Internal and Domestic Companies
Essay Preview: Internal and Domestic Companies
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For any company that operates internationally, the term political risk refers to risk regarding a host countrys political decisions and whether or not those decisions will have a detrimental effect on the companys overall profits or objectives. As an example, a political decision by a government about taxes, labor laws, or environmental regulations could have adverse effects on a business profitability. In relation to this, non-economic factors such as terrorism or international wars may also pose as potential political risk for a company.
Founded in 1962 by Sam Walton, incorporated in 1967, and publicly traded on the NYSE by 1972, Wal-Mart rose to power as the largest company in the world by 2002, just ten years after the passing of its founder. Operating, in general, with three types of stores, Wal-Mart established itself as an incredibly successful power in their domestic retail market before they ventured into the international market. Wal-Mart has over 8,000 stores in 15 different countries. While these stores may operate under different names in different countries, the brand is still the same. Some of the countries where it operates are the United States, Mexico, India, Japan, the United Kingdom, China, and several more. Based strictly on the governments of some of these countries, it is clear that Wal-Mart faces political risk. As a retail superpower in the US, Wal-Mart is faced with a great deal of political risk when entering a new international market. For example, if a country imposes trade barriers to limit or prevent international trade, Wal-Mart could be negatively impacted. Their profits are based strictly on the ability to import and export goods from country to country, so if something is set in place to prevent such trade their overall profitability is bound to take a hit. Another possibility is that a country may ask for additional payment from a company in order to be allowed to export items into their borders. Such payments, or tariffs, restrict the possible revenues to be earned. Another aspect of political risk that could affect Wal-Mart is a countrys currency exchange rate, or value of that countrys currency. For example, if Wal-Mart were to start doing a heavy amount of business in Japan and for whatever reason the value of the Japanese Yen were to drop significantly, any profits made in yen will yield a much smaller value in USD as a result of the drop in value of the Japanese Yen.
While these risks are faced by a domestic company like Wal-Mart, it isnt right to assume that even foreign companies operating internationally dont face the same risks. For example, any foreign automobile manufacturer will face the same, if not more political risk when trying to expand its product throughout the global marketplace. Volkswagen is the largest automotive company