Country Risk by Political Systems

• types of country risk produced by political systems:

  1. seizure
  2. embargoes and sanctions
  3. boycotts
  4. terrorism
  5. war, insurrection, violence
• seizure: government takeover of corporate assets
• industry sectors most often targeted by government seizure are natural resources (mining and petroleum), utilities, and manufacturing
• creeping expropriation: subtle form of country risk in which governments modify laws and regulations after foreign MNEs have made substantial local investments in property and plants
• confiscation: seizure of corporate assets without compensation
• beginning in the 1980s, the government of Zimbabwe seized more than 5,000 farms
• expropriation: seizure with compensation
• in Venezuela, ExxonMobil and ConocoPhillips were forced to abandon multibillion dollar investments in local oil industry
• nationalization: government seizure of entire industry, with or without compensation
• the government of Bolivia nationalized much of the oil and gas industry in that country
• Venezuela's president nationalized the cement industry
• Iceland nationalized most of the country's banking industry
• sanction: trade penalty imposed on one or more countries by one or more other countries
• sanctions generally arise in the context of unresolved trade or policy dispute
• embargo: official ban on exports or imports from particular country to isolate it and punish its government
• embargoes are generally more serious than sanctions
• there's evidence that sanctions often don't achieve desired outcomes
• boycott: voluntary refusal to engage in commercial dealings with a nation or company
• boycotts and public protests result in lost sales and increased costs
• Disneyland Paris and McDonald's have been targets of boycotts by French firms
• activists in numerous countries organized a boycott of petroleum company BP following oil spill in Gulf of Mexico
• terrorism: threat or actual use of force or violence to attain a political goal through fear, coercion, or intimidation
• in the days following the September 11th, 2001 attacks in New York, the value of the US stock market dropped some 14%
• war, insurrection, and violence have indirect effects that can be disastrous
• the border has led some firms and financiers to withdraw investments from Mexico
• in India, Tata Motors shifted the location of a major new factory due to violent protests by local farmers
• to minimize losses from violent acts, firms can purchase risk insurance