Question

Political risk is one of the major areas of concern with MNCs. Explain the various types of political risk and describe the various ways that political risk can be assessed. Finally, explain the various ways of managing political risk.

Answer 1

Political risk for MNCs includes various types like expropriation, political violence, and unfavorable policy changes, which can be assessed using both qualitative and quantitative methods. Managing political risk involves strategies such as market diversification, joint ventures, political risk insurance, and active diplomacy.

Step-by-step explanation:

Political risk refers to the potential for losses that multinational corporations (MNCs) might suffer due to changes in the political environment of countries where they operate. The various types of political risk include expropriation, where a government takes control of a company's assets; political violence, such as terrorism or civil unrest; and changes in laws or policies that negatively affect business operations, like new taxes or trade restrictions. Assessing political risk can involve qualitative methodologies like expert opinions and scenario analysis, or quantitative methods such as examining country risk ratings and political risk insurance data.

MNCs can manage political risk through various strategies such as diversification of markets to reduce reliance on any single country, engaging in joint ventures with local firms, or utilizing political risk insurance. Additionally, MNCs should stay informed about the political climate and engage in active diplomacy to anticipate and influence local political changes. Understanding the influence of globalization on workers, the environment, and international trade is also crucial for evaluating and managing political risks.