Case Study 1 – First Quantum Minerals VS. Eurasian Natural Resources
1. How can companies that want to expand internationally protect themselves when facing high political risk in a potential market?
Firstly, before entering a new and unknown market it is essential for multinational firms to investigate beforehand in order to make sure that it is beneficial for them to begin business in that country. Firms must understand various factors and be aware of the risk in each country before entering a new market. For instance, they should examine properly the location; by analyzing political and social climate, local tax and regulatory environment, legal system, infrastructure, cultural compatibility, local workforce and many other variables.
Finally, by doing so, the firm can decide if they wish to enter a certain market.
After properly examining every aspect, the firm can decide and analyze if they wish to establish themselves in a new country or not. However, if a country has high political risk it is recommended to avoid doing business with that market. Nonetheless, if a company wishes to enter it is important to understand the main reasons for the increase of political risk. First of all, there has been an increase in global instability and secondly that more stable countries usually have a slower growth thus companies now prefer to enter emerging markets which are usually riskier. Therefore, nowadays there are more political risks when entering an unknown market such as expropriation, war, terrorism, etc. Additionally, as well as understanding the risks they are facing, companies must also take the initiative to reduce political risks. This can be done through risk reduction strategies. The firm can rely on a local partner since by doing so they might decrease the chance of nationalized. However, it is important to state that the foreign firm should have a higher percent of the shares in order for this plan to be positive. Additionally, the...