Question 1.

Venturing into international markets can be a potentially powerful tool to improve the performance of a company’s investment portfolio. However,going into international markets is not that easy as it may seem on the first sight,for these operations involve high risks that can occasionally become even much higher, or at least more complex, than the risks companies usually face when doing business at home.Political riskis a fundamental example of such risks.

Political risk refers to a specific type of risk, well known to multinational companies and banks, that a host country will enact a certain political decision, or more of them, that will then bring to adverse effects on multinational’s profits and/or goals. Unfavorable political decisions in the host country may vary from very harmful, such as some kind of destruction due to a revolution or even war, to those of a more financial character, such as the creation of new laws that prevent or hinder the free flow of capital (Phung n.d.).

The most simple definition of the political risk would be that it is a risk of losing money (internationally), due to sudden changes that occur in a host country’s government, or the regulatory environment. As an example, expropriation of assets by the host country’s government, or just the threat of seizure, can also have devastating consequences on affected companies. As Fidel Castro’s government took over control of Cuba, after a revolution in 1959, hundreds of millions of US Dollars’ worth US-owned property and companies, were seized. Unfortunately, and as in most of the time is the case, almost all of these US companies had no recourse (the right to acquire any of that money invested back).

There are two main types of political risks, in general, macroeconomic and microeconomic. Macro-risk refers to possible adverse actions of the host countries that will eventually strike all foreign companies doing business in these countries. The examples of macroeconomic risks are the already described risk of expropriation, or the risks of war and terrorism. On the other hand, micro-risk refers to adverse actions in the host country that will only strike a certain sector of industry, or type of business. Main examples of the microeconomic risks are corruption and adverse legal actions against companies from foreign countries. On the whole, regardless of the specific type of the political risk that amultinational or bankcould face up with, in a foreign country, they will usually end up losing a lot of money, if they were not well prepared up-front for these unfavorable situations.