Sensors Guide for POL1005
SECTION I
1. Discuss any three important tools which Multi-National Companies (MNCs) can utilize to
mitigate political risk.
Sensors’ Guide: The student must answer on various risk mitigating tools available to
MNCs to counter political risk. They must talk at least three of the following tools: (i)
Bilateral investment treaties, (ii) International Centre for Settlement of Investments
Disputes (ICSID), (iii) Political Risk Insurance, (iv) Structuring/Tailoring operations (at
firm level) which include: restructuring the capital structure like forming joint ventures,
reducing their equity ownership, restructuring leverage, lobbying, campaign funding,
aligning firm’s goals with local politicians goals, (v) micromanagement which include:
engaging in local community programs (specially for natural resource companies),
encourage some form of direct host government participation, partner state-trading
corporations in the business, finance investments through borrowings from a local bank(s)
and getting a multilateral institutions to be an investor
2. What is resource nationalism? Discuss the three forms of resource nationalism.
Sensors’ Guide: The answer must focus on explaining in their own words what resource
nationalism is. They must discuss the three forms of resource nationalism in their own
words which are: (i) Revolutionary resource nationalism, (ii) economic resource
nationalism, (iii) historical conditional resource nationalism.
The answers must be considered even if the students write about these three forms
of resource nationalism without mentioning their names ‘as it is’!
3. Does democracy moderate the obsolescing bargain mechanism? Illustrate.
Sensors’ Guide: The answer must focus on how and why foreign investors are attracted
to democracies when making their investments. More specifically what advantages
democracies provide to foreign investors which autocracies cannot.
4. Why firms operating in natural-resource industry are more prone to risk of obsolescing
bargain mechanism?
Sensors’ Guide: The answers must more or less talk about atleast some of these features
namely, Substantial capital investments (huge fixed assets / LDCs lack capacity), Long
time-horizon (recouping investments takes time / never ending rents), Mature technology
(vertical integration difficult / learning curve easier), Commercial risk (risk-premium
(unfair) demands / fiscal take), High returns IF exploration succeeds (redistribution
demands / lucrative revenue stream), Substantial price fluctuations (windfall profits),
Natural resources (limits choices / nationalism).
5. Prepare causal chain analysis of political risk faced by the foreign companies in mining
industry in Indonesia as illustrated in the two case studies below. The causal chain
analysis should be prepared for both case studies separately highlighting the actors
involved; sources of political risk; political risk effects; and parties affected.
Sensors’ Guide: They must identify who are the actors involved, who are the parties who
got affected, sources or root causes of political risk and finally the particularities of the
event which are harmful for foreign investors.
SECTION II
Answers for multiple choice questions:
1. C
2. D
3. B
4. A
5. A
6. A
7. D
8. A
9. D
10. B
SECTION III
1. Define Political Risk
Sensors’ Guide: can define as they want as long as it covers two things (a) government
actions which are intended to harm foreign firms and (b) socio-political events
2. What is the difference between Foreign Direct Investments (FDI) and Foreign Portfolio
Investments (FPI)?
Sensors’ Guide: Again can define in their own words as long as they draw atleast one clear
distinction between the two forms of investments.
3. What is time inconsistency problem?
Sensors’ Guide: Again can define in their own words as long as they highlight that it is a
policy which governments can’t sustain in the long run which becomes harmful for foreign
investors in the long run.
4. What is Extraterritoriality?
Sensors’ Guide: Again can define in their own words as long as they talk or point out the
fact that the operation of laws upon persons existing beyond the limits of the enacting state
but who are still amenable to its laws.
5. List four symptoms of ‘state capitalism’
Sensors’ Guide: If the list any of the four out of the following:
•
•
•
•
•
Advocates ‘Protectionism’
State-owned enterprises (SOEs)
‘National champions’ (pvt. owned)
Sovereign wealth funds (SWFs)
National oil companies (NOCs)
Grade scale is as follows:
86 > points
=A
71 – 85
=B
56 – 70
=C
41 – 55
=D
26 – 40
=E
< 25 points
=F