Political Risk Essay Example

A general barrier to entry is often the stability of the country of choices economic and currency stability in regards to the currency with the gold reserves revaluation, which took place in December 1971; Libya retained its existing parity with gold. As a consequence, the dollar value of the Dinar rose from US$2.80 to US$3.04, where it was kept until 1974 when it moved to LD1 equal to US$3.3778.

The Dinar was maintained at this rate until March 1986 floating rate linked to the SDR. This move resulted in a 10-percent decline in the value of the Dinar, but has served to make it stable even though it has devalued it will in the long term draw foreign investment and therefore improve the financial, and global situation of the country. Other barrier's will be posed as the world has an educated awareness of the health risk associated with smoking and these may result in specific tax regulations put in place on cigarettes.

Political Risk

The importance of political risk needs to be considered but despite the extreme consequences very little time or money is invested in the research that this area deserves, many authors have written on this matter on both sides of the Atlantic, Rummel and Heenan(1978) they suggest that ad hoc methods are still employed, as Kobrin stated in 1979 it is known that this risk exists but analysis of this is superficial and subjective therefore it is not incorporated in any of the decision making apparatus. But looking at the recent turn of events since

September 11th and the Iraq war, it proves just how crucial this should be in the decision making process. Before political risk can be quantified it must be defined Shubik (1983) differentiates between political risk and uncertainty, the paper by Rummel and Heenan (1978). In the case with Libya their main political risk is that they re not ready for global competition and that there are a lack of legal structures in place to host competition (lack of contact with the rest of the economic society for so long has lead to this), the only hindrance that this, may cause is that the government may impose regulatory restrictions until local firms have caught up as mentioned earlier the two types of barriers the economic one that relates to competition may be exercised here.

One cannot rule out terrorism in a political risk analysis as in Spain when Etta did bombings because they were against some of the government decisions hoping to scare of the tourist trade and also evident in Egypt. Bat was in Burma when the terrorist attacks took place on Ms Suu Kyi, and home political pressures forced BAT to withdraw from Burma, BAT Head of investing and corp. strategy stated "Tobacco companies have enough reputation problems hanging round their necks without adding other. Reducing this reputation risk will make a positive contribution to shareholder value" if that were to happen in Libya then Bat may need to pull out again, with so much time and money invested that is not an easy decision to make for a CEO. 

Although it may be beneficial to move manufacturing to Libya due to close proximity to Kenya where BAT have leaf plantations, Libya's own infrastructure is poor, it has no rail service, a very poor telecommunications networks, but being modernised with the introductions of a cellular telephone system in 1996 and only 500,000 main telephones in operation that's less than 10%, these facts are from the CIA World Fact book. However as any developing country these are due to be advanced with the rail network plans including a linking network between Tunisia, Egypt and sub-Saharan Africa.

When a company plans to make an investment of any kind it will calculate from some data how much their cost of capital will be they will compare the possible returns with those of if they put it into a risk free investment the method used is called Capital Asset Pricing Model (CAPM).

This must be calculated to establish the cost of capital normally defined as the minimum risk adjusted rate of return before an investment decision can be made it is going to form part of the companies general investment portfolio as different assets are financed by different means and have differing returns this is why the Weighted Average Cost of Capital is worked out instead or as well as CAPM. (See Appendix 2 for CAPM). After the CAPM has been calculated then the NPV can be calculated ad in appendix 3 and an investment decision can be concluded bearing in mind all the qualitative factors not jus the results of the figures.


In conclusion I would as management of the BAT Company take on the investment as the advantages specified would outweigh the potential political and financial risks that are present and also the possible barriers to entry.

Since the news coverage of what is referred to as the Enron Scandal which lead to the demise of the company much emphasis has been put onto the way that accounts are presented in regards to creative accounting there has since been much call for a harmonisation of the accounting standards so that international accounts can be compatible with each other. The reason why the accounting reports must be clear simple and in compliance is very simple. Shareholders who have invested their time and money into the company, have appointed the principles who are the management to run the company.

A problem will arise if there is not clear communication between the owners and the people who run the company. After the 'scandal' with Enron it is very important for these investors and possible future investors to have trust in the companies that they invest in, therefore to rebuild the trust is a big issue, and the lack of trust in the accounting profession, will render it obsolete. Many companies have taken steps to rebuild confidence by making active efforts to be in compliance with the various standards set out, and if there was a harmonisation between the likes of the UK GAAP the US GAAP, if this were accomplished then it would increase investor confidence.

The needs for this are even simpler as the information is made for a wide range of people, and as we can see if a company has subsidiaries the information of a multinational may be assed by a person outside of that country as part of the growing multinational environment. If these rules and regulations could be harmonised throughout the world it would increase reliability, comparability, and increase the soundness of auditing

Also preparing internal information for the appraisal of performance of subsidiaries in different countries would be much easier. Investment appraisal, performance evaluation, and other decision-making techniques of management accounting would greatly benefit from harmonisation. A good example of the need for harmonisation comes about in the inventory valuation, in three main trading countries Japan, UK and US different methods are used, and these differences can have a large effect on earnings or shareholders equity making the accounts from different countries little use when comparing their position in order to make an investment decision. Finally if all of this takes place then the cost of capital should fall due to the reduced risk to investors.