Side Track: International Political Risk Management & Multinational Corporations

Foreign direct investment (FDI) undertaken by multinational corporations (MNCs) is one of the major drivers of globalization. The past three decades marked an unprecedented increase in FDI flows and stock. According to the data published by UNCTAD, the world FDI stock increased phenomenally from US$ 698 billion in 1980 to US $ 23 trillion in 2012. The growth in FDI flows has indeed outpaced rate of growth in international trade. FDI flows had declined since the beginning of the global financial and economic crises in 2007. This was not surprising as the crisis has severely restricted economic growth and international private capital flows, urging outrageous government interventions. 2009 was the beginning of recovery period for global FDI flows; and in 2011 downward trend started again and continued by 2015. After a significant improvement in 2015, the trend has still been downward. Cross-border investment in developed and transition economies dropped sharply; and global flows fell by 23 per cent in 2017. UNCTAD expects only a very modest recovery for 2018. This negative trend is a real concern for policymakers worldwide. However, as UNCTAD (WIR2017: p.2) states “elevated geopolitical risks and policy uncertainty for investors could have an impact on the scale and contours of the FDI recovery” in many countries.

MIGA, Multilateral Investment Guarantee Agency defines political risk as the probability of disruption of the operations of multinational corporations by political events or forces, whether they occur in host countries, home country, or result from changes in the international environment. In host countries, political risk is largely caused by uncertainty over the actions of governments and political institutions, but also of minority groups, such as separatist movements. In home countries, political risk may be due to political actions directly targeting host countries, such as sanctions, or from policies that restrict outward direct investments.
Within this context, two other concepts, namely regulatory risk and foreignness should also be mentioned. Regulatory risk is broadly defined as risk of having the license to operate withdrawn by a regulator, or having conditions applied that adversely impact the operations and consequently the value of a corporation. Regulatory risk could be faced in a host country as well as in a home country. However, with regard to multinational corporations’ operations, the issue will be more meaningful in terms of rather host country regulators. With this regard, foreignness will mean more. As is known, the multinational enterprise should have a number of firm specific ownership advantages to compete against the local rivals in the host country as there are various disadvantages caused by foreignness. In case, even though such firm specific ownership advantages are extremely significant and rare, the host countries government’s approach as well as the general political and social environmental conditions will be very important for the MNE’s operations in the host foreign location. That is why political risk is a major concern for multinational corporations or for any company that evaluates the option of a direct investment abroad. Naturally, many may assume that emerging markets or developing countries are the main host locations for such risks. The recent events, however, prove that even the industrialized countries could be very risky politically and hence it is not the right approach to restrict such concerns only with the developing world.

In fact, in a very quickly changing current world, the focus for political risk seems to be shifting from developing countries to developed ones. Interestingly, for instance, there is a rise in populist and nationalist views among a number of politicians in the western world. When such people are elected they may bring trade and investment restrictions, higher government spending and lower taxes, resulting in wider fiscal deficits and restrictions on immigration. Surprisingly, some of such views have even been able to gain additional power recently.

Donald Trump was elected as the US president in 2016 by campaigning over such perspectives; and one of the first decisions of his government was abandoning the Trans Pacific Partnership Agreement. Even the future of Transatlantic Trade and Investment Partnership Agreement is not really clear under the Trump administration though the negotiations are still in progress. His policies on free trade, inward foreign direct investment, NATO, foreign policy and immigration etc. are reflecting a significant shift from the traditional approaches in US. The relations of US with the EU countries have also been in a general deterioration since Trump came into power.

One of the major reasons of this new situation is clearly trade-related issues. Mr. Trump has opened up trade battles on a series of fronts with the EU, China and the rest of the word. As a result, the US and other countries around the world have increased tariffs on around $85 billion worth of goods.

Similarly, the Trump administration's announcement of the U.S.' withdrawal from the historic Iran nuclear deal, the economic sanctions of the US on Iran will take full effect in November 2018, hindering the country's ability to export its oil. This will not affect only Iran but also many other countries which have had trade relations with this country.

Another interesting event has been Britain’s exit from EU, so called the Brexit, following a referendum in June 2016. After this decision, many Eurosceptic politicians in other European countries celebrated the result, and expected other countries to follow the British example. It seems that by the time for a full recovery from the global financial and economic crisis, those discussions and the risks against the existing establishments will be on the scene.

The European affairs were not limited only to these events. Moreover, for instance, the Ukrainian territory Crimea’s annexation by Russia in March 2014 with a military intervention has changed the security position on the European continent significantly. Though there were contradicting views even within EU over the conflict, it now seems that Poland for example has particular concerns due to the unpredictability of Russia that does not avoid using even military power.

In the late 1980s after the collapse of communist regimes and the end of the cold war, however, there was initially a huge optimism for peace and political stability in Europe. Yes, there was a long civil war in the ex-Yugoslavia in the centre of Europe for a very long time; but with the impetus of the end of cold war, the European Union started an ambitious enlargement process and then many newly independent or ex-communist countries have either joined the EU or applied for full-membership. While all such developments were in progress, Russia was forced to accept all these as she was also in her own restructuring process. In 1999, Vladimir Putin first became the prime minister and then the acting president in Russia. Since then, Russia’s standing regarding the world political events have resembled the Soviet period.

