Political, Social, and Economic Risk in Business

Global Business and Politics: Risk Management
When it comes to managing international risk, there are three main areas that must be addressed: political risk, economic risk and social risk—i.e., the limits to expansion. This presentation will address each of these three risks and show how expansion of the scope of the organization should proceed.
As DiDraga (2013) notes, the scope of risk management is based on three points: 1) analysis—i.e., posing the question of what happens if…, 2) response—i.e., formulating an answer to the question posed in point 1; and 3) control—i.e., monitoring the situation and making adjustments when necessary (DiDgraga, 2013). These three points should be considered whenever risk is to be managed.
Political risks can be seen everywhere today. The recent case of “Brexit,” with the UK voting to leave the EU, has created an international environment in which nationalism and new trade deals are a constant issue. In America, the concept of an “America First” policy has been put forward by the Trump Administration—and it has, in turn, put pressure on other countries, from Canada to China, in terms of a how free and fair trade will be pursued. In other parts of the world, political instability can lead to market crises, currency crashes, and production halts. Case in point is Greece, which has attempted to show foreign investors that the country is open for business and would like to see more businesses investing in the nation; however, as El Dorado—a Canadian base junior gold miner has shown—investment in Greece is fraught with headaches and false starts, as it has had to shut production on its mine due to political grandstanding in Greece. Other countries have taken note and investment in Greece continues to be sluggish. Managing political risk, therefore, depends upon assessing the political situation of the target country and determining whether the stability there is authentic, whether the political leaders are likely to form good partnerships with businesses seeking to invest in the country, and whether there is likely to be any profit for both sides as a result of the investment. A country like China, which has recently had President Xi Jinping’s name written into its Constitution, shows tremendous stability, politically speaking, and its leaders have demonstrated a great interest in forming strong business relationships with entities looking to work with China to build a multipolar world (Amin, 2017). In order to manage political risk, it is important to understand what the political leaders of a host country want and to gauge whether or not the business can work within the established parameters to effect a win-win situation for both the organization and the host country.
Economic risks are another story. They very often follow from and/or are connected to political risk—as politics and economics are typically intimately connected—and both may determine the extent to which social risk (i.e., the limits to expansion that a company can enjoy) may be managed. Economic risks include issues of costs versus the ability to sell, as well as financial risks that must be considered in international markets—such as currency exchange risks. Managing economic risk depends upon knowing how doing business in foreign currencies will translate to profits. For example, transaction exposure risk (cash flow risk) may be encountered if FX rates move one way or another so as to impact dividend repatriation. Translation risk might be encountered if a company’s expansion into a foreign country is achieved by way of subsidiary, in which case FX rate changes could affect the balance sheet of the parent company. Net asset exposure is typically measured against possible FX swings and hedges placed accordingly, using options and futures to protect net assets of the subsidiary against FX swings (Papaioannou, 2006). Hedging may also be performed to obtain purchase power parity and interest rate parity (Bergin, Glick, Wu, 2013). Another risk to watch for is the USD as reserve currency—especially now that China is set to offer sales of oil in a gold-backed yuan: this could upset the status enjoyed now by the USD (Costigan, Cottle & Keys, 2017).
The extent to which expansion should be considered must be based on how well the organization has understood the country it seeks to penetrate. As Purkayastha and Rao (2014) show, a company must be able to adapt to the culture it is entering in order to be successful. Just because a company can expand, does not always mean it should. Mattel failed in China because it did not precede its expansion with due diligence of the Chinese culture. Likewise Walmart struggled in countries on other continents because it failed to conduct due diligence as to what the consumers wanted. In order to manage the risk of expansion, a company must consider the social risks attenuated with entering into another country by asking questions such as: “What do these consumers want from the type of service or product that this sort of organization delivers?” “Does the organization’s offering meet the expectations of the consumer and the culture in this country, or does it need to adapt?” Adaptation is the key to minimizing risk in expansion, and the key to adaptation is to research the country, survey its consumers and make adjustments to the product or service of the organization before entering into the country’s marketplace. The limits to expansion will be defined by the organization’s awareness of the country’s culture, but also by the organization’s ability to work with the country’s political leaders and its ability to hedge against economic risk.
References
Amin, S. (2017). The Sovereign Popular Project; The Alternative to Liberal
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Bergin, P. R., Glick, R., & Wu, J. L. (2013). The micro-macro disconnect of purchasing
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Costigan, T., Cottle, D., & Keys, A. (2017). The US Dollar as the Global Reserve
Currency: Implications for US Hegemony. World Review of Political Economy, 8(1), 104-122.
DiDraga, O. (2013). The role and the effects of risk management in IT projects success.
Informatica Economica, 17(1), 86-98. 
Papaioannou, M. (2006). Exchange rate risk measurement and management: Issues and
approaches of firms. IMF Working Paper.
Purkayastha, D. & Rao, A. (2014). Wal-Mart in Africa. ICMR. International Marketing,
by Ghauri and Cateora, 4e, McGraw Hill Education, UK, 2014.