Every country has government regulations that govern the political climate of the country. Political risk arises when the developmental aspirations of a host country are inconsistent with the operating conditions of a foreign investor. This in turn refers to the difficulties of businesses and governments may hinder and the effects are political decisions. Political risks may in turn change the probability of achieving a business objective due to change in the climate.
A political risk however can be managed with reasoned foresight and investment; “Political risk analyst have to be able to recognize signs that can act as clues to situations in which risks to an investment can occur, (measuring Political risks: risks to foreign investment By Charlotte H. Brink)” and that is why it is important for we at Axtem to focus on the political risks that may be involved in the developing nation where we would wish to establish a factory and a customer care service center in order to take advantage of a less expensive labor force.
According to Harms, he suggests that some governments may introduce political risks in the form of a tax that governments may impose the returns on foreign owned capital. This may be one of the hindering factors since some countries may be wanting to harness full profits for themselves and hence the political body in charge would try to make it inflexible for foreign investors who would want to repatriate their profits. This may be one of the sources of political risks that we may have a great challenge in.
Another source of political risks may be caused by government decisions on discriminatory measures that target foreign investors but does not directly affect the incomes of domestic residents. this fact somewhat relates to the government of the particular state in question not wanting foreign investors to repatriate profits to their home country and instead encourage the particular earnings to circulate in the economy of the country in question and hence boost their economy. In a developing country, chances of their economic power improving due to these foreign investments is high and hence it is only expected that they would try and create a political environment that would ensure they reap maximum benefits from the particular investment.
Political risks analysis can also be said to have been caused by unethical business practices of the investors such may be scenarios where there have been tax evasions, poor working conditions, and interference in domestic politics of the host country. All these factors may create a lot of tension between the investors and the hosts hence leading to creation of an unfriendly political environment.
When it comes to distributive political analysis, then it becomes possible to split the risks into parts, this makes it easier for investors to deal with certain calamities in the political arena that may come their way. The distributive property can be used the same way as it is used in simple arithmetic to make a political environment easier for an investor to deal in, let’s say by focusing on individual political factors then it is possible to see the implications of each factor separately as an entity and then combine these in order to be able to have better scope as well as control of the market.
A catastrophe on the other hand is thought by many as particular large event that may result to sudden change. However, a catastrophic political risk does not necessarily occur in one threshold, it is a gradual accumulation of many small incidences that lead to the same scale or damage. These events would only be recognized after the losses have accumulated. Catastrophic risks can mainly be generated in the macro environment since there are very numerous issues that draw closer into play in the general political environment: sovereign credit defaults, government currency actions, regulatory changes, endemic corruption, government composition changes and war declarations . According to Kobrin, “Ahar, concluded that the assessment of political risk associated with investment in an unfamiliar country is strongly influenced by a priori assumptions. These assumptions are subjective and general; they are based on a general image of a specific country, of a whole continent or less developed countries as a whole, or even foreign countries in general….”.
In a developing country, there is a higher likelihood to be faced by a catastrophic political risks, since in this countries, there are hardly available resources to keep check of what is really happening majorly in the country. You will find that uncertainty and political risks are factors that are inevitable in these countries and so one can only assume the worst of situations before venturing to invest in the area.
Considering the interest of Axtem Inc to want to invest in a developing market then it is necessary that the political climate of the country that the company may wish to invest in be looked into as well as the logistics and feasibility being able to fetch maximum profit despite the political risks involved.