Introduction
Political risks are risks that occur due to the governments’ actions that have the potential to affect profitability or attainment of goals of a business (Kobrin, 1982, p.32). Generally, political stability or lack of it affects the viability of businesses to prosper in a given economy. Globalization and liberalization have resulted in many firms establishing themselves in foreign countries with different forms of governance systems. Therefore, it is paramount for any business to assess carefully the political nature of a county before venturing to do business in that country, as the actions of a government can facilitate or hinder the success of MNCs (Siddaiah, 2007, p.227).
Macro-political risks, also known as country-specific risks, affect all businesses in the country i.e. high levels of inflation, recession or new taxation rates. Alternatively, Micro-political risks (firm-specific political risks) are risks that affect a specific type of business (Botten, 2006, p.57). The three common political risks include ownership-control, operational and transfer risks. Mostly, operational risks are adversely affected by political contingencies compared to transfer and ownership-control risks (Kobrin, 1982, p.32). The outcomes of these risks on the business include reduction of market share, disruption of production or destruction of property and hinder repatriation of profits (Aswathappa, 2008, p.118).
This paper assesses doing business in Fiji, coup-prone country, exploring variables that contribute to the increase in political risks. Additionally, the paper also explores how different kinds of businesses are affected by the degree of political risks. Finally, the bargaining power or the ruling military over the Vatukoula Gold Mine plc (VGM) is discussed and the possible future government interventions.
Risk rating
Constant irregular changes in political systems as a result of coups bring about instability in the structure of the economy. The nation of Fiji which has a history of coups presents some key variables that contribute to the increase of political risks. These variables include ethic tensions, military in politics, corruption, democratic accountability, socioeconomic conditions, and law and order.
Ethnic tension is a major contributor to high political risks in the nation of Fiji which contributes to overall risks in Fiji. Fiji predominantly constitutes of indigenous Fijians and Indians Fijians, descendants of migrant labourers. These ethnic groups have core differences in their cultural practices and religion, an aspect that seems to fuel the tension. Moreover, the Indian Fijians have developed their economic standards and political powers (Chand, 2004), while the indigenous majority have become frustrated by the economy. Therefore, the indigenous people have resent the successful Indian Fijians, leading to tensions and coups to overthrow the political dominance of the. The natives of Fiji have given themselves special rights and privileges, creating inequality in society. Moreover, the segregated group in society, Indo-Fijians is constantly seeking both economic and political equality.
The nation of Fiji does not have a democratic political structure, as the military overthrew the elected members of the government. Thus the nation lacks government stability and less interest to invest as a result of frequent coups. The nation lacks solid governance and has high bureaucracy. Moreover, there is minimal institution accountability, transparency or justice to its citizens (Brink, 2004, p.84).
The governance powers are centralized to an individual; therefore, various institutions lack independence since single individual heads all key political positions in Fiji. Moreover, the state has continually undermined all activities of any opposition parties in the country, while the judicial system is subject to constant interference from people holding powerful political positions. The government’s commitment to its contracts is in question due to lack of accountability and weak institutions.
Socioeconomic factors have fuelled the ethnic tension in Fiji. The majority of indigenous people have been overshadowed economically by Indo-Fijians (Starnes & Luckham, 2009, p.50). Therefore, the natives perceive the Indo-Fijians as threats and cause of their low economic status. Also, the dominance of indo-Fijian in the economy and politics led the indigenous Fijians to overthrow the Indo-Fijian coalition elected government.
Further, the nation lacks skilled labour due to migration as a result of constant political instability; therefore, the nation also lacks adequate financial capital. In this regard, managers are compelled to hire foreign expertise, which is expensive. To make the matter worse, the country records one of the world’s highest rate of unemployment especially among the youth, while the levels of wages are too low to support the needs of those employed (State & Society and Governance in Melanesia Project, 2006, p.309). These conditions have generated general dissatisfaction among the citizens in Fiji.
Lack of law and order in Fiji increases political risks; during the frequent coups, businesses have lost their property through looting and death of human capital. Besides, the personnel tasked with maintaining law and order are highly corrupt, hence they enforce the law in a discriminatory manner. Moreover, the country lacks proper laws governing the allocation of land among the indigenous Fijian and Indo-Fijians, hence the issue of land ownership has been highly contested (Ward & Kingdon, 1995, p.198). It is also worth noting that the land tenure issue will affect allocation or leasing of land in the host country or the business facilities locations will be affected by government interference.
The frequent coups in the country have led to a decline in upholding of state laws; hence, there is a drastic increase in the levels of crime. Subsequently, the capacity of the government to deal with lawlessness is limited, given that the military took over the role of maintaining law and order since the police force had failed in the task (State & Society and Governance in Melanesia Project, 2006, p.309). Moreover, the ability of the government to perform regulation activities is undermined by the high corruption in the country.
Degree of political risks and type of business
The nature and type of business or industry determine the degree of political risks the business is exposed to i.e. businesses in which the host country perceive to have significance in social welfare are less prone to political risks (Punnett, 2004, p.63). Hence, some government policies may hurt some business sectors while it does not affect others. Businesses that highly depend on imports of raw materials for their production are exposed to many political risks, and so are the firms whose market share is based on export.
The outbreak of coups creates instability, and travel safety is a huge concern for most tourists. This affects international hospitability business growth and sustainability, which depends on the amount of political risks present (Yu, 1999, p.99). Besides, nations give travel advisories to their citizens, limiting the number of tourists. This is evidenced by the 2006 coup, which caused adverse effects on the tourism sector, with an estimated six per cent decline in numbers of tourists and loss of property and job opportunities (Central Intelligence Agency, 2008, p.225).
