Explain the integrative, protective, and defensive techniques MNCs use to respond to political risks
Political Risks & Mitigating Techniques
A business entity runs its operations in a combination of micro and macro environment. This integration becomes more complex and technical when a company moves to global platform. MNCs often face barriers in exploring international markets due to political structures and government policies. This form of risk becomes more adverse with a change in governmental policy which negatively impacts the foreign companies’ operations in the respective local market (Jensen, 2008). The three strategies, which are used by MNCs, to mitigate the political risks are as followed:
Integrative techniques. Integrative techniques allow an MNC to develop and manage its subsidiary according to the local cultural needs and wants (Gupta, 2013). By pursuing these techniques, an MNC develops and strengthens sound relationship with the operating country. The foreign companies manufacture the products locally to meet the local standards and regulations. To avoid the political risk and potential violation of the regulation, the foreign companies often create joint ventures with the local companies. Moreover, they make effective and strong relationships with the labor union to generate their local support and avoid strikes or business closure.
Protective & defensive techniques. These strategies encourage the companies to avoid integration with the local government (Gupta, 2013). They protect themselves from the political risks by avoiding establishing the manufacturing facilities in a host country. A foreign company doesn’t let the host country manager handles all the business operations. Major responsibilities are controlled by the home office. Moreover, it diversifies the manufacturing among different countries. This strategy splits and minimizes the risk (Aswathappa, 2008).