POLITICAL, ECONOMICAL AND

OTHER FACTORS AFFECTING MNCS

Prof. Murali Krishnamurthy
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Introduction
When thinking about the international
business
environment,
concerns
over
economic, political, cultural, technological and
regulatory conditions of your target markets
will always crop up.
The dynamics of the international business
environment
are
driven
by
complex
combinations of these factors.
As such, it is always important to consider the
implications of country-specific investment
climate when making operational and strategic
decisions for a multinational corporation.
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Political Factors
Political factors concern government policies,
laws and administrative orientations of different
countries and regional economic blocks. The
political factors form the basis for regulating
international trade with respect to tariffs, quotas
and technical standards.
For example, the European Union has regulations
that guarantee preferential trade treatment for
member countries. Political stability is also an
important aspect of the international business
environment. Frequent political unrest and military
coups could force a multinational cooperation to
suspend or close operations.
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Political Problems
Political risks take many shapes. They may come in the
form of policy actions from national governments, such
as regulatory or nationalization programs, and they can
have adverse effects on your objectives and bottom
line.
The host country may get involved in a war or
experience civil strife or revolution, leading to
detrimental political decisions such as laws preventing
capital movement. Minimize your exposure to these
risks by conducting in-depth research before setting up
shop.
If your MNC already has a presence in the target
country, have a legal basis for recourse if your
operations are disrupted by negotiating terms of
compensation in advance. Purchasing political risk
insurance is also an option.
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Economic Factors
Rates of economic growth influence the levels of
demand for your goods or services in
international markets. However, economic growth
rates may be high in some countries and low in
others.
For example, the 2010-2012 Eurozone debt crisis
slowed down economic growth in many European
countries at a time when countries in other
regions were experiencing an economic boom.
Consider such disparities of economic growth in
the operational and planning activities of a
multinational corporation.
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Financial Factors
Random movements in the economic
environment affect interest rates, exchange
rates, wages and commodity prices.
There are a number of methods for managing
these financial risks. Select low-cost
production sites to manage wages. Adopt a
flexible sourcing policy and aim at diversifying
the market.
Devise a strategy to manage currency risks
by using foreign exchange derivatives, such
as forward and option contracts and currency
swaps.
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Competitive Factors
Your MNC will face competition and advances in
technology. The risk element is founded on uncertainty
about your competitors' actions and the development
of competitive technology.
Apart from strategies like lowering prices or
implementing
state-of-the-art
technology,
rival
companies may resort to cyber attacks, digital
misinformation and data fraud or theft. These activities
may also be state-sponsored in a bid to help local
companies gain competitive advantage.
To manage these risks, embrace and invest in
technological advancements, be vigilant with data
security and collaborate with multi-stakeholder
networks involved in global cyberspace governance.
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Technological Factors
The availability of technological infrastructure and
technical capacities determine the prosperity of a
multinational corporation in host countries.
Factors such as broadband connectivity and
technical training have become essential
ingredients of successful operations in the
modern business world. Moreover, the levels of
technological developments in a given country
determine the scope of technical understanding
among its population.
While it may be easier to establish and maintain
technical operations in high-technology countries,
the same cannot be said of low-technology
countries.
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Social Factors
Demographic factors such as religion and culture
affect the types, quality, functional features and
demand levels of your products in international
markets. Cultures attach different meanings to
time, objects, names, colour and attitudes.
For example, General Motors suffered low sales
when it introduced the Nova car in Latin American
markets because the car name translated to it
does not move in Spanish.
Therefore, a multinational corporation must have
the ability to interpret and understand varying
cultural cues and patterns that are characteristic
of the international business environment.
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Resource Factors
Resource risks in overseas regions stem from a lack
of skilled labour and inadequate technology. It may be
a challenge to get people with the right skills to work
in every geographic location.
Some countries do not have the necessary telephone
and satellite communications to support your data
systems. These factors can hinder operations.
Incorporate a global human resource function to
identify, recruit and train suitable personnel in foreign
countries and set uniform company policies that can
unite culturally diverse people into one employee
community.
Invest in additional technology and improvise when
necessary to keep all subsidiaries in the
communications loop.
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Ethical Issues
New ethical issues for human resources
managers have emerged with the globalization of
commerce and the rise of increasingly large,
complex multinational companies.
In particular, the blending of languages, cultures
and ways of doing business create a minefield of
challenges.
Today, human resources managers must make
difficult decisions in order to bridge these gaps to
create harmony within the company and to
ensure the company is operating within
acceptable practices in each country in which it
does business.
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Lack of Cultural Awareness

Multinational managers inevitably deal with
miscommunication
and
lack
of
cultural
awareness. They must prepare their employees
for appropriate conduct before sending them to
their overseas destination.
Training and cultural classes help to enlighten
employees about different customs and practices
overseas. A lack of cultural awareness could be
shown by a lack of respect for the conservative or
liberal nature of other cultures.
HR managers should assume responsibility for
providing employees the right knowledge to
successfully navigate cultural issues in foreign
countries.
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Bribery & Corruption

The Foreign Corrupt Practices Act prohibits
bribery. However, this law cannot possibly
cover all of the range of payments that
international businesses encounter.
Things like facilitation payments may be
required to operate in a foreign country, and
the U.S. government has ruled differently on
multiple situations surrounding these types of
payments, which provides the company with a
true ethical dilemma, particularly a human
resources manager who must aid an
employee facing bribery attempts overseas.
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Bribery & Corruption

In addition, international companies face an
environment of pervasive corruption, according
to a 2011 survey by Ernst and Young. In that
survey, 39 percent of respondents said
corruption occurred frequently in their country.
Some countries, such as Brazil and Indonesia,
had very high rates of reported corruption -- 84
percent and 64 percent, respectively.
Human resources management must prepare
its employee traveling to these hot-bed
countries on how to properly interact with the
people and authorities, as well as ensuring the
employees remain safe and secure.
14

Privacy
Privacy is a pervasive issue for many companies.
In addition, privacy laws vary in different
locations. The European Union has much stricter
privacy laws than the U.S. When the two sets of
laws conflict, human resources managers must
make a decision which to follow.
For example, a European Union company that
operates in the United States will have the choice
to follow the EU's more restrictive policies or the
more lax policies in the U.S. Some corporations
choose to enforce the home country standards
due to their belief that it is a better operating
model that will produce better corporate results,
as well as protection for their employees abroad.
15

Compensation
Another important issue to consider is the relative
compensation
levels
for
each
country.
Multinationals often have offices in both
developed and developing countries where the
salaries are quite different.
For example, an American transferred to China
might make 2 to 3 times their Chinese counterpart
doing the same job. It is a bit unseemly to have
people working side by side earning so differently
for jobs requiring the exact same skill set.
In this case, human resources management may
face the ethical issue of whether to narrow the
gap in compensation.
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Other Factors
Cost Controls
Operating overseas can take advantage of lower
labour costs in the same way as outsourcing,
while allowing greater supervision and control to
ensure quality.
A multinational corporation can also benefit from
reduced transportation costs.
For example, a jewellery company could save
money by setting up a branch in a country with
gold mines, making rings locally, then shipping
them to the home country for retail, rather than
shipping the gold to the home country for local
manufacture.
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Other Factors
Taxation
Having operations in multiple countries may
allow the company to take advantage of tax
variations. The company could place its
business officially in the country with the
lowest tax rates, even if management is
elsewhere.
Running a multinational corporation can help
the business benefit from the tax systems of
countries that require the company to have a
physical presence to benefit from low rates,
rather than simply operate a "shell" or "paper"
company.
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