Management of Multinational Corporations ( MNCS )
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Chapter 15 : Enterprise Risk Management in MNCs
Enterprise Risk Management
Definition and Process
Operational and Strategic Risk
Political and Country Risk
Nature of Political Risk
Nature of Country Risk
Measuring and Managing Political and Country Risk
Politics and Strategic Management
Relationship with Political Parties. Social and Environmental Responsibility
Reducing Risk in Emerging Markets
Business Country Plan.
The meaning of risk has changed drastically with the
downfall of big corporations and of companies with renowned managers on their
boards and with the terrorist attacks on the Pentagon and the WTC in the US. In
these circumstances, it is imperative for companies to implement Enterprise-wide
Risk Management (ERM).
Since various types of risk have an effect on each other, it is necessary to
take an overall view of risks and hedge against them. The sources of operational
and strategic risks include machinery breakdown, industrial strife, supply and
distribution imperfections and wrong selection of product category and markets.
Political risks are highly subjective and hence difficult to measure. But
political and country risk are prominent sources of risks affecting businesses.
The strength of the communist party in the country, the lobbying power of
domestic industrialists and the relationship between the trading countries
determine the amount of political risk involved. Country risk is determined by
the host country's balance of payments, fiscal deficits, economic fundamentals
like GDP, interest rate and inflation, the strength of the country's financial
system and regulatory authorities.
MNCs might do well to uphold the interest of citizens of the host country and
comply with environmental protection laws, maintain cordial relationships with
local political parties including the minority parties and participate in social
causes against child labor, employment of women and children in hazardous
processes. The importance of understanding the size and characteristics of the
market need not be over emphasized.
In entering an emerging market, MNCs have to be cautious in dealing with the
resistance from domestic industrialists. Respecting local culture and forming
strategic alliances with host country entrepreneurs will mitigate the risk. Cost
and time overruns in any one project can hamper the overall plans of the
organization. Project risk can arise because of natural calamities, changes in
the prices of raw material and in government regulations and the difficulty in
maintaining labor relations.
Obsolescence of an existing technology, development costs of new technology,
failure of a new technology and security concerns of electronic transactions are
emerging technological risks and the best way to manage them is to be proactive
by anticipating the changes in technology. Another form of risk called
environment risk comes in two forms.
The company can either incur the wrath of the regulators for polluting the
environment or there may be a public outcry in the event of an environmental
damage caused by the company. Preventive measures such as fire fighting devices
and early warning systems and insurance policies are ways of managing
environmental risk. Business contingency plans (BCP) ensure the functioning of
business in times of adversity.