The latest Business Network Breakfast Briefing saw Dr Anna John use examples from all over the world as she explored three approaches to managing political risks to foreign investments. The Lecturer in Strategic Management presented her research and took questions at the Milton Keynes campus on Tuesday 9 April.
Her presentation, ‘Managing non-market risk to foreign investments: do nothing or manage actively?’, explored these different approaches with examples from countries as varied as Mozambique to China, India to Russia – with the UK and its never-ending Brexit another good source – helping to bring the theory alive.
Non-market risk comprises social risks (for example, nationalist movements and environmental protests) and political risks (for example, political regime change and regulatory uncertainty). Arguably, social activity of organisations, groups and individuals is more visible so social risks are relatively easier to predict and manage. Managing political risks is more of a challenge as the lack of information about political actions and intentions of organisations and governments makes it more difficult to make sense of these risks.
I wanted to focus on how, if at all, political risk should be managed relating to foreign direct investments. What is better: to ‘do nothing’ or to manage actively?
Dr Anna John, Lecturer in Strategic Management, OUBS
Two views – traditional, and modern – exist on what companies should do. The traditional view says political risk has negative implications for the performance of foreign direct investments and is largely defined by actions of governments (for example, protectionist policies). It should be avoided, meaning any investments into highly risky areas should be avoided too.
The modern view, which emerged in the early 1990s, suggests that political risk does not always have negative implications for the performance of organisations; instead, it may be a source of opportunities. Organisations can manage political risk and use it to their benefit.
Anna explored these two views in suggesting three approaches to political risk management of foreign direct investments: institutions approach (reactive), resources and capabilities approach (proactive) and resource dependence approach (active).
The institutions approach suggests that organisations passively react to pressures of political and regulatory institutions and ‘do nothing’. They either passively comply with the existing legislation, or avoid investing into a new and unfamiliar area; for instance, some US-listed companies are expected to comply with the Foreign Corrupt Practices Act (1977) and may not invest in some African and Asian countries where corruption is high.
The resources and capabilities approach suggests that organisations can proactively manage political risk and turn it their advantage by using political resources and capabilities. For instance, companies may benefit from prior experience of working in politically risky contexts (political resource) and from the ability to use this experience to make sense of new politically risky contexts (political capability). Some companies from politically risky environments like Russia, China and South Africa invest actively in Africa, Asia and Latin America.
The third resource dependence approach is a midway option with its major assumption that organisations are not autonomous; instead, they are dependent on resources of others. Like the institutions approach, this focuses on the negative implications but, like the resources and capabilities approach, suggests that organisations can manage political risk by managing their resources dependence upon others.
Reducing resource dependence by gaining control over key strategic resources is a possible strategy. For example, some newcomers to the Mozambican oil and gas sector such as Qatar Petroleum gain access to its key onshore and offshore blocks by partnering with more experienced firms with established ties to key government officials to lead the bidding process. This reduces dependence upon the government officials in the petroleum sector of the country.”
Dr Anna John, Lecturer in Strategic Management, OUBS
The effectiveness of these approaches varies from one context to another:
- The institutions approach is more effective in places such as China and Russia where institutions are well defined and homogenous, and where the central authority is rather strong.
- The resources and capabilities approach may be more effective in volatile places such as Venezuela and Ukraine.
- The resource dependence approach may work better in the USA and India, and somewhere like Mozambique, which have divisions due to federal structure and ethnic differences.
These approaches are not mutually exclusive or in conflict with each other; they can complement and be used in combination with each other.
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