Political risk management in multinational corporations

Political risk is one of the different elements of country risk that a company must take into consideration when operating internationally. Political risk reflects the risk posed by the government of a country, including risks that the government will take action against your company (China v. Google), up to and including the risk of nationalization (Argentina v. YPF). Governments have the capacity to, in an unpredictable and ad hoc manner, change the rules governing a company's operations in a country. In the West, where political processes tend to be transparent, it is a lot easier to understand and measure political risk. Political risk, it should be noted, reflects actions taken on existing ventures, and not something like project approval. So Keystone XL is a pending decision, not a political risk. Risk would be if Keystone is approved and then after it is started the next government moves to block the project retroactively.

Dekra in Germany

Dekra is a vehicle inspection company based in Stuttgart. One does not normally talk about political risk in the home country. Risk represents the unknown, and if there is any political environment that a company knows, it is the domestic one. The German political environment is relatively transparent. So are there political risks? Dekra was founded in 1925, which means that it did face a very high degree of political risk early on in its existence, as the company was shut down during the war. Any operations in the East would have been nationalized after the war. But otherwise Germany has proven a stable and transparent place with respect to political risk.

One political risk is that the inspections are mandated in part by German law. Changes to the laws can reduce the demand for vehicle inspections. For example, Germany at some point introduced emissions testing, as many other governments have. But as automakers reduce the emissions their vehicles give off, some governments have removed emissions testing requirements, effectively ending that industry -- this happened in Virginia, in British Columbia, in New Jersey and there is the risk that it could happen in Germany, too.

Another political risk is that posed by trade agreements. For example, any trade agreements or enlargement of the EU will provide more opportunity for Dekra, but also more risk of market entry by a new competitor. Dekra has no real control over this, because it is the result of a political process. A third political risk is that of nationalization, but in Germany this risk is minimal.

Dekra will need to be able to continue to justify the need for emissions testing in order to maintain that demand. This requires having a good relationship with government, and lobbying to maintain the status quo. Dekra can also hedge against this risk by developing other revenue streams, so that if emissions testing is ended the company will still have diversified set of businesses and can survive. But otherwise, there is minimal political risk for a Germany company operating in Germany, and the company has a high degree of familiarity with the political environment, which helps to mitigate risk.

Kellogg's in India

India is a country with a moderately high degree of political risk. While India is a democratic nation with a legal system based on the English tradition, the country has also had flirtations with communism in the past, and some states are still run by communist governments. In the 1970s, Coca-Cola was turfed from the country after a regime change (Yergin & Stanislaw, 1998), and while India is much more open about foreign investment today, it remains riskier than Western nations. Kellogg's typically sells it normal brands in India -- Corn Flakes and other breakfast cereals. There is a low risk of nationalization today, but that has happened in the past in India so cannot be entirely discounted.

Another risk in India is with respect to GMO regulations, since Kellogg's products use many genetically-modified ingredients. There is risk with GMO labeling, especially since many Indians subscribe to specialized dietary restrictions. India has already passed one GMO labeling law, and may tighten restrictions going forward (Huff, 2013). A third political risk is that new governments are unable to govern effectively. In particular, there has been concerned that the recently-elected government will spark racial violence in the country due to its past levels of intolerance. While to this part the Modi regime has avoided such conflict, many observers still fear a resurgence of political violence in India over the medium-term, particularly relating to Hindu-Muslim clashes and the ongoing tensions with Pakistan (Jijakli, 2013).

There is little that Kellogg's can do about racial strife, and its target market, being wealthier, is more likely to avoid widespread violence. Likewise, there is little that Kellogg's can do about Pakistan, but the company does have influence on the issue of GMO labeling. Kellogg's can mitigate this risk by both appealing to the Indian government about the value of genetically-modified crops, and working with other companies in the country that have a similar interest.

Coca-Cola in Japan