Keith’s concerns with establishing Greenfield ventures in Bolivia and Peru

Keith’s concerns with establishing Greenfield ventures in Bolivia
and Peru

Keith’s concerns with establishing Greenfield ventures in Bolivia and Peru, at the urging of the head of Zip- 6’s Brazilian unit and you discussed some entry alternatives. In this Assignment, you are asked to assume the role of a Zip-6 Business Analyst preparing a report for Ravi and Keith outlining the possible economic and political risk factors involved in establishing plants within these two countries. For this Assignment, research the following web resources:
Look up Bolivia and Peru on the CIA Fact Book site and the Michigan State University globalEDGE
site by placing the links below in your browser:
CIA Fact Book:
Michigan State University globalEDGE™ website:
Respond to the following checklist items:
Analyze the possible political risks in building plants in each of these countries (Bolivia and
Analyze the possible economic risks in building plants in each of these countries (Bolivia and
Outline these risk factors for each country in your report
Political Risk Factors according to Hill, (2011) refers to “The likelihood that political forces [or the
government] will cause drastic changes in a country’s business environment that will adversely
affect…goals of a business enterprise” (p.82).
Economic Risk Factors according to Hill, (2011) refers to “The likelihood that economic
mismanagement will cause drastic changes in a country’s business environment that hurt the profit or

other goals of a particular business enterprise” (p. 83).
Hill, C.W. (2011). Global business today (7 ed.). New York, NY: McGraw- Hill.
Respond in a minimum of 1 page in APA format to this Assignment
Reading for pages 82 and 83
A number of political, economic, and legal factors determine the costs of doing business
in a country. With regard to political factors, a company may have to pay off politically
powerful entities in a country before the government allows it to do business
there. The need to pay what are essentially bribes is greater in closed totalitarian states
than in open democratic societies where politicians are held accountable by the electorate
(although this is not a hard-and-fast distinction). Whether a company should
actually pay bribes in return for market access should be determined on the basis of
the legal and ethical implications of such action. We discuss this consideration in
Chapter 4, when we look closely at the issue of business ethics.
With regard to economic factors, one of the most important variables is the sophistication
of a country’s economy. It may be more costly to do business in relatively primitive
or undeveloped economies because of the lack of infrastructure and supporting
businesses. At the extreme, an international firm may have to provide its own infrastructure
and supporting business, which obviously raises costs. When McDonald’s decided
to open its first restaurant in Moscow, it found that to serve food and drink indistinguishable
from that served in McDonald’s restaurants elsewhere, it had to vertically integrate
backward to supply its own needs. The quality of Russian-grown potatoes and
meat was too poor. Thus, to protect the quality of its product, McDonald’s set up its own
dairy farms, cattle ranches, vegetable plots, and food processing plants within Russia.
This raised the cost of doing business in Russia, relative to the cost in more sophisticated
economies where high-quality inputs could be purchased on the open market.
As for legal factors, it can be more costly to do business in a country where local laws
and regulations set strict standards with regard to product safety, safety in the workplace,
environmental pollution, and the like (since adhering to such regulations is costly). It can
also be more costly to do business in a country like the United States, where the absence
of a cap on damage awards has meant spiraling liability insurance rates.

