Page 66 - DMGT547_INTERNATIONAL_MARKETING

Unit 3: Political Environment of International Marketing

Private Insurance: Through ignorance, a large number of companies end up as self-insurers. A Notes
better plan would be to follow Club Med’s example by shifting political risk to a third party
through the purchase of political insurance. Its insurers handsomely compensated NBC, when it
had to cancel its telecast of the 1980 Moscow Olympic Games when President Carter prohibited
US athletes from participating as a protest against the Soviet Union invasion of Afghanistan.
Although property expropriation seems to be the most common reason for obtaining political
insurance, the policy should include coverage for kidnapping, terrorism and creeping
expropriation. Information about most companies’ coverage of this nature is very scarce because
revelation of such coverage would only serve to encourage such activity.
Government Insurance: Multinationals do not have to rely solely on private insurers. There are
non-profit, public agencies that can provide essentially the same kind of coverage. For US firms,
the two primary ones are Overseas Private Investment Corporation (OPIC) and FCIA. In India,
we have United Insurance Company, General Insurance Company and so on. All these companies
are business-oriented agencies whose purpose is to support the government’s private investment.
These companies provide several forms of assistance with political risk insurance as its primary
business. It has three types of insurance protection to cover the risks of (i) currency inconvertibility
(ii) expropriation (including creeping expropriation) and (iii) loss on damage caused by war,
revolution or insurrection. A typical insurance contract runs upto 20 years at a combined annual
premium of 1.5% for all three coverages. Considering that private insurers issue a three year
policy, OPIC’s coverage is a positive feature.
Motorola Inc. provides a good illustration of how OPIC works. In 1993, Motorola won a bid to
install, operate and maintain cellular telephone service in Nicaragua. Nicaragua has a crumbling
infrastructure, a very poor landline telephone system and an ailing economy. Motorola’s
telephone service was one of the biggest private foreign investments in Nicaragua. OPIC provided
$ 7 million in financing and $ 8 million in insurance against expropriation and political violence.
The assistance was instrumental in the company’s decision to enter the Nicaraguan market.

Self Assessment

Fill in the blanks:
7. To manage political risk, an ..................... can pursue the strategy of either avoidance or
insurance.
8. Multinationals do not have to rely solely on ..................... insurers.
9. ..................... must understand that privatisation is a political process.

10. In ..................... , Motorola won a bid to install, operate and maintain cellular telephone
service in Nicaragua.
11. .................................. plays an important role both with multinational and local firms because
it has a number of competitive implications

3.5 Super-national Organisations and International Institutions

A supranational union is a type of multi-national organization where negotiated power is
delegated to an authority by governments of member states. An international organization is
an organization with an international membership, scope, or presence. Following are the
institution:

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