Political risk management practices of Multinational Corporations: their approaches to deal with developing countries under economic sanctions

Abstract

This article explores adjustments to the traditional political risk management practices followed by Multinational Corporations (MNCs) in their international operations to incorporate an increasingly concerning risk arising from the more frequent imposition of economic sanctions on developing countries over the last ten years for political purposes. In order to identify the main determinants of this risk and its consequences, a literature review is conducted, highlighting the models proposed by Tsebelis (1990) and Kakutami (2017) as the main frameworks to understand the dynamics for sanctions impositions, their frequency and the management of this risk by traditional MNCs from developed countries. Kakutami’s model is further enhanced in this article with a game theoretical model to understand the dynamic behavior of MNCs under this context, considering evidences of a growing presence in international markets of MNCs from developing countries, whose motivations for their expansion are explored. Finally, different political risk mitigating strategies are reviewed to explore their suitability to MNCs, with particular emphasis on the use of insurance to cover this risk and its effects on MNCs’ willingness to engage with sanctioned countries. As a general finding, from a reputational point of view, MNCs should take a more active role in their network analysis to identify their direct and indirect exposure to this risk, given the more frequent imposition of sanctions with an extraterritorial reach.