Question 1

  • Explain the main reasons why multi-national companies (MNC) seek foreign investment.
  •  Explain the types of political risks that face multi-national firms in foreign countries.
  • How can a MNC protect itself against political risk?


a)Reasons for foreign investment by MNC.

  • To seek new markets for their products
  • To seek growth opportunities outside their home markets
  • To take advantage of tax incentives offered in other countries
  • To avoid regulatory and political bottlenecks in their home country
  • To diversify their operations and reduce their overall risk
  • To seek new technology in form of scientific ideas for design of their products and services
  • Increase production efficiency by moving to countries with low production costs.

b)Political (sovereign) risk is a probability that political event will impact adversely in the domestic and foreign firms. The host government may interfere with the operations of a MNC in a number of ways:

  • Non-discriminatory interferences e.g no transfer price, non-convertibility of the currency of host nation etc.
  • Discriminatory interference e.g special tax rates, government insisting on a joint venture with MNC etc.
  • Discriminatory sanctions e.g. ending the right to remit or repatriate profits
  • Wealth deprivation i.e takeover of a MNC by the government without any compensation.
  • Anti-trust policies
  • Fiscal & monetary policies e.g invest a portion of liquid cash in government to bills and treasury bonds etc.


c)Steps to minimize political risk

  • Investment insurance e.g. from multi-national investment guarantee agency (MIGA)
  • Forecast political interference in capital budgeting process
  • Negotiation with the host government before investing
  • Make prior arrangement on issues relating to transfer pricing, profit repatriation etc.
  • Joint venture with the host government
  • Sale of shares in the host country to raise capital
  • Local supply of goods and control of marketing
  • Pre-planned disinvestments and cease operations due to political interference



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