Political risk assessments are a fundament of determining the
competitiveness of a Multinational Corporation (MNC) that is looking to explore
or set any subsidiaries in any country. Political risks are generally the
business risk that can influence the financial as well as the social status of
a multinational company. Political risk factors can be of many types. For a Multination
company, it is important to evaluate the political risk factors in not only the
country in which it is residing but also in the country or countries where it
is aiming to establish its subsidiaries. (Erb et al., 1996)
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Any decision was taken by the local government of the host
country regarding taxes, currency valuation, spending regulations, tariff
trade, wages for laborers, and other regulations which can be influential upon
the business of local and foreign corporations. To minimize the political risk
and prevention of crisis or bankruptcy MNC must have the acquisition of various
political aspects of the respective country. Various political risk factors to
be followed are:
The attitude of the consumer in the host country risk
factor for an exporter is buying behavior of customers in the host country. In
most cases, the government exerts pressure on people to buy locally
manufactured products. So this is a threatening factor for exporters but on
mild to moderate level because people buy products of their likings and from
the brand of their own choice. So, this threat can be minimized by generating
high-quality products and meeting the demands of consumers. (Desta, 1985)
1.
Actions of the host government
The local government can make laws and regulations which may
affect the status of MNC. Expropriation can be done forcefully or peacefully.
The host country can take over the subsidiary with or without compensation. The
worst form of expropriation is the one in which the host country takes the
whole control of the subsidiary of an MNC without providing any kind of
compensation to the firm. As a result, the firm may collapse. (Desta, 1985)
1.
Blockage of Fund Transfers
At times, MNC faces the difficulty of limitations of funds
transfer from the host country to the parent firm. These funds are basic cash
flow which is not allowed to repatriate to the head office. (Booth, 1982)
1.
Currency inconvertibility
This risk is a host of ills. The host country may don’t allow
the firm to convert local currency into US dollars or any currency into local
currency. This would cause a haul in making payments. Currency transfer and
exchange are normally legal but a country for its own sake can make it illegal
or abandon it in the states regarding nationalist policies. (Mawanza, 2015)
1.
Bureaucracy
The bureaucracy of any country has a strong influence on foreign investors. Excessive regulations of bureaucracy known as red tape have a strong impact on the country’s economy as well foreign investors. Red tape includes all types of rules. Regulations, paperwork and taxes schedule that has to be followed during set up of a company. According to a report, the global impact of red tape on business is more than 30%.
