Issues of sovereignty, differing political philosophies, and nationalism are clear in a host of government actions that increase the risks of global business. Risks can rage from confiscation, expropriation and domestication. These are discussed in below..
A. Confiscation, Expropriation, and Domestication:
1. Confiscation: The most sever political risk is confiscation that is the seizing of a company’s assets without payment. The most two important recent confiscation of U.S. property occurred when Fidel Castro became the leader in Cuba and later when the shah of Iran was overthrown.
2. Expropriation: Less drastic, but still severe, when the government seizes an investment but some compensation for the assets is made.
3. Domestication: A third type of risk is domestication. This occurs when host countries gradually cause the transfer of foreign investment to national control and ownership through a series of government in a company’s management. The ultimate goal of domestication is to forle foreign investors to share more of the ownership, management and profits with nationals.
There are some ways to domestication as below:
• A transfer of ownership in part or total to nationals.
• A promotion of a large number of nationals to higher level of management.
• Greater decision making power resting with nationals.
B. Economic Risks: Restraints on business activity may be imposed under the banner of national security to protect an infant industry, to conserve scarce foreign exchange, to raise revenue, or to stand against unfair trade practices, among a score of other real or imagined reasons.
These economic risks are an important and recurring part of the political environment that few international companies can avoid.
1. Exchange Control: Exchange control stem from shortages of foreign exchange held by a country .When a nation faces shortages of foreign exchange, and a substantial amount of capital is learning the country, controls may be levied overall movements of capital. For example, Venezuela imposed currency controls a two month long national strike in an important attempt to stem the flow of capital from the country.
2. Local contents laws: In addition , to restricting import of essential supplies to force local purchase , countries often require a protection of any product sold within the country to have local content , that is, to contain locally made parts. For example Thailand requires that all milk products contain at least 50 percent milk from local dairy farmers.
3. Import restrictions: Selective restrictions on the import of raw materials, machines, and spare parts are fairly common strategies to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry.
4. Tax controls: Taxes must be classified as a political risk when used as a means of controlling foreign investments. In such cases, they are raised without warning and in violation of formal agreements.
5. Price Controls: Essential products that command considerable public interest, such as pharmaceuticals, food, gasoline and cars are often subjected to price controls. Such controls applied during inflationary periods can be used to control the cost of living.
6. Labor problems: In many countries, labor unions have strong government support that they use effectively in obtaining special concessions of business. For example-layoffs may be forbidden, profits may have to be shared, and extraordinary number of services to be provided.
7. Political sanctions: In addition to economic risks, one or a group of nations may boycott another nation, thereby stopping all trade between the countries, or may issue sanctions against the trade of specific products. For example- The United States has long term boycotts of trade with Cuba and Iran.
8. Political and social activists and non-governmental organizations: Although not usually officially sanctioned by the government the impact of political and social activists can also interrupt the normal flow of trade PSA’S can range from those who seek to bring about peaceful change to control violence and terrorism to effect change. Example-In Bangladesh, coalmine issue in Fulbaria is a kind of socio-political movement against Asia Energy.