Political Risk and Methods of Risk Management - Coursework Example

Political Risk and Methods of Risk Management Name Institution Affiliation Different changes occur in the political set up of a country every time a decision is made or when the government of any state adjusts its policies (Kerner & Lawrence, 2014). The changes that take place have both negative and positive effects on the citizens as well as on the businesses within the areas of political changes (Benáček et al. 2014). These changes expose the organizations to various risks which reduce their profitability a challenge that remains to be handled by the managers of the affected organization. They also cause the mother countries to have stagnated development and economic progression process within the institutions of political change is always negative (Kerner & Lawrence, 2014). With the understanding of various challenges that the organizations face due to political changes as well as the effects on the citizens of a country, this paper will address the following. It will explain and identify various issues related to political risks. Secondly, it will proceed to look at various methods managers can use to manage risks in the international market. Political risk is the complications that an operating business or government may face due to the influence of the political decisions in a country or society. The decisions in context include alteration of government policies and structures which greatly have impact on the expected outcomes or profitability of a company or organization. Sometimes political risks become very unpredictable and the managers fail to understand and predict the behaviour of the risk on long term basis. There exist two types of political risks depending on the number of individuals or firms affected by the political decision or political structure change (Kerner & Lawrence, 2014). The first type of political risk is the macro-political risk and the second one is the micro-political risk as discussed below. Macro-political risk is the type of risk in which all the foreign firms within a state are affected by the political decision such as expropriation or insurrection (Benáček et al. 2014). The risk poses two portfolios for the business that is; it creates both portfolio investments and foreign direct investments which changes the overall suitability of destination for investment. The second type of political risk is the micro-political risks which are more of specific projects risks. The risk majorly affects the local business in relation to the political climate that is created. They are sometimes referred to the internal risks are they are majorly affecting specific projects at different times. The risks are more depended on the governance and at most cases get corrected through the use of the international discussions to determine the reliability and solutions to the problems. Various organizations have made mistakes as they have ignored as well as others underestimating the risk that might be exposed to them by politics (Benáček et al. 2014). The issue of sovereign debts is an indicator of political risk which has been ignored by different organizations as the governments are trying to negotiate on the debt ceiling debates. Political risks have been based on the security and threats that different countries offer in relation to the stability of their actions. Challenges come on daily basis and the threat has ensured that some companies shy away from the production or investment leading to failure of success and progression. Currently, political risks are taking new and different forms which greatly affect the international trade. This has been seen as the government is fighting to promote the state-owned companies with the aim of tapping cash flow of companies within the national borders. The action has resulted to breakage of agreements as well as failure of new negotiation as every state wants to remain independent. The second issue is the creation of the trade barriers by different states which reduces the efficiency of making the international business work efficiently (Kerner & Lawrence, 2014). The barriers discourage most of the investors leading to slow or no investment in different states. The nature of this risk (political risk) has made many companies or organizations to omit various business opportunities as they do not want to engage in businesses associated with politics. The fear that various companies have regarding political risk has ensured failure in maximizing the organizations profitability. Despite the risk being out of the organization hands, it is true that some aspects of the risk can be managed by the individuals in the management positions within an organization. The micro-political risks are self-caused and should not be taken lightly in the process of ensuring the business run smooth. The risk is based on taxes, currency valuation and trade tariff changes in a country. Political risk is always termed as long-term risk since it can result to total failure of a business within a short period of time for example in the cases of terrorist attack. The extent of the effects that can be caused by political risk is hard to quantify, but companies are advised to take control and design ways of dealing with the risk (Benáček et al. 2014). The most important factors to consider in dealing with this risk are; location history which is mostly concerned with the actual positioning of the business or organization premise. Secondly is the political institution which dictates the potential of changes that might take place, the duration upon which changes in policy might take place as well as the procedure for making changes. Lastly is the political force in the area of the business. This category is concerned with the fights that might erupt, the causes of fights as well as the likely wood of the risk occurring. Methods business can use to manage risk in the international market The following are some of the methods that can be applied by the managers to manage risk in the international context. First is through the use of insurance policies as a cover. Managers need to understand the power that is associated with insurance and maximize its utilization for the benefit of the organization (Benáček et al. 2014). The catastrophic aspect that political risk exposes to many organizations should give room for the businesses to insure and take precautions in order to avoid losses. Though it is an expensive practice to insure, it is of great importance in case the organization is faced with the catastrophic issues. In the international context, it is very hard to understand the political mission of different countries as well as the atmospheres that is presented in the various countries of the business. Secondly, the firms should avoid political risks with control procedures which are to be manifested within the organization (Marcelino-Sádaba et al. 2014). This management practice requires the managers to be proactive and avoid situations with overt political risk within the economy and areas of business venture. The process involves employing professional chief risk officer whose main role within the organization would remain to analyse the political situations in various countries, look and evaluate the political climate, the elections and legislation process. These individuals compile the reports and provide the organizations with the best recommendations that would be put into consideration by the management. The management ensures that someone is always given the opportunity to daily analyse the political situations in order to have the required data and information regarding politics and developments. The idea is more important to the management as it enables the organization to invest in risky environments despite the fear that the environments brings to them. The businesses are always able to work and withdraw their investments, cash or capital in situation when they realize that the environment has become too much risky for the investment to grow or to continue operating (Marcelino-Sádaba et al. 2014). It therefore prove that it is a good management practice which requires an individual to be alert and ready to handle all the situations in the business environment. Thirdly, managers should establish goals and context in managing the risks (Marcelino-Sádaba et al. 2014). This is done by clearly understanding the organization environment and the way the firm has been working in the previous years. They should know the previous