National transnational and civil society actors can pose a risk to political stability. Political risk has increased at every level over the past decade.
- Transnational/geopolitical risks rise when countries’ interests in the defined policy terms collide. Global conflicts have been a result of global trade and investment barriers that have increased by 257% in the past decade.
- National risks are caused by economic instability or government policies that have a negative impact on the domestic market and businesses. As the year progresses, democratic sentimentality is rising at the national level.
- Societal risk is when trade unions and consumer groups organize protests or boycotts. It has a negative impact on global markets and businesses. An analysis of sentiments reveals that negative feelings towards foreign companies are contributing to an increasingly uncertain policy environment.
How political risk affects business performance
Political risk is a combination of multiple problems that can materially impact a company in many ways. These areas are where political risk can have a significant impact.
- Sales reduction
- Production & Operations disruption
- Forcefully transferring intellectual capital results in an increase in research and development costs
- Foreign direct investment can be hampered by security concerns
- Due to the fact that investors and creditors view corporations with political risks as being risky, high capital cost
- Costs of regulation compliance are increased
- Governance challenges that reduce accountability and transparency
- Political reactions can cause the loss of social license
Corruption threat can be mitigated with different regulatory strategies, while the financial impact due to adverse political happening can be mitigated with credit and political risk insurance.
Political risk is a significant cross-enterprise unavoidable threat that can be devastating to a company’s reputation. It requires a holistic approach in order to increase their growth potential and protect their reputation. The company can reduce the negative sales impact by sourcing strategically and implementing domestic recruitment to mitigate regulation.
Different regulatory strategies can mitigate the corruption threat, while financial consequences due to adverse political events can be minimized by policy. Niche Trade Credit brokers have extensive experience in protecting Australian businesses against political violence, asset seize, and other risks.
The purpose of political risk coverage is to protect your commercial assets, properties, and income from the consequences of political events. It is difficult to predict the impact of political risks on income and assets. MNCs have great opportunities in emerging markets to expand and gain a significant market share.
They do have inherent risks that are greater than those in developed markets. Foreign government actions, socioeconomic factors, and political turmoil can all lead to asset destruction, confiscation, and even decline. Coverage businesses might have difficulty leveraging emerging markets without political risk.
The areas that are covered by political risk are –
- Expropriation, nationalization, and confiscation
- Forcible divestiture
- Deprivation
- Forcible abandonment
- Selective discrimination
- Cancellation or revocation of license
- Business interruption
- Breach concession
- Political violence
- Terrorism & War
- Export embargo
- Conversion of currency
Different insurance providers offer different levels of protection for political risk. Be familiar with your policy terms before you make any claims. The type of policy you have will determine the exact coverage. The policy might protect you against terrorist attacks on your oil rig, but not when political unrest causes the drop in oil prices. Make sure you understand your policy on political risk protection.
Trade credit insurance is best for entrepreneurs who are able to offer credit terms to customers. This