Name: Edmund Cuddy Module Title: Intro. to International Political Economy Assignment Title: Simulation Assignment Submission Date: 17/04/2014 Word Count : 1086

Simulation 2: MNC You are a political risk analyst working for EPN-Exocom, a British multinational telecommunications company headquartered in London. EPN-Exocom is the world’s fourth largest mobile telecommunications company and has 324 million subscribers as of December 2013. EPN-Exocom owns and operates networks in over 25 countries and has partner networks in over 35 additional countries. It has a market capitalisation of approximately £75 billion as of December 2013. The company has identified several emerging markets with great potential for high returns on investment. The company now wishes to consider the political risk associated with a long-term investment of one billion dollars in Kobol. Please advise the CEO on the political risks associated with this investment.

Kobol Kobol regained its independence after a devastating Cylon invasion in 1965. Its economic recovery was disappointing and it continued to experience chronic inflation until well into the 1980s. However, Kobol’s economic performance improved dramatically following the death of its charismatic left-wing President Santos L. Halper. The “Miracle of Kobol” was a term used by Nobel laureate Albert O. Rugman to describe the neoliberal and free market reorientation of the economy in the mid-1990s. Since this time, the government has strongly welcomed foreign investment and eliminated trade barriers. Kobol is now a party to several bilateral investment treaties including agreements the United Kingdom and the United States. It has also entered into a string of preferential trade agreements with its main trading partners. In 2013, The Economist listed Kobol as a top destination for foreign investment in the future.

Kobol is an electoral democracy. Executive power rests with the president, who is elected by direct popular vote for a maximum of two five-year terms. Legislative power is held by a unicameral National Assembly, which currently has 357 members serving five-year terms. Of these, 239 are directly elected in single-seat constituencies; 102 are women chosen by the political parties according to their representation in the Assembly.

Corruption remains a serious problem. A 2007 anticorruption bill gave the government greater power to target abuses in procurement and money laundering, but critics claim it is insufficient. Several high-profile scandals, particularly the controversial purchase of Cylon detection equipment involving alleged kickbacks to Kobol government officials and businessmen, were the focus of considerable press attention through 2010 and into 2011.

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Simulation : Multinational Company

Introduction This simulation will endeavour to advise the CEO of EPN-Exocom, a large British

multinational telecommunications company on the political risks associated with

investment in Kobol. Political risk analysts examine the political climate and social

conditions of a country, determine the level of political risk. Political Risk for multinationals

refers to the risk that a country invested in will make political decisions that will prove to

have adverse effects on the multinational's profits and goals. Adverse political actions can

be of extreme detriment, such as widespread destruction due to insurrection or war, to

those of a more financial nature, such as the legislation on expropriation and/or capital

controls. Political risk also involve adverse affects on business such as corruption and

prejudicial actions against Multinational Companies. Multinationals can end up losing a lot

of capital and investment if they are unprepared for these adverse situations

(Investopedia, 2009). For example, in January 2007 the Chavista government in

Venezuala nationalised the telecommunications and electricity companies (Thompson

Reuters, 2009).

Political Risk Analysis of Kobol A common form of Political risk may come from the instability of the foreign country's

political system. Kobol is an electoral democracy, executive power resting with the

president, who is elected by direct popular vote. The president can be elected for a

maximum of two five-year terms. Many scholars argue that democracy reduces political

risks. Democratic institutions provide a stability in government policy, which reduces the

ability of leaders to enact sweeping policy changes that could harm multinationals.

Multinational companies can influence policy outcomes through the democratic institutions.

These institutions allow these companies to influence policy by providing formal avenues

to do so (Jensen, 2008a). Thus, by and large democratic institutions are assumed to lead

to policy stability, and be of benefit to multinationals and investors. As Kobol has

reorientated its economy since the mid-1990s to neoliberal and free markets policies, the

government has strongly welcomed foreign investment and eliminated trade barriers. It

must be stated however, that although democratic systems provide multinationals with

formal mechanisms to influence policy, this also opens the door for domestic companies.

Domestic companies may be disadvantaged relative to foreign investors in access to

“investment capital, management expertise, and technology” (Jensen, 2008b). These

domestic actors may push local politicians eager for reelection to harm the foreign �2

investors and their market competition. Domestic companies have indepth knowledge of

local politics; with one seat per constituency, it would be easy to influence and lobby for

change in the status quo. As legislative power is held by a Unicameral National Assembly

it would make it easier for legislation to be passed to harm multinationals. This could put

foreign companies at a disadvantage relative to domestic companies (Jensen, 2008b).

Furthermore, with legislative power being held by a Unicameral National Assembly, it also

may leave a risk of legislation being passed backing expropriation and capital controls.

