“High political risk requires a quick payback on investments which leads to charges of exploitations”

By | May 1, 2014

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1.        Discuss this potential dilemma: “High political risk requires companies to seek a quick payback on their investments. Striving for a quick payback, however, expose firms to charges of exploitations and results in the increase of political risk”. Use examples to demonstrate understanding

1.1    High political risk requires companies to seek a quick payback on their investments


Liquidity is a major concern within the foreign investment activities, even large companies usually want to know how quickly a project will replay its initial investment. The definition of a project’s payback period is the time required for the project’s expected after-tax incremental cash flow to repay the entire initial investment in the project. Therefore, the payback period is a measure of a project’s liquidity in the short term. And many companies also consider the payback period to be a measure of exposure to risk. Short payback periods are favored for project in countries with high political risks (Broyles 2003, p. 85) which refer to losses emanating from governmental or political sources and include confiscation, nationalization, expropriation, and depravation of assets by foreign governments like import/export license cancellations, currency inconvertibility, war, strikes, riot, civil commotions, embargo and so on (Cook, Alston & Raia 2004, p. 61). When companies are exposed with such political risks, it is normal and rational that these companies will seek to focus on a quick payback to recover the initial investment in a foreign country because their business could also be stopped suddenly if these risks would become sustainable threats and bring significant impacts. For example, if there should be risks of civil wars in an African country, it is obviously not advisable that a multinational corporation will invest heavily in the long term projects with a slow payback on their investments in term of building up factories and hiring local people with several years’ contract, because their investments could be ruined over night by the sudden happening of war.


1.2    Balance between a quick payback and good CSR (corporate social responsibility) performance


1.2.1            Charge of exploitation


MNCs’ operations in foreign countries often give rise to conflicts between the MNCs and the host country with regard to business, developmental, environmental, health, and safety protection issues. MNCs have been frequently subject to charges of exploitation and colonization in third world countries. The sources of these conflicts are mainly the divergence of goals and abuse of power both by MNCs and the host countries. For instance, increased automation aimed at promoting safety may run counter to host policies for promoting local employment; and reliance on the trained foreign experts may be in conflict with the desire for local control (Alkhafaji 2003, p. 172). And return back to the topic of the focus of high political risk caused by quick payback projects, since there are perceived political risk which could be quite influential to the business activities in the country, foreign countries would choose not to invest in the fixed assets (automated machines) and local expert training (reliance on the trained foreign experts) and thus these behaviors would obviously lead to the quick payback investment relative behaviors which are under the charge of exploitation in the general understanding. But such behaviors should be forgiven and there are also ways which foreign companies could adopt to achieve a balance between a quick payback and good CSR (corporate social responsibility) which will be elaborated as following.


1.2.2            Good CSR (corporate social responsibility) under quick payback investments


Corporate social responsibility refers to companies voluntarily going beyond what the law requires to achieve social and environmental objectives during the course of their daily business activities. It covers a range of areas such as new skills and jobs, youth, local development, human rights, CSR reporting, socially responsible public procurement and so on (europa.eu 2010). While the mentioned charges of exploitation behaviors such as hiring only the trained foreign experts is going against the good CSR (corporate social responsibility) practice requirements, there are also many other ways that companies could approach and thus avoid the charges of being a bad CSR (corporate social responsibility) performer.      Contributing to the local development


In 2011 Shell companies and their partners contributed over $164.1 million (Shell share $59.9 million) to the Niger Delta Development Commission (NDDC) – opens in new window as required by law. The NDDC was established in 2000 by an act of parliament to promote the sustainable development of the Niger Delta. In the same year, the operations run by the Shell Petroleum Development Company of Nigeria (SPDC) contributed a further $76.3 million (Shell share $23.6million) to community development projects focusing on a range of activities. These promote and support small businesses, agriculture, skills training, education, healthcare, micro lending and capacity building (shell.com 2011). Therefore we can see that foreign countries could divide out their profits generated through their quick payback business operations to the long term local development which will benefit the society in the long term basis.      Supplier management


One major technique that foreign large MNCs adopt in the international business is to source products from the various suppliers around the world, though because of higher political risk in the host countries, these MNCs could also through appropriate supplier management and monitoring techniques to ensure the labor exploitation behaviors are effectively avoided. For example, Foxconn, which manufactures more than 40 percent of the world’s electronics for such companies as Apple, Dell, Amazon and others, is China’s largest and most prominent private employer, with 1.2 million workers. No other company in the world has quite the manufacturing scale of Foxconn. Nearly every global electronics company has some tie to the manufacturing giant, and while much of its work can be done cheaply, with low-skilled workers, the sheer volume of goods and scale of its operations make it China’s single biggest exporter (nytimes.com 2012). After a series of worker suicide events in the Apple’s Foxconn factory, company as well as the supplier are under the charge of exploiting the cheap labor force in China. After months of growing scrutiny over its labor practices, Apple has agreed to implement reforms following an independent audit that discovered major violations in the sprawling Chinese factories that produce iPhones and iPads. The report, conducted by the Fair Labor Association, comes as Apple seeks to diffuse criticism about labor conditions at Foxconn following a rash of worker suicides and industrial accidents. The FLA’s report is the most comprehensive audit of Chinese tech hardware factories ever conducted, and the commitments it has received could mean a significant change in the way that Western companies do business in China (time.com 2012). After the release of the report, the supplier, Foxconn had agreed to adopt several major changes to correct the wrongdoings and protect the employee human rights according to the legal requirements. Therefore, we can see that the foreign companies could through careful supplier management to push forward the human right protection in the host country while they could still engages in quick payback business activities.