What is meant by “policy risk” and why can’t firms engaged in international business “hedge” against it?
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The term “policy risk” refers to the danger to an investor’s reduction of financial returns from an investment owing to failure to implement laws and regulations or a decision by the government to enforce investment laws, policies, contracts, and regulations in a discriminatory manner (Henisz and Zelner). It is one of the most common strategies that governments use to benefit financially from foreign investments. This strategy has replaced asset seizure, which was common in many countries before the 1980s. Common forms of policy risk include civil disturbance, breach of contract, the subjection of contracts are subjected to government-initiated negotiations, and regulatory restrictions (Henisz and Zelner). Firms engaged in international business cannot hedge against policy risk because of the legal hurdles that they are subjected to by local governments. Many international companies use approaches such as legal contracts, trade-in financial tools, and insurance to hedge against policy risks. However, these strategies are ineffective (Henisz and Zelner).
The difficulty experienced in hedging policy risk through the use of the aforementioned strategies necessitates the direct management of risk by international organizations. Firms have shifted from the improvement of business operations to the shaping of public debate on certain financial and legal matters that affect their businesses. Many governments do not enforce legal contracts, thus rendering them useless. Also, the laws and regulations of many countries are always shifting, and as a result, render legal contracts void (Henisz and Zelner). Also, politicians have uncanny ways of circumventing legal contracts. Insurance companies overprice their products and offer short-term coverage because some firms are over-exposed thus making their coverage very expensive (Henisz and Zelner). The use of financial instruments to hedge policy risk is ineffective because of the unpredictable nature of policy risk. In that regard, financial hedging strategies that are applied in financial markets are infeasible.
How are services different from products? Also, explain how certain services are more susceptible to offshoring than others.
Services are different from products in several ways. First, services are intangible while products are tangible. In that regard, it is possible to box a product and transport it from one destination to another. On the contrary, a service cannot be boxed and transported between destinations (Blinder 115). Traditionally, services were nontradable while products were tradable. However, this perspective has changed since advancements in technology have rendered services tradable as they can be transported electronically between different destinations around the world. Second, products involve the process of manufacturing while services do not. Products are primarily made in factories and involve numerous processes that require skilled labor. In contrast, services are offered everywhere and involve simple processes and procedures.
Some services are more susceptible to offshoring than others because of their mode of delivery and the technological advancements that have heralded an era of the high rate of globalization. Services can be divided into two groups, namely personal and impersonal services. For instance, jobs such as typing, security analysis, data entry, financial analysis, accounting, engineering, and economic forecasting can be offered to people in other countries because information can be shared electronically. On the contrary, services such as policing and driving cannot undergo offshoring because they cannot be delivered electronically over long distances (Blinder 119). Policing and driving cannot be replaced by electronic monitoring because such a shift would be ineffective. Moreover, they are personal services that necessitate face-to-face contact and that cannot be transmitted electronically (Blinder 120). On the other hand, accounting and financial analysis are impersonal services that can be transmitted electronically over long distances (Blinder 120).
Blinder, Alan S. “Offshoring: The Next Industrial Revolution.” Foreign Affairs, vol. 85, no. 2, 2006, pp. 113-128.
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Henisz, Witold J., and Bennet Zelner. “The Hidden Risks in Emerging Markets.” Harvard Business Review, Web.