Post on 18-Nov-2014
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The Hidden Risks in Emerging Market
1091200541 Panteha Akbari Khadem 1091200020 Hassan Bihamta1091200499 Ilyas Zhantureyev1091200247 Rita Amina 1091200493 Sedigheh Tavakkoli
The Hidden Risks in Emerging Market
Foreign companies
Investing abroad
Beneficiaries
Shareholders
Citizens of the host country
The Hidden Risks in Emerging Market
Type of Risks
Elections and other political events
Economic crises
changing societal attitudes
The Hidden Risks in Emerging Market
Governments policy
The Hidden Risks in Emerging Market
Risks in Traditional Investment
The biggest risks faced by foreign investors in developing
countries
Volatile political systems
Expropriation risk
What is the policy risk?
The Hidden Risks in Emerging Market
The risk that a government will discriminatorily change the laws,
regulations, or contracts governing an investment—or will fail to
enforce them—in a way that reduces an investor’s financial returns
is what we call “policy risk.”
The Hidden Risks in Emerging MarketThe Hidden Risks in Emerging Market
Prevention
Must develop proactive political-management strategies
The Hidden Risks in Emerging Market
What is the Policy Risk ?
Firms engaged in international business have policy risk including:
Fuel supplies. Exchange rates. Currency conversions.
The Hidden Risks in Emerging Market
Reasons to Failure AES Corporation
Public official’s inaction to Terminated supply to non paying industrial consumers
Public official’s inaction to supply fuel to AES.
Public official’s demand for government's own tax payment.
The Hidden Risks in Emerging Market
Ways to protect policy risk and currency or
price swings.
Use of legal contracts. Use of insurance. Trade in financial instruments
Use of risk-mitigation strategies.
The Hidden Risks in Emerging Market
Why hedging against policy risk is difficult
Insurance offers limited protection against policy risk: Since insurance protection is related to
firm’s ability to manage the policy-
making process. Insurance offer short-term coverage or
don’t offer any coverage at all.
The Hidden Risks in Emerging Market
The project and the nature of policy risk Conventional hedging strategies are infeasible.
Average risk premium instrument in a given country offers a false comfort
No financial institutions have not used premium to pay out money when a policy risk is realized.
The Hidden Risks in Emerging Market
THE NEW RISK — MANAGEMENT PLAYBOOK
Constructing hedges against policy risk through contracts, insurance or financial risk — management tools
Rewriting the playbook
Improve operation Quick cost — benefit analyses Political pressure
The Hidden Risks in Emerging Market
INVESTING IN GOODWILL
Managers spend a great deal of time and energy on improveing efficiency
It was struggling with poorly maintained equipment that had detriorated before privatization
A smarter approach was used by Italian state — owned oil company Eni
CEO, Franco Bernabe visited Rio de Janeiro to announce a $500 million investment. He proclaimed : '' Now is the time to show that Petrobras [ the state — owned oil company] has long — term friends]''
The Hidden Risks in Emerging Market
FRAMING THE DEBATE
Firms need to master the art of political spin.
Presenting a venture as «fair»,equitable», or «growth enhancing»
Dominant firms appeal to '' fairness'' by arguing that smaller entrants cannot survive without the government's helping hand
The Hidden Risks in Emerging Market
LG Telecom — the third entrant, behind the much larger SK Telekom and Korea Telecom — made repeated calls for '' asymmetric'' government regulation of the market leaders in order to '' level the playing field''
The Korea Times reported, '' The defining question is whether the government will back new entrants in the name of encouraging fair competition, or limit the pool to experienced players''
May 2001 the South Korean government announced that it would '' guarantee a market share of at least 20% for third major telecom operator through asymmetric regulation on Korea Telecom and SK Telecom''
The Hidden Risks in Emerging Market
FINDING POLITICAL PRESSURE POINTS
The network of relationships in a society greatly influence policy outcomes, especially in countries with weak legal systems
International investors must identify and engage local politicians' power bases
The Hidden Risks in Emerging Market
Eni has shown the way, this time in Kazakhstan. Through its subsidiary Agip KCO
Conducts knowledge — transfer, training, develop seminars
At least 60% of local employees are Kazakh citizens
Constraction of various publick works
Crucial component of an effective strategy is to assemble a coalition of interests
The Hidden Risks in Emerging Market
To political analysis managers have consulted:
Employees Local business partners Supply chain partners ……
The Hidden Risks in Emerging Market
Information gathering
It’s different ways to gather information Varies in intensity and structure Radio Newspapers Conversing with locals And different method to use in computerized systems: Delphi
The Hidden Risks in Emerging Market
Non-Business Organizations
• Anticipate concerns about environmental, health and safety issues
Professional Experts
• Ex-Government officials operating• Economist intelligence unit • Stanford, Oxford analytics• Political Risk Services
TO
Such as:
The Hidden Risks in Emerging Market
Multiple real-time indicators and metrics
CEOs and board of directors demand real-time data This human intelligence effectively incorporate into
enterprise risk-management models and frameworks
The Hidden Risks in Emerging Market
Information-Extraction Software
Data Mining: Relies on the coincident location of wordsNatural Language Parsing(NLP):Facilitates more refined sentence-level inferences by syntactically distinguishing among subjects, verbs, and objects
The Hidden Risks in Emerging Market
Why Country risk Rating Don’t Work
Level of policy risk vary among investors in a country
Country risk rating usually reflecting pas policies out-comes
The Hidden Risks in Emerging Market
The “Tummy Test” and Other Models
Speak about relevant sources by decision makers Draws upon their own knowledge of similar cases Make an educated guess about the likely policy outcome.
Necessities Skill set of the decision maker The relevance of past experience to the current situation. Involving specialized consultancies
The Hidden Risks in Emerging Market
War room
Method;Brainstorming sessionsInfluence map “Influence maps” are used to depict each politically relevant actor as a bubble arrayed in space according to the player’s position on a given issue, with the size of the bubble proportional to the player’s power. What happens if we target actor X? What if we break the link between X and Y? What if we try to reduce Z’s power?
The Hidden Risks in Emerging Market
The dynamic expected utility model based on game theory. Every actor with a vested interest in an issue has a choice of
proposing a policy, opposing a proposed policy, or doing nothing.to maximizes his, her, or its expected utility in each period.
The Hidden Risks in Emerging Market
The sensitivity of the outcome to various assumptions and parameters can then be calculated, helping to identify which actors are so pivotal that a change in their preferences, power, or salience would have a large impact on policy.
The selection depends on
The direction and intensity of the actor’s preferences, The salience of the issue, The cost of proposing or opposing a policy, Similar information about other actors.
The Hidden Risks in Emerging Market
Models are used by the intelligence community and by specialist consulting groups such as Mesquita & Roundell, Sentia Group, the Probity Group, and Commetrix.
Analysts; Identified which actors were most commonly cited in the press and referenced in their speeches and writings. Constructed a network of key “influencers” and modeled various points of entry into this system to identify the target areas and the messages that would maximize their effect on the climate change debate.
The Hidden Risks in Emerging Market
The risks of investment may be great to justify entry into certain political zones ,but by
Recognize the dynamism of the environment Implement appropriate strategies to address the risks quite manageable.
Combining data-mining&
Traditional approaches
Defensible system for managing
“tummy tests toward an
analytically oriented
This system will retain elements of tacit knowledge and experience & should be powerful source of competitive advantage