products, and funds from point to point in the global market. Each move creates a procedural transaction between the units involved, whether units of a company or units of a country. Political actions sometimes create frictions that interfere with these transactions. - Political policies can constrain the flow of products/services or investment (IB procedures). Bribes might be requested in order to expedite products of for investment to take place - bribing through production e.g. if you want product testing to go faster

What is political risk?

refers to the risk that political decisions or events in a country negatively affect the profitability or sustainability of an investment

Customary law

reflects wisdom of the daily experience, time-honours philosophical outlooks. Usually law comply with community standards (Africa)

Starting a business (operational concern0

registering a name, obtaining a licences, tax registration, arranging a credit (if needed)

The legal system

the mechanism for creating, interpreting and enforcing the laws