Large companies are often looking for ways to expand into international markets; political risks should be taken into account when adopting a business strategy in a new country. Political risk is a manifestation of local power that affects the economy and foreign business in a particular country. Political risk in international business can negatively impact a company’s earnings or make it difficult to operate because of economic factors.
Effect on International Business Decisions to Invest
Political risks may include government actions that hinder the development of foreign companies in a particular country. The problems may be macroeconomic, including high-interest rates; social problems such as civil unrest can lead to supply chain disruptions (Zegart & Rice, 2018). Government actions can make it challenging to get funding; political events may prevent the conversion of the local currency (Zegart & Rice, 2018). These factors negatively impact foreign companies’ desire to invest in a country with high political risks. The consequences of political risk can lead to increased operating costs, business closures, and losses.
If a company, despite political risks, believes that it is profitable, there are several measures that minimize a negative outcome. First of all, the company needs to investigate the degree of risk by requesting the help of consultants or by researching on its own. The company can negotiate with the host country to compensate for adverse outcomes if the country is interested in foreign investment. It is necessary to clearly understand the host country’s legal system (Haendel, 2019). One of the best solutions might be to buy political risk insurance (Haendel, 2019). Multinational companies specialize in selling insurance compensating for losses in adverse events.
Investing in Cuba
Cuba is a country with a very high political risk; however, it attracts investors due to little competition. The US is on course for a gradual rapprochement with Cuba, but investors worry about growing risks. The island is in a constant situation of economic instability (Zimbalist, 2019). Cuba is vulnerable because it does not have many of its own resources, and supplies are complicated by its insular position (Zimbalist, 2019). The general management of the economy is ineffective and provokes prices for raw materials (Zimbalist, 2019). Cuba’s economic dependence over the last century has primarily led to its economic problems; the country still has an embargo. In such circumstances, the risks for investors seem too high.
Opening Burger King in Cuba
Cuba is a good field for opening new establishments due to the lack of competition. Opening a Burger King in the country could be theoretically possible if local people in business partially manage it. Firstly, the company will face difficulties in quality control of products due to the region’s remoteness and the franchise management. Cuba’s economic and political isolation has meant that buyers will find it difficult to accept the new product. Despite being world famous, Burger King in Cuba may not be popular, and the effort will not be paid off.
Thus, not taking into account political risks can lead even the most severe investors to losses. It is necessary to take into account not only obvious factors such as economic indicators but also macroeconomic factors. Local legislation may prevent foreign people in business from investing in the country’s economy. A detailed study of the country’s economy and political situation and insurance purchase will help minimize political risks.
Haendel, D. (2019). Foreign Investments and the Management of Political Risk. Taylor & Francis.
Zegart, A., & Rice, C. (2018). Political Risk: Facing the Threat of Global Insecurity in the twenty-first Century. Orion.
Zimbalist, A. (Ed.). (2019). Cuban Political Economy: Controversies in Cubanology. Taylor & Francis.