A Question of Political Risk - European Motors Entering Tropica: A Question of Political Risk

The (mythical) Asian nation of Tropica may be the best growth market in the world for car sales. But executives at a leading European producer don't know how to evaluate the conflicting information they are getting from risk rating agencies. Professor of Asian Business and Comparative Management Michael Witt presents a hypothetical case mirroring the real world of heightened risk and unpredictability for foreign investors in Asia following the currency crises of 1997 and the continued instability inherent to the post-9/11 world.

by Michael Witt
Last Updated: 23 Jul 2013

European Motors, a major automaker, faces an all too common set of problems for multinationals wishing to enter many developing markets. The Asian nation of Tropica is widely seen as one of the final frontiers in the global automotive industry. It had 370 million citizens and one of the highest economic growth rates in the world. It quite possibly could become the world's third biggest car market within a decade.

But major concerns could not be ignored. The company was receiving conflicting findings from the risk rating agencies it had hired to conduct exhaustive analyses of Tropica's political stability and its foreseeable development. None of the carmaker's senior executives even had the training to interpret the data they were receiving - they were businessmen, not political scientists. What did all this inconclusive data mean for the likely direction of foreign players in their industry in the Tropican market? EM had planned to build a plant in Tropica, but changed its mind after a monetary and political crisis hit the country in 1999-2000.

Professor of Asian Business and Comparative Management Michael Witt presents a hypothetical case mirroring the real world of heightened risk and unpredictability for foreign investors in Asia following the currency crises of 1997 and the continued instability inherent to the post-9/11 world. EM's Director of Corporate Strategy Christophe Meyer had closely followed the country entry analysis model he had been taught in the INSEAD MBA programme.

The corporation had conducted comprehensive analysis at the levels of country, industry and the firm itself. Meyer was satisfied with the results of the findings, except for the nagging doubts created by the unclear assessments of political risk.

With insurers unwilling to offer sufficient coverage for the type of large-scale investment EM was considering in Tropica, the company would be extremely exposed if the political, and/or economic environment suddenly turned sour. Witt presents a concise yet thorough country profile of Tropica, illustrating the types of highly "mixed bag" scenarios foreign corporations routinely need to consider in emerging markets.

A major negative factor for FDI in Tropica, for example, is the continued absence of genuine rule of law. The judiciary enjoys constitutional guarantees of independence, but remains corrupt and largely ineffectual - especially when foreign interests are involved. While still a highly patrimonial political and social system, the current president lacks the firmness of control of his predecessors. And the ruling party has only a very narrow parliamentary majority.

After years of squabbling, the various opposition parties finally managed to unite as the Democratic Front under a largely nationalistic agenda. Its anti-American and anti-foreign business rhetoric has been generally dismissed by most foreign observers, but seems to have growing appeal with much of the Tropican general public, including a union movement that has strengthened greatly in recent years. The business community is increasingly hedging its bets by making contributions to both the governing and the opposition political parties.

Moreover, while macroeconomic government policy has been prudent, the microeconomic situation - especially a weak, overwhelmingly nationalised and oblique banking sector - remains a serious concern. Other negative factors, such as continued energy shortages in much of the country, also need to be taken into account by any foreign investors contemplating setting up factories.

The case provides an EIU-style country risk assessment profile that incorporates a broad and internally consistent set of expressions of political risk. It is suitable for use in both MBA and executive education courses.

INSEAD 2005

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