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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

Market Risk

Reducing Risk in Emerging Markets

Project Risk
Technological Risk
Environmental Risk
Business Country Plan.

Chapter Summary

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.

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