QUESTIONS AND ANSWERS
- 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 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 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 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