How can foreign companies manage the political and legal risks in emerging markets?

Question

What will be an ideal response?

Answer 1

First of all, some of the political risks in a given market may not be relevant to the company’s operations at all. Hence, the company may find that they do not need to be concerned about such risks in carrying out their operations in a given country.

The first step in managing political risks is assessing such risks and evaluating how such risks pertain to the company’s operations. In assessing risk structure of a country, consulting local sources often leads to more accurate insights.

One of the main distinctions that need to be considered in assessing political risks is whether the risk affects the sales or the physical assets. If the risks are focused on physical assets, then a company may take advantage of the sales opportunities. In some cases, the growth prospects of emerging markets have also led to the entry of internationals in the presence of political risks which may effects physical assets. In such cases, these companies either controlled the size of the investments or shared the risks with partners.

The political risks that remain a concern for investors can be termed as policy risks – or political uncertainty – based on the risks arising from a government’s ability to change the regulations, adversely affecting the investment; or the government’s failure to enforce contract investment guarantee agencies such as MIGA, as well as bilateral investment treaties, which provide insurance against major political risks.

Companies increasingly try to engage with local communities and governments, and form joint ventures with local enterprises. Companies can maintain personal relations, increase their resource commitments in the host country, stimulate the local economy by purchasing local supplies, employ nationals, or advocate their presence as a responsible corporate citizens in order to improve their relations with the authorities and establish their presence in the market.

Generally, in markets where the political risks are deemed high, multinationals can limit operations and lower commitment or focus on increasing firms’ importance politically. Another successful approach to managing political risks is to manage political relations by ensuring the government that the multinational enterprise will contribute to the economic growth of the country by providing technology, employing locals or investing in public resources. In order to build such a relationship with the government, the company must analyse the interests of the particular government, and their attitudes towards the firm’s industry.