How to Overcome the Political Risk of Expanding a Business

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Operating or expanding a business is not always just about the bottom line. While investment costs, profit margins, and rate of return are all key risk factors one must consider, the political dimension can also be extremely important, especially if the new branch will be located in countries experiencing temporary or sustained political instability. Given this, you not only need to be aware of potential political risks, but also what you can do to mitigate them when expanding a business into a new area.

  • Understand what political risk means in the first place. Generally, the term refers to risk factors which are political rather than economic in nature. A good example of a political risk would be instability in the political system of a country or even regional or local area. If an area is constantly shifting leadership, then it becomes hard to determine with a degree of certainty what sort of policies will be enacted in the future.

  • Assess the basic elements of the business climate, such as corporate tax rate and the government's respect for property rights. These elements can be hard to count on in an unstable environment, but they are keys to the viability of your business in the long-term, and if you are about to invest a good deal of money in a new area, you want to be sure of as much as possible. Sometimes it does not even matter whether or not the government is pro-business, so long as there is the potential for profit and the policies of that government are consistent. Things become problematic when political instability is coupled with political violence. It will be very difficult to sustain business operations if there is civil unrest, terrorism or all-out war.

  • Obtain or create your own political risk assessment of the area you are looking to expand into. Such an analysis can be purchased from established political and security consulting firms worldwide or they can be performed on your own using basic research tools such as the Internet and books. Your choice in this regard will likely depend on how large your business is and how much time you have to devote to gathering all the necessary data.

    Some factors to consider are:

    -Political parties, including their power share and policy agendas

    -Historic political instability, such as how many changes of government have occurred over the last decade.

    -Current or historic political violence, either by government or non-government groups such as terrorists.

  • Make a list of political factors that can directly and indirectly affect your business. A new legislative initiative to nationalize the oil industry in a country might not necessarily affect your fast food business. Assess which factors need to be focused on and which can be placed on a lower priority.

  • Develop contingency plans to have in place should the risk manifest itself and affect your operations. This could include a way to get quickly get money, equipment or personnel out of the country, or kidnap and ransom insurance to give you peace of mind should things go awry.

  • Understand what you are getting yourself into and plan accordingly. The only political risk you can every truly overcome when expanding a business overseas is the risk of not knowing. Everything else is a question of awareness, prevention, and if necessary, an exit plan.

References

  • Analysis Without Paralysis: 10 Tools to Make Better Strategic Decisions; Babette E. Bensoussan and Craig S. Fleisher; 2008
  • Measuring Political Risk: Risks to Foreign Investment; Charlotte H. Brink; 2004
  • Country Risk Assessment: A Guide to Global Investment Strategy; Michel Henri Bouchet, et al.; 2003
  • Photo Credit Comstock Images/Comstock/Getty Images Stockbyte/Stockbyte/Getty Images Jupiterimages/Photos.com/Getty Images Thinkstock/Comstock/Getty Images
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