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Political risk is the risk that is associated with the political stability of a nation and the risk associated with political actions on the part of a nation's government. A decline in the economy of a nation because of a violent change in government falls under the category of political risk, as does the risk of nationalization or other adverse government action directed at the company. There is considerable political risk associated with doing business in a nation like Fiji, for example. There are a number of ways that firms seek to manage the political risk that they face when doing business overseas.
Because of the nature of political risk, the implications can be significant for business. The worst case scenarios could see the loss of the entire business, combined with risk to life and limb of the employees that work for the business. Even minor political risks could have significant long-term negative impacts on the viability of the business. Before a firm enters a country, it needs to gain a sense of the political risk that the country has. Often, firms are confronted with trade and economic advisory boards of the host nation that encourage investment and downplay the risks. Thus, it is important for the firm to gain independent assessments of the political risk in a country. Oftentimes, there are subtle dimensions to the political risk that are not always apparent to the outside observer. For example, while the Fijian-Indian tensions characterize some of the political risk in Fiji, less understood to outsiders is the degree to which clan alliances within the native Fijian community contribute to the country's political risk. Thus, country risk ratings can provide valuable third-party insight into issues that are not always easy to obtain information about.
In Fiji, there are a number of variables that impact of the degree of political risk in the country. Standard and Poor's, when issuing a rating in 2008 that placed Fiji as having among the highest levels of political risk in the Asia-Pacific region, noted among other issues "institutional and political weakness, severe political instability, the risk of outright conflict" (Fiji Times, 2008). Political risk, the report noted, can have an impact on the country's creditworthiness and the country's ability to deal with macroeconomic challenges. It was not surprising, then, that some of these predictions came true. In 2009, the Fijian government suspended elections for five years and re-appointed the coup leader Frank Bainimarama as Prime Minister during the interim. The nations' constitution was revoked and media freedoms were curtailed, promising even greater instability and political risk in the future (IHS, 2009).
Coups are endemic in Fijian politics, having occurred twice in 1987, and again in 2000 and 2006. At the root of the conflict is the political battle between native Fijians of Melanesian and Polynesian descent and Indo-Fijians, who arrived in the islands as indentured laborers under British rule. The first coup came in direct response to a majority Indian government headed by a Fijian with the support of the Indo-Fijian community, and all subsequent coups have come as an ethnic Fijian response to Indian gains in power. The Fijian government has a policy of racial discrimination against Indo-Fijians, and this is at the root of the conflict. Conflict between native Fijian groups has largely been downplayed in the context of political risk.
While Fiji is nominally a republic, the current regime is totalitarian in nature, with the military effectively pulling the strings of nominally civilian leadership (Radio Australia, 2011). As a result, there is significant uncertainty with respect to doing business in Fiji. The government can effectively act unchecked, and has incentive to capture a greater share of income that is generated on the island. The military regime should be considered unpredictable -- its moves to consolidate power were suspected in advance but went against their public declarations of commitment to the democratic process (IHS, 2009).
There is no resolution to the political risk in Fiji in sight. The country is now not slated for elections until 2014 and many observers doubt that the current regime is committed to the democratic process, having seized power and then opted to cancel 2009 elections in order to maintain this power (IHS, 2009). Moreover, the ethnic issues that drive Fiji's current problems are nowhere near being resolved. Most Indo-Fijians, having been on the islands for 100 years or more, do not relate to other countries and have little desire to leave. Native Fijians see the islands as theirs. Thus, the racist policies that have driven the coups are likely to continue for the foreseeable future. That the demographics do not show a geographic split between the two communities indicates that there is little potential for a two-country resolution either.
2. The nature of political risk does vary by business. There are a number of different business characteristics that impact on the political risk that the business faces. There is little research on the subject, but several factors are self-evident. The first is the portability of the business. A manufacturing business can exit Fiji, for example, while a tourist resort cannot. Perhaps a classic example of the risk faced by a business that cannot move during times of instability is illustrated on the other side of the planet, with the now-empty tourist resorts in Famagusta, in what is now the Turkish-occupied part of Cyprus. A tourist resort in Fiji could face a similar circumstance, should the government make that choice. A manufacturing facility could move its plant to a neighboring country or elsewhere in the world and produce the same product. So the degree of political risk faced depends in part on the company's ability to leave the country.
Another factor is the dependence on raw materials. An example of this comes from Fiji Water, the bottled water producer. Faced with high taxes and political instability the company exited Fiji completely in 2010 (Hsu, 2010). The company could take water from elsewhere, but may simply fold. The degree of dependence of the company on Fiji will therefore be reflected in the degree of political risk that the firm faces operating there. Coca-Cola, for example, may face the same risk of taxes and adverse political action, but because it is not dependent on the Fiji market for its profits, the company's total political risk from operating in Fiji is low.
Another feature of the business that affects its level of exposure to political risk is its relationship with the government. An example would be a sugar company operating in Fiji that is owned by an Australian firm and run by Indo-Fijians. The ties to the democratically-elected governments would have been good, resulting in a relatively low level of political risk. However, the Indo-Fijian and colonial features of the business would make it a target of the post-coup regime. In addition, the dependence of the government on revenues from the business is also a factor. If the Fijian government relies on the business, then it has less leverage over the business, meaning that the business faces less political risk. A good example of this might be a bank, which makes an important contribution to the financial stability of the country. However, if the business is largely inconsequential to the government, then the business would have a higher degree of political risk. An example of this might be the clothing company, which provides a handful of low-end jobs that could probably be replaced.
Altogether, the political risk that a business faces is related to its size and importance to the economy, its relationship with the government, the relative bargaining power than the firm has with the government, the firm's ability to move and the dependency that the firm has on the local raw materials. Political risk can be reduced by ensuring that the firm is important to the government or even to the country as a whole regardless of who is in government. In a coup-prone country like Fiji, the latter strategy is probably the most effective one.
3. Relative bargaining power reflects the degree to which the company and the government have power over one another in negotiating the terms of the company's operations in that country. Bargaining power relates to a number of factors, but boils down to how much each party needs the other. The firm contributes revenues and jobs to the government and country, while the country contributes the opportunity to do business to the firm. If the country is small and the firm big, then the firm likely has the bargaining power, for example, because it can easily choose not to operate in the country if it does not like the terms of doing business there.
The relative bargaining power of the Vatukoula Gold Mine and the Fijian government can be analyzed by examining what each brings to the table. VGM is a company whose sole operation is the mine in Fiji (VGMPLC.com, 2011). The company is entirely dependent on its Fiji operations for its profit.…[continue]
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