Money, Banking, and International FinanceSuggestion 5 : Corruption is illegal within the corrupt country and usually a business's home
country. Some countries like the United States could pursue criminal charges if it catches a U.S.
businessman involved in corruption in a foreign country.
If businessmen or investors ignore the five suggestions and still want to invest in a highly
corrupt country, subsequently, they should use a local advisor to handle the government officials
and form friends and connections at high places.
Multinational enterprises can use eight strategies to minimize political and country risk,
which are:
Strategy 1: A multinational company can use fronting loans to reduce its transfer risk. For
example, a parent company deposits U.S. dollars (or euros) into an international bank in a safe
country. Then the international bank lends to the subsidiary, located in the foreign country.
Usually, a government allows a foreign business to repay loans to international banks. If a
government prevents repayment, then the government hurts its image, and the international
investors could avoid investing in the country.
Strategy 2: An international corporation or investor can use leverage. Unfortunately,
leverage has several meanings in finance. In our case, leverage means a firm or investor acquires
loans without increasing its equity. Simply, a firm borrows heavily within the foreign country. If
a firm experiences a conflict with the foreign government and exits the country, subsequently,
the firm could default on its loans and obligations. Default could spark a backlash against the
government, and this strategy is effective if a government seizes or nationalizes an industry.
Thus, the firm leaves the country and stops paying its loans.
Strategy 3: A firm artificially creates exports to transfer its funds outside the country,
minimizing transfer risk. For instance, the military in Burma had overthrown the government,
and it had imposed strong currency controls, preventing the outflow of currency from the
country. Unfortunately, Pepsi produced sodas within the country and could not transfer its
profits outside because of government restrictions. Instead, it bought beans with its profits; then
it exported and sold the beans to foreign consumers recouping its profits in U.S. dollars.
Strategy 4: Some firms have bargaining power with government, called special
dispensation. Thus, a firm could convince a government to transfer funds outside the country or
to demand exemptions. Companies specializing in high tech industries, pharmaceuticals, and
electronics have special dispensation. Many governments want these industries to operate within
their borders because these industries create spillover effects. For example, these industries use
skilled labor and strengthen a country's image and prestige. Moreover, the political leaders view
these industries vital for economic development, and they relax rules, regulations, and taxes to
attract these industries to their country. For example, the United States is suffering from a jobs
crisis since the 2007 Great Recession. Economic recovery is slow, and job growth has been
weak. Some firms threatened to leave a state and take the jobs with them unless the state
government reduces their taxes.
Strategy 5: A business could buy investment insurance from the home country or receive a
government guarantee. Insurance covers any profits that an investor loses from a project located
in a foreign country. Insurance could pay claims where a foreign government has expropriated
the business, or the business experienced a loss from a war, revolution, or riots.