Explain key issues relating to political risk and discuss methods the business manager can use to manage risk in an international context.?
This report is basically on the political risks that have to be faced by the global organization. It is known that every country has different political situations thus the global organization needs to solve all those political factors collectively. Thus this essay discusses about the key issues related to the political risks and how those risks can be solved by the manager of organization.
There are various key issues related to political risks some of those are as follows:
Expropriation is actually an issue related to political risk. In this type of issue a plant can be seized by government when any company or organization doesn’t pay the taxes at time. The government can force the owner to sell his property to government at the low prices than the market (Accenture, 2012). The government can also make the force the owner to run the company in joint venture with government. The government mainly have the rights to perform any of the above activity if the company is unable to pay tax at time.
The other political risk associated is that the government has the right to cancel the license of the organization. If any organization performs any activity against the rules and regulations government can cancel the license of the organization in serious situations. When the organization loses the community support due to lack of faith among the people or providing the inappropriate services or products, the government cancel the license of the organization. The risk is also associated if the organization changes its license to function fast in elections (Rajwani, 2011).
It is known that each country has two parties, one ruling and other opposition. On electing a new government the opposition party becomes the ruling party and ruling part becomes the opposition party. Thus the ruling party has the rights to change the government policies. These changes can include the import / export policies or business relationship foreign companies (Paul, 2007). Now the profit maximization or minimization for the organization depends on those policies made by currently ruling government. Sometimes organization may suffer a huge loss due to changed policies.
Two countries may not have good relationship or may have the situation of cold war between them. These can be either neighbouring or other countries. These poor relationships with the other countries may also affect the trade relationship. This may create a great risk for the trade of the organization.
It is obvious that different countries have different types of taxation rules and regulations. Each country has its own criteria about the taxations. Thus internationally an organization needs to manage and consider various types of taxes. The examples of taxation political risk can be extra taxes charged over extreme high revenues or identical excise claims by dominant or native government. The first example clearly demonstrates that if any organization earns high profit in the government then the organization needs to pay more amounts to government as tax (SIPA, 2014).
The various situations may occur when the government needs to change the labour standards or the environment for the business. Government may make the new laws for the rights of labour and workers. These rights for labour and workers may affect in various types to the organization (PWC, 2014). Due to some reasons if the central government provides the right of regulations to the state government then the situation of regulatory changes may occur, as a result organization may need to do various changes in the organization which leads to high expenses.
In various countries the government executives force the organization to use the third party consultants or they themselves include the third party to complete various necessary formalities by the government for business in the country. In this situation the owner needs to pay a great amount of bribe to the third party. The government may also apply the unidentified border taxes to the company (Zelner, 2010). The company has to pay these taxes or bribe otherwise government executives don’t do their work.
For performing any business or trade in any country, the company needs to take permission and perform various legal activities with the government. This is on the government about how much time government executives take to process the application by the company. Sometimes government executives may delay in approving the capital transfer which leads in heavy loss (How to Control Export import, 2015).
When any organization contracts with government on any type of project, if the organization fails to deliver the service or task on time the organization may have to pay a high amount of money as penalty to the government. Sometimes it may leads to high loss to the organization.
Even protests or strikes may also affect the organization. Sometimes due to protests, the key supplier or the main client of the organization may become inactive this leads to slow down or stop the work of the organization. There may be other situation also, suppose an organization needs to make an urgent delivery but due to anti-government protest the roads may be blocked by the protesters which leads to fail in urgent delivery (Ashley & Bonner, 1987).
Actually the political risks can be managed in three steps. First step is identification, identification actually includes the identifying the political risk that is affecting the organization. The identification part of solving the political risk is very important as this help the organization to know very well about the risk that the organization may face. For identifying the risk the managers should set a scenario. This scenario includes checking of political condition of the country. The combined study of political situation and the current situation of the organization help in identifying the political risks associated to the organization (Chua, Wang & Tan, 2003).
The second step of solving the political risk is measuring. Measuring of the political risk include the identification of the risk factor associated with the identified risk. The risk factor actually measure about the chances of the risk to happen and how much loss the risk will create for organization. The condition of the organization after facing that risk is also measured in this step. This step actually enhances the clarity of capital performance estimation by the organization. The step creates the opportunity of investment of capital for the organization. The organization has clear knowledge about the capacity of its management team. Thus this step clears various things about the organization.
The third step is actually management of the risk. After the identification and measurement of various criteria the management of risk should be taken place. The risk should be managed according to the strategy developed by the managers for the identified (Dahl, 1976).
For any solution to make successful, all the three steps should be performed very carefully if the identification of the risk will not be done properly then there will be no any mean of other steps. If the measurement of the factors will not be done properly then the proper strategy for the risk management can’t be prepare and of course the implementation of the plan should be appropriate to successfully solve the risk situation.
Conclusion
The above essay is the result of various studies and researches. According to the above discussion it can be clearly said there are various political factors which can affect the organization. It is very necessary for the organization to deal with political risks otherwise these may result in high loss. These may also create various legal issues against the organization. There are actually three steps of facing those risks identification, measure and manage which help in assessing the political risks.
References
Accenture (2012). Managing Political risks [online]. 3(2) p. 3-10 Available From: https://www.accenture.com/Microsites/asia-go-global/Documents/pdfs/page-5/Accenture-Managing-Political-Risk-Controlling-Loss-Finding-Opportunity.pdf [Accessed: 15th March 2015].
Rajwani, Tazeeb(2011). How should Firms deal with political risk? [online]. Available From: https://www.som.cranfield.ac.uk/som/p16495/Think-Cranfield/2011/May-2011/How-Should-Firms-Deal-with-Political-Risk [Accessed: 15th March 2015].
Paul, Joseph (2007). Impact of political risks in international marketing: the case of West Africa [online]. Available From: https://www.memoireonline.com/08/09/2610/Impact-of-political-risks-in-international-marketing-the-case-of-West-Africa.html [Accessed: 15th March 2015].
SIPA (2014).Political risk Analysis Firms [online]. Available From: https://sipa.columbia.edu/sites/default/files/Political%20Risk%20Analysis%20Firms.pdf [Accessed: 15th March 2015].
PWC (2014). How managing political risks improves the global business performance [online]. Available From: https://www.pwc.com/us/en/risk-compliance/managing-political-risk-improves-business-performance.jhtml [Accessed: 15th March 2015].
Zelner, Bennet A. (2010). The hidden risks in emerging market [online]. Available From: https://hbr.org/2010/04/the-hidden-risks-in-emerging-markets [Accessed: 15th March 2015].
How to export import (2015). Political risks, one of the threats in international business [online]. Available From: https://howtoexportimport.com/Political-Risks-in-International-Business-567.aspx [Accessed 15th March 2015].
Ashley & Bonner (1987). Political risks in international construction. Journal of Construction Engineering & Management, 113(3), pp. 447-465.
Chua, Wang, & Tan (2003). Impacts of obstacles in East Asian cross-border construction. Journal of Construction Engineering & Management, 129(2), pp. 131-141.
Dahl (1976). Modern political analysis. Englewood Cliffs, N.J. : Prentice-Hall
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