Challenges of

political and legal

environment
Andy Lim Zhe Onn
Anwar Azeez

Political and Legal Risk

Political risks facing MNEs as being firm-specific, country-

specific and global-specific.

Firm-specific risks, known as micro risks. Those political

risks that affect the MNE at the project or corporate level.

Country-specific risks, known as macro risks. Same as firm-

specific risks but originate at the country level.

Skilled labour deficiency

Firm-Specific Risks (Micro risks)

Governance risk, due to goal conflict between an MNE and its host government, is the main political

firm-specific risk . Ability to exercise effective control over an MNEs operations within a countrys
legal and political environment
goal conflict between bona fide objectives of host governments and the private firms operating

within their spheres of influence. Governments are normally responsive to a constituency of their
citizens. Firms are responsive to a constituency of their owners and other stakeholders. The valid
needs of these sets of constituents need not be the same, but governments set the rules.
Consequently, governments impose constraints on the activities of private firms as part of their
normal administrative and legislative functioning.
Historically, conflicts between objectives of MNEs and host governments have arisen over such

issues as the firms impact on economic development, perceived infringement on national

sovereignty, foreign control of key industries, sharing or non- sharing of ownership and control with
local interests, impact on a host countrys balance of payments, influence on the foreign exchange
value of its currency, control over export markets, use of domestic versus foreign executives and
workers, and exploitation of national resources. Attitudes about conflicts are often colored by views
about free enterprise versus state socialism, the degree of nationalism or internationalism present,
or the place of religious views in determining appropriate economic and financial behavior.

Country-Specific Risks (Macro risks)

Cultural and institutional risks spring from ownership

structure, human resources norms, religious heritage,

nepotism and corruption, protectionism.

Skilled Labour deficiency

Most African countries have abundant labour but finding

skilled workers can be difficult.

Employing foreign workers also slows down the skills transfer

process. Language barriers in certain African countries can

also be a problem for expatriates. Therefore while investors
have to deal with infrastructure deficiency and cumbersome
business environment, unavailability of skilled labour is also
another.

Relations between governments and MNCs are generally positive if the

investment in South Africa :

Improves the balance of payments by increasing exports or

reducing imports through import substitution

Uses locally produced resources
Transfers capital, technology, and/or skills
Creates jobs
Makes tax contributions

Strategies/steps that MNCs use to minimize political vulnerability and risk :

Joint ventures

Expanding the investment base Licensing

Planned domestication

Political bargaining

Political payoffs

 So how can multinational companies minimize political risk? There are a couple of

measures that can be taken even before an investment is made. The simplest
solution is to conduct a little research on the riskiness of a country, either by paying
for reports from consultants that specialize in making these assessments or doing a
little bit of research yourself, using the many free sources available on the internet
While that strategy can be effective for some companies, sometimes the prospect

of entering a riskier country is so lucrative that it is worth taking a calculated risk. In

those cases, companies can sometimes negotiate terms of compensation with the
host country, so that there would be a legal basis for recourse in the event that
something happens to disrupt the company's operations.
If you do go ahead and enter a country that is considered at risk, one of the better

solutions is to purchase political risk insurance. Multinational companies can go to

one of the many organizations that specialize in selling political risk insurance and
purchase a policy that would compensate them if an adverse event occurred.
Because premium rates depend on the country, the industry, the number of risks
insured and other factors, the cost of doing business in one country may vary
considerably compared to another.