Political Risk and Government Policy Changes. Presented By: Alysa Shcherbakova
Political Risk <ul><li>Potential for the value of an investment to change due to </li></ul><ul><li>changes in government ...
Host Country Policy <ul><li>Severe </li></ul><ul><ul><li>Expropriation </li></ul></ul><ul><ul><li>Nationalization </li></u...
Home Country Policy Continuum <ul><li>Severe </li></ul><ul><ul><li>Required Divestment </li></ul></ul><ul><ul><li>Sanction...
Types of Policy Changes <ul><li>Not directed at foreign owners </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Tax incre...
Benefit-Cost Analysis
Benefit-Cost Analysis Continued <ul><li>Considers the benefits and costs of government action </li></ul><ul><li>Government...
Benefit-Cost Analysis Continued <ul><li>Expropriation – country receives firm’s assets and future cash flows </li></ul><ul...
Benefit-Cost Analysis Continued Long Term Consequences of Policy Change <ul><li>Expropriation – less investment in the fut...
Benefit-Cost Analysis Continued <ul><li>Estimating benefits and costs of government intervention is difficult </li></ul><u...
Bargaining Power Analysis
Bargaining Power Analysis Continued Definition <ul><li>Occurrence and severity of incidents depends on one party’s </li><...
Host Country The Firm Bargaining Power Analysis Continued <ul><li>Size of the market it offers </li></ul><ul><li>Wealth of...
Example: Intel’s Site Selection in Latin America <ul><li>Brazil vs. Costa Rica </li></ul><ul><ul><li>Brazil has high barga...
Bargaining Power Analysis Continued Bargaining Power Leverage over Time <ul><li>Initial Investment – firm BP > country BP ...
Bargaining Power Analysis Continued Factors Influencing Bargaining Power <ul><li>Two Main Factors: </li></ul><ul><ul><li>B...
Bargaining Power Analysis Continued In Summary <ul><li>BP Analysis is useful in predicting incidents within a particular c...
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Political Risk and Government Policy Changes.

Published on: Mar 4, 2016
Source: www.slideshare.net


Transcripts - Political Risk and Government Policy Changes.

