Chapter 8: International Strategy 259international strategy, may have concerns about the stability of the national government
and the effects of unrest and government instability on their investments or assets.^110
A recent study also suggests that political risk in one country often spreads to others, as
in the Arab Spring revolutions among many mid-eastern countries.^111 To deal with these
concerns, firms should conduct a political risk analysis of the countries or regions they
may enter using one of the five entry modes. Through political risk analysis, the firm
examines potential sources and factors of noncommercial disruptions of their foreign
investments and the operations flowing from them.^112 However, occasionally firms might
use political (institutional) weaknesses as an opportunity to transfer activities or practices
that stakeholders see as undesirable for their operations in the home country to a new
market so they can continue earning returns on these questionable practices.^113
FIFA, the international soccer federation which sponsors world cup soccer matches
along with its regional and country affiliates, have come under heavy scrutiny for possible
corrupt practices, as illustrated in the Strategic Focus. Much of the alleged corruption
that has taken place has been indirectly supported by the nature of the governments and
institutions in which soccer is popular, especially in less developed countries. Bribes were
alleged to have been paid for Africa to receive the World Cup and the recent decisions
by FIFA to host the games in Russian and Qatar in 2018 and 2022 have come under ques-
tion.^114 Many of the countries, for example Brazil and Paraguay, are seeking to overhaul
their country soccer regulating bodies because of the scandal.^115
Russia has experienced a relatively high level of institutional instability in the years
following its revolutionary transition to a more democratic government. In an effort to
regain more central control and reduce the decentralized chaos, Russian leaders took
actions such as prosecuting powerful private firm executives, seeking to gain state control
of firm assets, and not approving some foreign acquisitions of Russian businesses. The
initial institutional instability, followed by the actions of the central government, caused
some firms to delay or avoid significant foreign direct investment in Russia. The risk-
iness of the situation has worsened as Russia has taken the Crimea from Ukraine and
used proxy rebels to fight in Eastern Ukraine. “The resulting U.S. and European Union
sanctions, in conjunction with falling oil prices, sent the Russian economy into a tailspin.
The ruble lost half its value, and, despite a muted recovery in oil and a boost to industry
from the devaluation, Russia’s economy is set to shrink by 2.7 percent this year [2015],
according to a World Bank report.”^116
8-5b Economic Risks
Economic risks include fundamental weaknesses in a country or region’s economy with
the potential to cause adverse effects on firms’ efforts to successfully implement their
international strategies. As illustrated in the example of Russian institutional instability
and property rights, political risks and economic risks are interdependent. If firms cannot
protect their intellectual property, they are highly unlikely to use a means of entering
a foreign market that involves significant and direct investments. Therefore, countries
need to create, sustain, and enforce strong intellectual property rights in order to attract
foreign direct investment.^117
In emerging economies, one of the significant economic risks is the availability of
important infrastructure to allow large industry players, such as miners, to have suffi-
cient electrical power in national grids to meet their power usage requirements. Often,
inefficient, state-owned electric power producers are forced to run intermittent black-
outs, which is devastating for continuous process manufacturing and refining such as
found in the mining industry. South Africa used to have a reliable electrical power
grid. However the state-owned electrical utility, Eskom Holdings Ltd., has neglected to
build new power plants and sufficiently maintain current operating generating plants.