While the western world has been struggling with these developments, the developing countries are also having important problems with further implications on the industrial word. One of such major affairs is the civil war in Syria started in 2011 and still continues. At the moment, nobody can predict which type of resolution will be the final stage. But even this single event has caused millions refugees’ flow from the region mainly to Europe. The Syrian refugees have particularly been a burden on neighbouring Turkey, and also on Greece and Germany not only financially but also regarding social and political aspects.

A final outburst has come from the Middle East. The four Arab countries led by Saudi Arabia have first cut off their diplomatic relations and then initiated a boycott against Qatar stating that the government in Doha has links to terrorist groups. The conflict arose less than a month after Donald Trump’s visit to Saudi Arabia where he called for Muslim nations to unite against extremism. Interestingly, the recent murder of the Saudi Journalist Jamal Khashoggi in the Saudi Consulate in Istanbul reflects the fact that we can expect further struggles in the Middle East as the murder was not an ordinary event but rather political.

It is interesting to go through all these events which are, in fact, not the all. Let us keep in mind that we have not yet even mentioned the acts of global terrorism in major cities in the world. As is known, the deaths have been counted by hundreds by now.

These issues are not only political but they may have significant economic or business-related consequences. For instance, the Brexit has already proved that there will be unexpected outcomes on multinationals’ operations in Britain. For example, it is claimed that many banks and financial sector companies based in London are planning to relocate their operations somewhere in the continental European cities such as Frankfurt.

In this environment, probably caused partly by the global financial and economic crisis, there are serious concerns among business people, politicians, academics and thought leaders that the world is getting more insecure due to global terrorism, nationalist and authoritarian tendencies etc.. Naturally, multinational corporations’ FDI activities cannot be isolated from all such developments. Therefore, political risk management will surely be a very interesting area to study particularly these days. In other words, in the current global environment of high political risks and policy uncertainty, it will certainly be valuable to examine the evolution of political risk perceptions of multinationals and also the tools and techniques they use to skilfully manage such risks. Analysing how investors perceive and deal with these risks will additionally contribute to a better understanding of the role of political risk insurance in the post-crisis investment landscape, and how it can help to multinationals’ direct investment activities in high risk regions or countries.

In this respect, the Würzburg International Business Forum’s 2st International Business Conference will bring academics, professionals, business people and representatives of the public sector from Germany and also from other countries together to analyse the current situation and foresee the future developments regarding political risk management within the framework of foreign direct investment and all other activities of multinational corporations. As an extension of this main theme, availability and use of political risk insurance will be also evaluated. The Conference will also provide an international forum for the exchange of information and experience on firm internationalization, export-import business, international entrepreneurship and risk management in different countries and the implications of these so far on countries’ economies and societies from a broader perspective. The Conference will explore both theoretical issues in the field and practical issues in formulating policy and strategy and it will also pay attention to the issue of employment and growth regarding multinationals and foreign direct investment. Some major questions and topics would be:

  • Why and how multinationals need to manage political risks What are their major motivations, strategies and tools?
  • overall trends in FDI and multinational corporations’ political risk perceptions;
  • corporate views on foreign investment and the political risk environment in the world in general, and the developed and developing countries in particular; and
  • the ability of the political risk insurance industry to respond to an emerging post-crisis investment landscape.
  • Effects of a potential trade war between US and other countries
  • Political risk insurance and investment insurance
  • Role of export credit agencies (ECAs)
  • Role of multinational institutions (such as MIGA)
  • Political risk insurance and providers’ approach to the new international scene
  • Insurance for terrorism: Who takes the risk?
  • Major risks: Regulatory risks, confiscation, expropriation, transfer difficulties etc.
  • Sectoral case studies regarding political risk management such as energy sector, extractive industries, manufacturing, services etc.
  • Emerging paradigms of political risk management
  • Political risk perceptions of German and other country multinationals regarding, US, Russia, China, Iran, Qatar, Turkey and other countries historically and at present.
  • Political risk management approaches and strategies, tools and mechanisms
  • Expectations and decisions regarding further investment or divestment in some countries and reasons behind
  • The future of free trade and investment agreements under the Trump administration
  • FDI by small and medium-sized multinationals and effects of their activities on value creation, employment and growth in both home and host countries
  • Small multinationals approach towards political risk management: Do political risks discourage small and medium-sized firms to be involved in internationalization and FDI?
  • Political risk as an obstacle to small and medium-sized firm internationalization
  • Lessons to be learned from the German Mittelstand in terms of internationalization and foreign direct investment activities under political risks
  • Political risk management practices in Germany, in the European Union and other European countries
  • Political risk management practices in Asia, the Middle East and the North Africa, Africa, in Americas etc.
  • Emerging multinationals and political risk management
  • Refugee flows and political risks
  • SME internationalization and the role of officially-supported Export Credit Agencies
  • International opportunity recognition and opportunity development of companies under increasing political uncertainty and risk (regulatory risks etc.)
  • Other topics relevant to the theme of the conference