Macro and Micro Political Risk

3232 Words Nov 13th, 2010 13 Pages
Compare and contrast macro political risk with micro political risk. Discuss policies to combat their impacts on international business activities.
Strategic planning is essential prior to any individual or company deciding to engage in international business whether as direct/indirect investment or through trade. An evaluation of risks should be considered and strategies developed accordingly prior to any potential investment in a foreign country. One such risk which requires consideration is political risk i.e. "governmental or societal actions and policies, originating either within or outside the host country, and negatively affecting either a select group of, or the majority of, foreign business operations and investments."
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Protectionism by way of the price mechanisms such as tariffs, subsides, quotas, export licences and import duties (Rugman, 2009) are just some of the measures which can seriously impact on a foreign company. For example the American steel industry was afforded protection under the Bush administration when large tariffs were imposed on foreign steel imports in order to safeguard the jobs of the national steel workers (Mankiw and Taylor, 2008).
A firm’s operating costs can also be increased by changes in legislation which can lead them to seek cheaper alternatives elsewhere. For example labour laws will need to be thoroughly scrutinized. Increases in the minimum wage in the UK has contributed to UK firms looking to exploit cheap labour whereby in 2003 companies such as BT took the decision to shift all of their call centres to India ( Another such protection is foreign ownership laws e.g. the Australian “Broadcasting Services Act 1992” does not allow any more than 20% foreign ownership of a broadcasting firm ( Taxation of foreign firms is also another cost to consider.
As previously identified, there are also “non-legal/extra-governmental” political risks which could bring unexpected upheaval to foreign firms. Macro political risks such as the threat of violence, corruption, war or military coup, political instability and terrorism are all direct threats to foreign investors.

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