Describe business risk and political risk

Question

What will be an ideal response?

Answer 1

Answer:
Business risk is a function of the economic factors and business practices of the host country. Business risk concerns the relative possibility of profit or loss in terms of sales, costs, and taxes. When we look at a domestic-only company and analyze these areas, we tend to assign "forecasting errors" to the differences between actual and anticipated performance. When we look at foreign operations, we need to expand these differences to include changes in foreign markets that impact performance.
Political risk involves changes in a foreign government that can have far-reaching effects–both positive and negative–on a multinational company. At the one extreme is the case in which a local government "takes over" the assets of the company and nationalizes it. In this case, the original company is often not compensated for the loss of assets to the ruling government. At the other end of the spectrum is a government change that encourages foreign investment and gives breaks to companies willing to move operations locally. In this case, additional profits are possible as the local government tries to entice firms to move there and help grow the local economy. A company can guard against the extreme case of nationalized assets through three basic defensive mechanisms. They are: keep critical operations private; finance operations and assets with local money; and receive primary inputs outside the local economy.