International businesses often do encounter political and country risks

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Introduction:

Political and country risks:

Financial institutions and business organizations operate its business activities abroad in order to diversify and expand their sources of revenue and profitability. Organizations that make investment in a foreign market either in the form of equity or assets are exposed to risks that may arise either from an act of the host government or from other external political events taking place in that country, these risks include social, political and economic conditions and events that imposes negative impact on the financial performance and profitability of foreign organizations.

Types of political and country risks:

The following are the main types of political and country risks that may affect the business performance of an international organization operating in foreign countries.

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Nationalization or deprivation:

Nationalization is a process whereby a government takeover privately owned industries, corporations and resources with or without compensation.

Nationalization is a political risk which makes it very difficult or impossible for international organizations to invest in a country where businesses are exposed to such risk.

In past governments have nationalized highly profitable industries on the ground that it does not want foreign ownership of its valuable resources for instance in 2006 the Bolivian government nationalized the country’s oil and natural gas industries. Similarly in January 2007 the Government of Venezuela announced to nationalize firms in two major sectors of the country’s economy i.e. telecommunications and electricity. In November 2009 the president of Venezuela announced that he will nationalize banks in the country.

Forced divestiture:

forced divestiture another type of country risk in which an international firm is forced to divest its business operation, an example of forced divestiture is the Indonesian subsidiary of French retail giant Carrefour which has been ordered to sell the 75% stake it acquired in smaller rival Alfa Retailindo in January 2008.

Gradual expropriation:

Expropriation means a quick action of government to seize the assets of foreign entity, but in gradual expropriation a single international company is targeted by the host government. Gradual or creeping expropriation involves slow and gradual removal of property rights by way of tax increase on profits to make a foreign business less profitable, increase in property tax, instituting increasing barriers, changing the proportion of ownership which must be held locally. In gradual expropriation the ownership title of business remains in the name of foreign investor but the right to use the business is diminished as a result of the government interference.

An example of gradual expropriation is when China announced a policy restricting the property rights of domestic and foreign automakers to transfer their ownership or enter into strategic alliance in China, by banning the sale or transfer of manufacturing licenses by bankrupt or failing automakers.

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