year risk management, in order for them to set strategic rules on how they can handle the future risks. They should also take their time to know other countries and goods which they import. This will help them to identify the type of risk they can undergo and make the managers highlight several skills which they can use in case they encounter risk. Development of risk criteria on their stakeholder should also be an asset on which they can use to come up with an appropriate goal that define their firm and their context and which corresponds to their previous plans regarding the profitability objectives of the business. Fourthly, is the identification of risks that are prevalence in the international market. The organization should identify all the sources where the risk can come from in the market as they consider the political structure of different countries (Marcelino-Sádaba et al. 2014). Though, the risk is something that is uncertain, but the firm should try with the help of the other organization the possible way of identifying the risk. Risk interferes with the organization goals and success and so there is need of the organization to identify the appropriate method and areas where they are being hindered with the business risk. The management should also practise all the techniques and have appropriate tools that are used to identify risk in business environment. The integration of the risk assessment team should be put in place to ensure that every aspect of risk is valued and precautionary considered before it fully explodes on the business. After risk has been identified, the organization should analyse the risk. This is done by identifying all the sources of risk and analyse them using appropriate method. The analysis technique used can be qualitative or quantitative. These techniques are applied after the management of the organization have carefully identify the type of risk and the consequences they are undergoing since each type of business risk are being analysed differently. After the risk has been analysed, the managers should use the appropriate tools to measure the level of the risk in the business environment. Some of these tools include the risk matrix which gives the organization opportunity to prioritize and identify ways of dealing with risk (Marcelino-Sádaba et al. 2014). Evaluating the risk is another approach managers should use in reducing the business risk (Haimes, 2015). After analysing the risk, the manager should compare the previous risk and note the protected risk and those which have been accepted by the company. This is done after clearly understanding the priorities they have set for the success of the organization and the type of products from the foreign partners. If there is unacceptable risk in the organization, the recommended step for this is to treat all the unacceptable risk depending on the impact that it entails and the effect it might have to a business in the international market. The sensitivity of the international market should ensure that the business works perfectly for the market win. Fifth, writing a business plan for the organization. This is a major role for the managers, since after them identifying the type of business and the risks associated with it, the firm needs to achieve the conditions that will fit its business environment (Marcelino-Sádaba et al. 2014). The managers can work closely with their stakeholders and make sure that the laws are implemented by the company are obeyed and followed by each member and the countries where they get their goods from in the international sharing. After writing the business plan, the firm should go ahead to monitor their business by controlling the services they offer to their customers and the quality of goods imported to their organization. By doing these, the managers can manage any risk invading to their business from the international context. Sixth, the organization should train their employees according to the demand of the business to ensure that there is professional manner in which every activity within the business is being carried out (Marcelino-Sádaba et al. 2014). This will give the management humble time of supervising the work within the organization since every worker is assign to a specific work which they specialised in with the required experience. This will enable them to prioritise any risk within their firm and the incoming risk from the other countries due to their professionalism of the workers. The company should also employ the services of an internal control consultant. They are people who are specialised in investigating the weakness of the company and how the specified weakness can be corrected. They are usually people who are new to the organization. By their help, the company can get to understand various weaknesses in their firm and the methods to tackle. This will help the management to reduce the business risk within their firm and from the international environment. Seventh, the company should start slow when having a relationship with the foreign partner (Haimes, 2015). This is one of the ways in which it will help the organization to reduce the business risk as they will actively learn the success of the business, failure and other opportunities as well as the risks associated with them. Before establishing a meaningful relationship amongst themselves, they should get to understand the quality of the goods and services they offer to their customers. The advantage and the disadvantage of that particular product and how they will benefit their customers. The company has to take a standard amount to go and have a test on it to their customers, on which after seeing their demand to consumers is high, the alternative is to add more stock and build their relationship with the foreign partners. Company should also research on their own about the type of services the other countries are offer, by visiting their respective websites, visiting the place and interviewing the management of these foreign partners. These can enable them to learn how the foreign countries encounter their risk and manage them and how they can implement those skills from other countries to their organization. Eighthly, managers should use secure payment methods. When dealing with the international context, there are some banks which can help the organization dealing with the international business on how to deal and reduce the financial risk in their firm. These types of banks usually give the organization suitable methods when paying in the international market as they work with various currencies. The payment can be in form of credit or payment on delivery which is secure to both the countries and the business partners (Marcelino-Sádaba et al. 2014). Ninth, the organization can manage the risk by accepting it, reducing it and transfer it. By reducing the risk, the managers have to change goods and services offered to their customers due to lack of tools and techniques used in risk management process (Haimes, 2015). When dealing with transferring of risk, the company has to transfer services dealing with the insurance policing to other parties or organization. The acceptance ensures that you work with what you already know is a problem other than working without acceptance. From the discussion, it is clear that the paper has looked at the political risks and the issues that are associated with it. The issues have been discussed and it is clear that political risks cannot be avoided but can be managed. It also looked at the ways and methods of managing risks which are beneficial to the managers. All this points if put into consideration are helpful to the firms. The managers should therefore work closely with every individual to bring the success of the business in the international market without fearing risks. References Benáček, V., Lenihan, H., Andreosso‐O'Callaghan, B., Michalíková, E., & Kan, D. (2014). Political risk, institutions and foreign direct investment: how do they relate in various European countries?. The World Economy, 37(5), 625-653. Haimes, Y. Y. (2015). Risk modeling, assessment, and management. John Wiley & Sons. Kerner, A., & Lawrence, J. (2014). What's the risk? Bilateral investment treaties, political risk and fixed capital accumulation. British Journal of Political Science, 44(01), 107-121. Marcelino-Sádaba, S., Pérez-Ezcurdia, A., Lazcano, A. M. E., & Villanueva, P. (2014). Project risk management methodology for small firms. International Journal of Project Management, 32(2), 327-340. Read More