The locations of facilities of a multinational company also influence the degree of political risks. In business and industries that are of great significance to the country’s wellbeing and growth, the government exerts much control (Punnett, 2004, p.65). Through control and regulations in these sectors, the government yields more political risks to the businesses. These sectors include extraction of countries natural recourses, for instance, mining of gold in Fiji is extensively controlled by the military government.
The composition of a firm i.e. management structure, ownership and the size also determine the degree of political risks a firm is exposed to. Importantly, a firm that is perceived to be a good corporate citizen by the government and the citizens is less prone to political interference compared with a firm termed as a bad corporate citizen (Punnett, 2004, p.65). Additionally, multinationals firms that source most of the raw material from the country, employ mainly local citizens and have local management tend to contribute to the reduction in the degree of political risks.
Subsequently, firms that have major control of local business away from the host nation e.g. technological capability, distribution system or market, tend to create resistance to some degree of political risks. In most cases, the host countries are over-reliant to MCN firms, hence they have limited capability to interfere with their operations. Businesses that use high and sophisticated technology are less likely to be nationalized by small host government since such countries are not endowed with the capability of sustaining such firms (Vaghefi, Paulson & Tomlinson, 1991, p.198).
Features of firms that can expose them to political risks include large multinational companies which lack or uphold local equity. Firms that embrace local equity have lower local political interference since they seem to be promoting the wellbeing of local citizens.
Viewed from a different perspective, the degree of a firm integration affects potential political risks i.e. increasing vertical integration can prompt the government to interfere with their prospects. Additionally, the size of a firm determines the degree of political risks, for instance, large multinationals which will bring stiff competition to the local firms are subjected to harsh selective interference in an attempt to protect local firms (Brikinshaw, 2003, p.12). Nevertheless, firms that have influential actors in the management are better placed to lobby for changes in policies affecting their businesses or adapt and manage the political factors effectively (Krayenbuehl, 2001, p.75).
Bargaining Power
Ownership, control and operation of a multinational in a host nation depend on the bargaining power of the host government and the multinational company. Generally, the level of bargaining power of a host country is determined by the following factors; “population size of the nation, per capita income, host country’s expertise, type of FDI, human and mineral resources possessed by the country, the competence level of the political class” (Brikinshaw, 2003, p.12).
On the other hand, the bargaining power of the mining company is determined by its size, technological strength, and the ratio of fixed to variable costs, the complexity of foreign investment regime and the amount of influence of the MNC’s parent country over the host nation. For example, MNCs from a parent country that is a major donor to the host nation have higher bargaining power.
The military of Fiji has high bargaining power since it owns the mineral resource (gold) and it has the liberty to contract any company to extract the resource. Moreover, international actions geared to Fiji returning to democratic rule i.e. sanctions have increased the bargaining power of the military government. Further, the host nation has leverage over VGM since the government controls the extent to which the foreign firms can acquire desired resources essential for production.
However, the military government bargaining power is limited by international trade agreement i.e. reduction of tariffs. The government highly depends on exports; therefore, it is exposed to international obligations. Therefore, the reliance on foreign countries i.e. Australia and New Zealand limits the bargaining power of the government over MNCs from those countries. The level of expertise in Fiji is relatively low and has inadequate governance structures. Thus, weak institutions limit the government’s ability to negotiate with MNCs; moreover, the host nation may lack competent administrators.
Fiji political instability has limited the number of foreign investments in the country. Therefore, there less competition for investment opportunities in the country, hence lowering the bargaining power of the Fiji government. Conversely, when there is great competition from MNCs to invest in a host nation, the host posses high bargaining powers.
The Vatukoula Gold Mine plc has a considerable amount of bargaining power since the time of its takeover. The core bargaining power of the firm is its technological strength, as it can commit enormous resource to another country (Leontiades, 1987, p.156). Since the firm has invested high technology in gold mining which the local government cannot afford, thus the chances of obsolescence are lower.
The project investment by VGM involves high fixed costs and slowly changing technology hence more vulnerable to obsolescence. Practically, the company has managed to persuade the military government to review tax policies and levies i.e. fuel levies. The level of bargaining power of MNCs helps the firms to redefine their mode of operations.
However, the firm is bound to experience government interference if the government objects certain operations in the firm. Moreover, since the military government contracted the London based company to extract gold from the mine after its closure, it posses some high bargaining powers. Additionally, the firm’s bargaining powers are limited by lobby groups such as environmental groups. Once the firms have established its self in the economy, the firm’s bargaining powers decline due to having assets in a foreign land. Further firms in the extraction of valuable natural resources are at higher risks of government interference, hence reduced bargaining power for VGM.
Conclusion
Political risks comprise of potential harm to a business as a result of governments’ actions that have the potential to affect profitability or attainment of goals of such business (McKellar, 2010, p.3). Often, firms need to evaluate the political risks in a country before venturing in their economy, as these risks can have a significant influence on their profitability and sustainability (Chapman, 2006, p.341).
The key variables that influence the increase of political risks in Fiji are ethnic tension, military actively participating in politics, socioeconomic factors lack law and order. The weak governance as a result of frequent coups increases uncertainty in businesses, hence raising political risks. However, it should be noted that high political risk in a country should not prevent a firm from investing in such a country since some risks are industry-specific or the risks can be easily managed (Collier & Agyei- Amoamah, 2006, p.429).
The nature of the business determines the degree of political risks. Also, it is generally viewed that the greater the perceived or actual benefit of Multinational firms to the host country and the more expensive its replacement by a purely local operation, the lower the degree of political risk to an MNC. Large MNCs that are rapidly expanding and pose a threat to local firms are more susceptible to political risks (Roukis & Conway, 1990, p.195).
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