This paper examines political risk—the threat posed by government action against international business operations—through case studies of Dekra in Germany, Kellogg's in India, and Coca-Cola in Japan. Political risk encompasses regulatory changes, nationalization threats, trade policy shifts, and geopolitical instability. The paper demonstrates that stable democracies present lower political risk but require companies to maintain favorable government relationships, while emerging markets present higher uncertainty. Mitigation strategies include diversification, lobbying, collaboration with local stakeholders, and maintaining visible economic contributions to host nations.
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 a company (such as China's actions against Google), up to and including the risk of nationalization (such as Argentina's actions against 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 easier to understand and measure political risk. It is important to note that political risk reflects actions taken on existing ventures, not something like project approval. For example, the Keystone XL pipeline represents a pending decision, not a political risk in the technical sense. Political risk would emerge if Keystone were approved and then, after it began operations, a subsequent government moved to block the project retroactively.
Dekra is a vehicle inspection company based in Stuttgart, Germany. One does not normally discuss political risk in the home country, since risk represents the unknown, and the domestic political environment is typically the most familiar to a company. The German political environment is relatively transparent, raising the question: are there meaningful political risks?
Dekra was founded in 1925 and did face a very high degree of political risk early in its existence, as the company was shut down during World War II. Any operations in the East would have been nationalized after the war. However, since that time, Germany has proven a stable and transparent place with respect to political risk.
One current political risk for Dekra is that vehicle inspections are mandated in part by German law. Changes to these laws can reduce demand for vehicle inspections. For example, Germany introduced emissions testing, as many other governments have. However, as automakers reduce the emissions their vehicles produce, some governments have removed emissions testing requirements, effectively ending that industry segment. This occurred in Virginia, British Columbia, and New Jersey, and there is risk that it could happen in Germany as well.
Another political risk stems from trade agreements and EU enlargement. Any expansion of trade agreements or enlargement of the European Union will provide more opportunity for Dekra but also risk of market entry by new competitors. Dekra has no real control over this, as it is the result of political processes beyond the company's influence. A third potential political risk is nationalization, but in Germany this risk remains minimal.
To manage these risks, Dekra will need to continue justifying the need for emissions testing in order to maintain that demand. This requires maintaining a good relationship with government and lobbying to preserve the status quo. Dekra can also hedge against this risk by developing other revenue streams, ensuring that if emissions testing is discontinued, the company will still maintain a diversified set of businesses and can survive. Overall, there is minimal political risk for a German company operating in Germany, and the company benefits from a high degree of familiarity with the political environment, which helps mitigate risk.
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 historical flirtations with communism, and some states are still governed by communist parties. In the 1970s, Coca-Cola was expelled from the country after a regime change (Yergin & Stanislaw, 1998), and while India is much more open to foreign investment today, it remains riskier than Western nations.
Kellogg's typically sells its normal brands in India—Corn Flakes and other breakfast cereals. There is low risk of nationalization today, but this has occurred in the past in India and therefore cannot be entirely discounted.
Another significant risk in India involves GMO regulations, since Kellogg's products use many genetically modified ingredients. There is risk regarding GMO labeling, especially since many Indians subscribe to specialized dietary restrictions based on religious and cultural traditions. India has already passed one GMO labeling law and may tighten restrictions going forward (Huff, 2013). A third political risk is that newly elected governments may struggle to govern effectively. In particular, there has been concern that the recently elected government could spark racial violence due to its past levels of intolerance. While the Modi regime has avoided such conflict to this point, many observers still fear a resurgence of political violence in India over the medium term, particularly relating to Hindu-Muslim clashes and 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. Similarly, the company has limited influence over Pakistan relations. However, Kellogg's does have influence on the issue of GMO labeling. The company 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 share similar interests.
Japan, since the mid-1940s, has not been a major source of political risk. The country has a stable, open democracy and capitalist economic system. While it is not the most open to foreign business, this represents a known condition, and risk is defined by uncertainty and volatility rather than by fixed barriers.
One risk in Japan is the security crisis in Northeast Asia. Ongoing stability in Japan is related in part to its relations with North Korea, China, and other regional actors. While such nations are currently conducting typical geopolitical posturing with Japan, the region is probably less stable than its surface appearance suggests.
Another risk in Japan involves currency intervention, as the yen continues to fluctuate. If the government deems it necessary, it could become more activist in economic policy, and such activism will not necessarily benefit Coca-Cola (Sieg, 2009). Most risk in Japan is economic rather than political in nature, but it is reasonable to view fiscal policy as being focused on reviving the Japanese economy. Such policies might include trade barriers that will negatively impact foreign producers like Coca-Cola, which must import many products and ingredients.
Coca-Cola faces a relatively stable political environment in Japan, but it must recognize that as a foreign company, its situation is not as stable as that of domestic firms. Coca-Cola will need to continue ensuring that it is viewed as a strong contributor to the Japanese economy, particularly through local job creation, in order to receive favorable consideration from government.
"Risk management across different institutional contexts"
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