It can be more costly to do business in a country that lacks well-established laws for regulating business
practice (as is the case in many of the former Communist nations). In the absence of a
well-developed body of business contract law, international firms may find no satisfactory
way to resolve contract disputes and, consequently, routinely face large losses from contract
violations. Similarly, local laws that fail to adequately protect intellectual property
can lead to the theft of an international business’s intellectual property and lost income.
As with costs, the risks of doing business in a country are determined by a number of
political, economic, and legal factors. Political risk has been defined as the likelihood
that political forces will cause drastic changes in a country’s business environment that
adversely affect the profit and other goals of a business enterprise. 66 So defined, political
risk tends to be greater in countries experiencing social unrest and disorder or in countries
where the underlying nature of a society increases the likelihood of social unrest.
Social unrest typically finds expression in strikes, demonstrations, terrorism, and violent
conflict. Such unrest is more likely to be found in countries that contain more than one
ethnic nationality, in countries where competing ideologies are battling for political control,
in countries where economic mismanagement has created high inflation and falling
living standards, or in countries that straddle the “fault lines” between civilizations.
Social unrest can result in abrupt changes in government and government policy or,
in some cases, in protracted civil strife. Such strife tends to have negative economic
implications for the profit goals of business enterprises. For example, in the aftermath
of the 1979 Islamic revolution in Iran, the Iranian assets of numerous U.S. companies
were seized by the new Iranian government without compensation. Similarly, the violent
disintegration of the Yugoslavian federation into warring states, including Bosnia,
Croatia, and Serbia, precipitated a collapse in the local economies and in the profitability
of investments in those countries.
More generally, a change in political regime can result in the enactment of laws that
are less favorable to international business. In Venezuela, for example, the populist socialist
politician Hugo Chavez won power in 1998, was reelected as president in 2000,
and was reelected in 2006. Chavez has declared himself to be a “Fidelista,” a follower of
Cuba’s Fidel Castro. He has pledged to improve the lot of the poor in Venezuela
through government intervention in private business and has frequently railed against
American imperialism, all of which is of concern to Western enterprises doing business
in the country. Among other actions, he increased the royalties foreign oil companies
operating in Venezuela have to pay the government from 1 to 30 percent of sales (see
the Country Focus, “Chavez’s Venezuela”).
Other risks may arise from a country’s mismanagement of its economy. An economic
riskcan be defined as the likelihood that economic mismanagement will cause drastic
changes in a country’s business environment that hurt the profit and other goals of a
particular business enterprise. Economic risks are not independent of political risk. Economic
mismanagement may give rise to significant social unrest and hence political risk.
Nevertheless, economic risks are worth emphasizing as a separate category because
there is not always a one-to-one relationship between economic mismanagement and
social unrest. One visible indicator of economic mismanagement tends to be a country’s
inflation rate. Another is the level of business and government debt in the country.
In Asian states such as Indonesia, Thailand, and South Korea, businesses increased
their debt rapidly during the 1990s, often at the bequest of the government, which was
encouraging them to invest in industries deemed to be of “strategic importance” to the
country. The result was overinvestment, with more industrial (factories) and commercial
capacity (office space) being built than could be justified by demand conditions.

Many of these investments turned out to be uneconomic. The borrowers failed to
generate the profits necessary to service their debt payment obligations. In turn, the
banks that had lent money to these businesses suddenly found that they had rapid increases
in nonperforming loans on their books. Foreign investors, believing that many
local companies and banks might go bankrupt, pulled their money out of these countries,
selling local stock, bonds, and currency. This action precipitated the 1997–98
financial crises in Southeast Asia. The crisis included a precipitous decline in the value
of Asian stock markets, which in some cases exceeded 70 percent; a similar collapse in
the value of many Asian currencies against the U.S. dollar; an implosion of local demand;
and a severe economic recession that will affect many Asian countries for years
to come. In short, economic risks were rising throughout Southeast Asia during the
1990s. Astute foreign businesses and investors limited their exposure in this part of the
world. More naive businesses and investors lost their shirts.
On the legal front, risks arise when a country’s legal system fails to provide adequate
safeguards in the case of contract violations or to protect property rights. When legal
safeguards are weak, firms are more likely to break contracts or steal intellectual property
if they perceive it as being in their interests to do so. Thus, a legal risk can bedefined as the likelihood that a trading partner will opportunistically break a contract
or expropriate property rights. When legal risks in a country are high, an international
business might hesitate entering into a long-term contract or joint-venture agreement
with a firm in that country. For example, in the 1970s when the Indian government
passed a law requiring all foreign investors to enter into joint ventures with Indian
companies, U.S. companies such as IBM and Coca-Cola closed their investments in
India. They believed that the Indian legal system did not provide for adequate protection
of intellectual property rights, creating the very real danger that their Indian partners
might expropriate the intellectual property of the American companies—which for
IBM and Coca-Cola amounted to the core of their competitive advantage.


………………………………Answer preview……………………………

Before a firm decides to open up a branch or an individual decides to open a business in a foreign nation, it has to consider various risks associated with running the business in that particular nation. These risks range from economic, political and legal risks. This paper is going to talk about the economic and political risks associated with running a business in Peru and Bolivia………………………….


470 words

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