Kobol has several bilateral investment treaties, these including agreements the United

Kingdom. As EPN-Exocom, is a British multinational company and headquartered in

London, it must adhere to The Bribery Act 2010. As corruption remains a serious problem

in Kobol and many claim a 2007 anticorruption bill insufficient this could be a potential risk.

In the case of a proven corruption the Company under the UK Bribery Act could face fines

and possible imprisonment of company officials in the UK (The Bribery Act, 2010).

Furthermore, alledged corruption has been well documented, with considerable press

attention through 2010 and into 2011, on several high-profile scandals. Consequently,

should EPN-Exocom be involved with alledged corruption is could damage the prestige

and credibility of the company.

Another common form of political risk is from invasion or war. Kobol regained its

independence after Cylon invasion in 1965, it has since purchased Cylon detection

equipment. However, this deal was surrounded in controversy involving alleging kickbacks

to Kobol government officials and businessmen. Consequently, if the Cylon detection

equipment was purchased due to kickbacks to officals, it may not be the best equipment

available. Therefore, what should be noted from this is the Political risk should the

detection equipement prove faulty, it could lead to another devastating invasion.

Managing Political Risk The Economist in 2013, listed Kobol as a top destination for foreign investment in the

future. The main source for The Economists foreign investment reports is The Economist

Intelligence Unit (The EIU). The EIU is part of The Economist Group providing advisory

and forcasting services with five-year country economic forecasts, country risk service

reports on existing and emerging markets (EIU, 2014). This is respected and valued

forecasting. EPN-Exocom market capitalisation of approximately £75 billion as of

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December 2013, with a long-term investment of one billion dollars in Kobol. This is just

1.33% of the companies overall market capitalisation, with great potential for high returns

on investment in Kobol it is worth the risk. However, it is still may be a large risk for

investors in the company therefore, Political Risk insurance is needed. A large and

complex insurance industry has emerged to help multinationals mitigate political risk by

purchasing insurance contracts. This industry offers political risk insurance for multinational

companies. This insurance is distinct from other types of property insurance; these

contracts are designed to insure against specific political events such as, war and political

violence, expropriation or breach of contract (Jensen, 2008c).

However, the company could mitigate the risks and reduce the amount of insurance

needed, by working with the government and local government to invest in joint ventures.

These could be on national infrastructure projects, health; educational and community

initiatives. Thus increasing ties not just with the government but with the electorate and

citizens of Kobol. This would increase the prestige of the company and mitigate potential

for harm from electoral pressure on legislators. The legitimate influencing of government

policy through lobbying, with the help and advice of former legislators and public

representitives would also help mitigate any risks (Accenture, 2012).

Conclusion EPN-Exocom can gain significant benefits from identifying and managing political risk.

Effective identification and management of political risk enables the company to gain high

returns on their investment. EPN-Exocom’s ability to spot potental risks and respond more

quickly and effectively is also likely to mitigate losses, thus increasing future investment

potential for the company. The relationship between political institutions and EPN-Exocom

can have a broader impact on Kobol. This relationship can lead joint ventures and

initiatives with the government, which would give the company a strong and respected

foothold in the country.

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Bibliography

Accenture: Managing Political Risk Controlling Loss Finding Opportunity [online]. (2012). Available from: <http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Managing-Political-Risk-Controlling-Loss-Finding-Opportunity.pdf>. [Accessed 08 April 2014].

Great Britain. The Bribery Act 2010: Elizabeth ll. Chapter 23. (2010) [Online]. London: The Stationery Office. Available from http://www.legislation.gov.uk/ukpga/2010/23/introduction. [Accessed: 15th April 2014].

Jensen, N (2008a). Political Risk, Democratic Institutions, and Foreign Direct Investment. The Journal of Politics. 70 (4), pp.1041–1042

Jensen, N (2008b). Political Risk, Democratic Institutions, and Foreign Direct Investment. The Journal of Politics. 70 (4), p.1042

Jensen, N (2008c). Political Risk, Democratic Institutions, and Foreign Direct Investment. The Journal of Politics. 70 (4), p.1043

The Economist intell igence Unit [online]. (2014). Available from: <http://www.eiumedia.com/index.php/about-us>. [Accessed 15 March 2014].

Thomson Reuters (2009) FACTBOX:Venezuela's nationalizations under Hugo Chavez. Available <http://www.reuters.com/article/2009/03/05/us-venezuela-chavez-foodsb-idUSTRE5243CX20090305>[Accessed: 13/04/2014]

What is political risk and what can a multinational company do to minimize exposure? [online]. (2009). Available from: <http://www.investopedia.com/ask/answers/06/politicalrisk.asp>. [Accessed 08 April 2014].

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