International Corporate Finance & Political Risk

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  • 0:03 International…
  • 1:09 Political Risk
  • 3:01 Lesson Summary
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Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Multinational corporations face risks to their financial bottom line thanks to politics and political risk in different countries. In this lesson, we'll look at common sources of political risks for companies and how they can impact companies.

International Corporate Finance

Meena owns a company that does business in several different countries. Each country is different. Some countries have very stable economies, and they have a well-established political system. Other countries still have emerging economies, and their politics may be more unstable. Still, others are in the midst of conflicts that cause political instability. How might the different political systems affect Meena's company's finances?

International companies face many risks, and one of them is political. In terms of corporate finance, political risk is the chance that a country's policies will negatively impact a company's finances. When dealing with different countries, politics can be a heavy influence on a company's bottom line. However, how heavy that influence is depends on the risk itself. A small increase in a tax rate, for example, might only have a small impact on a company like Meena's. On the other hand, a political coup could destroy an entire segment of her company's profits. In other words, there's a huge range of political risks!

To help Meena understand political risk and her company's finances, let's take a closer look at how things could play out.

Political Risk

Companies like Meena's, which do business in multiple countries, face several financial risks due to politics. The most common issue is changes of value in a country's currency due to political actions. If a country's political system is unstable and there is conflict or uncertainty about the country's future, then that country's currency could drop in value. For example, if Meena's company is already doing business in the United Kingdom, which voted in June 2016 to leave the European Union, her company faces a real political risk. The money her company is making in the United Kingdom may be worth less if the currency rate of the British pound drops in the face of an uncertain future.

Another political risk to a company's finances has to do with tax rates. Let's say that Meena is doing business in China, and the Chinese government taxes corporations at 10%. That means that, for any business Meena does there, she has to pay the Chinese government 10%. But what if China's government decides to raise that tax to 12%? Now, Meena's company is paying higher taxes, which means they are bringing home less money.

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