Political Risk in International
Finance Management
P R ES E N TE D B Y:
R AK E S H PAT E L
P R ES EN T ED TO :
D R . VATS A L PATE L
D E PA R T M E N T O F B U S I N E S S A N D
I N D U S T R I A L M A N A G E M E N T, V N S G U
What is an Political Risk?
Political risk refers to the risks associated with
political changes or instability in a country that can
affect the financial and economic conditions of that
country, as well as the operations of foreign
companies or investors within the country.
Political risk is a critical consideration for
international finance management because it can
have a significant impact on investment decisions,
the cost of capital, and the overall profitability of
international investments.
Some examples of political risks include:
Changes in government policies: Governments can change policies related
to taxes, tariffs, regulations, and trade agreements, which can impact the
profitability of investments.
Political instability: Political instability, such as civil unrest, coups, or
terrorism, can lead to economic disruption, property damage, and loss of
investment.
Nationalization: Governments may nationalize industries, which can cause loss
of assets and investments for foreign companies.
Currency risk: Political instability can cause currency fluctuations, which can
impact the value of investments.
Corruption: Corruption can affect the business environment, increase costs,
and lead to legal and reputational risks.
To manage political risk in international finance management, companies and
investors can use a range of strategies, including diversification, political risk
insurance, hedging, and partnering with local companies. Additionally, it is
essential to conduct thorough due diligence and monitor political developments
in the countries where investments are made.
Impact of Political Risk on International Finance
Management
Increased cost of capital: Political risk can increase
the cost of capital due to uncertainty and higher risk
premiums.
Reduced profitability: Political risk can lead to losses
or reduced profitability for foreign companies or
investors.
Limited investment opportunities: Political risk can
limit investment opportunities in certain countries or
industries.
Legal and reputational risk: Political risk can expose
companies and investors to legal and reputational risks.
Strategies to Manage Political Risk
Diversification: Investing in a diversified portfolio of
countries and industries can reduce political risk.
Political risk insurance: Insurance policies can protect
against losses due to political risks.
Hedging: Hedging strategies such as currency hedging can
reduce exposure to political risk.
Partnering with local companies: Partnering with local
companies can provide better insight and access to the
political environment.
Due diligence and monitoring: Conducting thorough due
diligence and monitoring political developments can help
identify and mitigate political risk.
Macro Risk Factors
Freezing the movement of assets out of the host country
Placing limits on the remittance of profits or capital
Devaluing the currency
Refusing to abide by the contractual terms of agreements previously
signed with MNC
Industrial piracy (counterfeiters)
Political turmoil
Government corruption
Micro Risk Factors Some MNCs are treated
differently than others
Industry-specific regulations
Taxes on specific types of business activity
Restrictive local laws
Impact of WTO,EU and American regulations on
Indian MNCs
Government policies that promote exports and
discourage imports
Classification of Political Risk
Examples of Political Risks
Example #1
Since Donald Trump came into power in the U.S. in
2015, there have been several changes in trading
policies. There has been the imposition of import duties
primarily on Chinese goods, which caused a trade
war kind of situation, causing a business slowdown for
the Chinese companies, further adding pressure to the
Chinese investors. The Trump government also imposed
strict regulations on the USFDA, the governing body of
the pharmaceutical sector. Thus, this kind of change in
the scenario results in macro risks for the investors.
Example #2
The entry of immigrants from Asian countries to
several parts of Europe is causing an imbalance in
the socio-economic structure of the continent. Thus,
there may be a rise in the unemployment of local
labor due to the availability of cheap labor from
other countries. Therefore, the above situation might
be positive from the business point of view while it
might cause trouble for the local citizens of the
country.
Thank You