  • 1. Political Risk and Government Policy Changes. Presented By: Alysa Shcherbakova
  • 2. Political Risk <ul><li>Potential for the value of an investment to change due to </li></ul><ul><li>changes in government policy. </li></ul>Definition
  • 3. Host Country Policy <ul><li>Severe </li></ul><ul><ul><li>Expropriation </li></ul></ul><ul><ul><li>Nationalization </li></ul></ul><ul><li>Mild </li></ul><ul><ul><li>Tax Increases </li></ul></ul><ul><ul><li>Additional Government Regulation </li></ul></ul>Continuum
  • 4. Home Country Policy Continuum <ul><li>Severe </li></ul><ul><ul><li>Required Divestment </li></ul></ul><ul><ul><li>Sanctions </li></ul></ul><ul><li>Mild </li></ul><ul><ul><li>Licensing Requirements </li></ul></ul><ul><ul><li>Tax changes affecting treatment of foreign income </li></ul></ul>
  • 5. Types of Policy Changes <ul><li>Not directed at foreign owners </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Tax increase </li></ul></ul><ul><ul><li>Change in government regulation </li></ul></ul>General Selective <ul><li>Directed primarily at foreign owners </li></ul><ul><li>Usually single out specific industries </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Scrutiny of transfer prices </li></ul></ul><ul><ul><li>Equity dilution </li></ul></ul>
  • 6. Benefit-Cost Analysis
  • 7. Benefit-Cost Analysis Continued <ul><li>Considers the benefits and costs of government action </li></ul><ul><li>Government policy changes occur when the present value of </li></ul><ul><li>the benefits from intervention exceeds the present value of the </li></ul><ul><li>costs of intervention </li></ul>Definition
  • 8. Benefit-Cost Analysis Continued <ul><li>Expropriation – country receives firm’s assets and future cash flows </li></ul><ul><li>Increased Price/Currency Controls – macroeconomic controls </li></ul><ul><li>Equity Dilution – higher employment, improved job training and access to </li></ul><ul><li>technology </li></ul><ul><li>Stricter Regulation – microeconomic control over affected industries </li></ul><ul><li>Increased Taxes – additional revenues </li></ul>Benefits of Policy Change for the Host Country
  • 9. Benefit-Cost Analysis Continued Long Term Consequences of Policy Change <ul><li>Expropriation – less investment in the future and some disinvestment </li></ul><ul><li>resulting in a decline of economic base, higher unemployment, reduced </li></ul><ul><li>transfer of technology </li></ul><ul><li>Increased Price/Currency Controls – unemployment and general </li></ul><ul><li>stagnation of the economy </li></ul><ul><li>Equity Dilution – less investment and less technology transfer </li></ul><ul><li>Increased Taxes – firms will locate profits abroad </li></ul>
  • 10. Benefit-Cost Analysis Continued <ul><li>Estimating benefits and costs of government intervention is difficult </li></ul><ul><li>Government has no motivation do to a general analysis but rather prefers </li></ul><ul><li>specific analysis approach </li></ul>In Summary
  • 11. Bargaining Power Analysis
  • 12. Bargaining Power Analysis Continued Definition <ul><li>Occurrence and severity of incidents depends on one party’s </li></ul><ul><li>bargaining power vis-à-vis the other party involved. </li></ul>
  • 13. Host Country The Firm Bargaining Power Analysis Continued <ul><li>Size of the market it offers </li></ul><ul><li>Wealth of the market </li></ul><ul><li>Abundance of skilled labour or raw materials </li></ul><ul><li>Uniqueness of the product and sophistication of technology required to </li></ul><ul><li>product it </li></ul><ul><li>Size of the Multinational </li></ul><ul><li>Ongoing investments in the host country </li></ul>
  • 14. Example: Intel’s Site Selection in Latin America <ul><li>Brazil vs. Costa Rica </li></ul><ul><ul><li>Brazil has high bargaining power relative to Intel because </li></ul></ul><ul><ul><li>of FDI in the country – Intel needs Brazil’s opportunities </li></ul></ul><ul><ul><li>more than Brazil needs Intel </li></ul></ul><ul><ul><li>Cost Rica has low bargaining power relative to Intel and </li></ul></ul><ul><ul><li>was willing to negotiate and make concessions as it </li></ul></ul><ul><ul><li>needs Intel’s Investment </li></ul></ul>Intel Chose Costa Rica as its manufacturing location because it had a relatively high BP compared to the BP of Costa Rica.
  • 15. Bargaining Power Analysis Continued Bargaining Power Leverage over Time <ul><li>Initial Investment – firm BP > country BP otherwise investment </li></ul><ul><li>will not occur. </li></ul><ul><ul><li>Country is interested in obtaining something from the firm - technology, </li></ul></ul><ul><ul><li>product, etc. </li></ul></ul><ul><li>As time progresses, BP shifts to host country . </li></ul><ul><ul><li>Size and wealth of the market increase and nationals eventually </li></ul></ul><ul><ul><li>acquire skills necessary to operate the project </li></ul></ul><ul><ul><li>Similarly, the longer a firm operates in a country the more highly </li></ul></ul><ul><ul><li>specific assets it acquires, decreasing its BP </li></ul></ul><ul><ul><li>However, if the firm’s operations grow or exports increase the firm may </li></ul></ul><ul><ul><li>sustain its BP </li></ul></ul><ul><li>With time, Firm BP = Country BP </li></ul>
  • 16. Bargaining Power Analysis Continued Factors Influencing Bargaining Power <ul><li>Two Main Factors: </li></ul><ul><ul><li>Best alternative to no agreement </li></ul></ul><ul><ul><li>Status Quo </li></ul></ul><ul><ul><ul><li>The farther one is between its current state and the status quo, the less </li></ul></ul></ul><ul><ul><ul><li>BP it is likely to have </li></ul></ul></ul><ul><li>Other Factors: </li></ul><ul><ul><li>Drastic changes in economic environment can shift the bargaining </li></ul></ul><ul><ul><li>power </li></ul></ul><ul><ul><li>Different countries have different levels of bargaining power and </li></ul></ul><ul><ul><li>acquire additional bargaining power at different rates. </li></ul></ul>
  • 17. Bargaining Power Analysis Continued In Summary <ul><li>BP Analysis is useful in predicting incidents within a particular country </li></ul><ul><li>Is not very good at predicting incidents across countries </li></ul><ul><li>Example: </li></ul><ul><ul><li>Brazil vs. Bolivia – while risk analysis suggests that Bolivia is </li></ul></ul><ul><ul><li>riskier than Brazil because of high uncertainty, BP analysis </li></ul></ul><ul><ul><li>would suggest that Brazil is a riskier investment because it’s BP </li></ul></ul><ul><ul><li>is high and growing rapidly </li></ul></ul>
  • 18. Questions?

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