Political risk is referring to that a company’s investment in a foreign country might be constrained by local government, likely due to violate government policy. The major risks are: asset freezing, limitation of remittance of capital, currency devaluing, government corruption and so on (Luthans & Doh, 2012). When the risk happens, loss will be inevitable if there is no corresponding plan against it.
Julio & Yook (2012) firstly describe the risks investors may face in international trading. For a foreign investor, the major traditional risks are government regulation, national financial risk, currency exchange rate volatility and political disturbances. As time goes by, nowadays, investors are facing more new risks, including violation of intellectual property, terrorism, and so on. In addition, there are many micro risks. For example, the treating investor differently from local companies, extra taxes, or restriction on employment, resources, etc. In recent, Greek would be a typical bad example. According to NZ Herald (2015), Greek government is on the edge of cliff, that the country might be bankrupt. Not only are the international companies in Greek significantly affected, but also the world market.
Julio & Yook then provide clear suggestion on how to deal with political risk and cultural distance when investing in a foreign country, when investors may encounter political uncertainty. Before actually enter a foreign country, the investors must know the different political system in destination country comprehensively. A famous example is Google that they encounter political issue when try to do business in mainland China. Finally, Google has to make a decision that discontinues the services in mainland China. Secondly, prepare to deal with different legal system. First things first, the commercial law and tax must be taken into account. Not like civil law or common law, which is similar all over the world, the law on financial terms might be totally different. Misunderstanding or mis-violate these law may also bring critical consequences.
Therefore, a company must well know the local political and legal system.
Julio, B. & Yook, Y. (2012), Political Uncertainty and Corporate Investment Cycles. The Journal of Finance, 67: 45–83.
Luthans, F. & Doh, J.P. (2012) International Management-Culture, Strategy and Behaviour (8th Edition), New York: McGraw Hill Irwin.
NZ Herald. (2015). Greek crisis frays nerves on world markets overnight. Retrieved from: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10805987.