Political and Economic Risks
Political risk can be defined as the threat that an enterprise faces during legislative changes in a country it has made investments. Also known as the geopolitical risk, political threats could be due to foreign policymakers, change in government, military control, or legislative bodies ( Kohler, 2017) . They are difficult to classify them into quantities as there is a minimal number of countries that could be used as case studies especially in the assessment of individual states. However, the result of political threats could make it impossible for international enterprises to withdraw capital or go to the extent of ruining them entirely.
Economic risk, on the other hand, can be described as macroeconomic conditions such as the regulations by the government, exchange rates, or political stability’s probability to affect a company's investment overseas. Economic threats are of major significance to international companies as they are riskier investments in comparison to domestic investment ( Armingeon, & Baccaro, 2012) . However, the risks associated with the economy could avail to investors a considerable number of opportunities such as foreign bonds. But also, these threats can be mitigated by selecting instant diversification through global mutual funds, by spreading the risk to different instruments, countries, international industries, or currencies.
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Political stability is interrelated with the economic risk in that when there is instability caused by any of the political factors, and foreign investors are more likely to hold on to the dollar and consequently, the dollars net worth inflates. The inflation of the dollar will cause a devaluation of the Argentinian Peso ( Kohler, 2017) . The depreciation will result in more of the pesos being used to by the dollar as investors would prefer the dollar to purchase securities that are dollar-denominated such as the United States' stock. An example is in the Argentina Currency Devaluation sheet where the company’s contribution after marketing is 69.30 ARS which are more units of the pesos compared to its equivalent n USD 16.10. This has been brought about by the fact that 4.2974 ARS are used to purchase USD 1.00; hence, the peso has less value in comparison to the dollar and thereby, affecting the company’s financials as it will be able to export more.
Effective Management of Political Risks
Companies can use a number of ways to decrease their financial risk of fluctuations in foreign exchange. For multinational companies that have operations in numerous countries, the threats can easily be ignored with the belief that gains in other markets will compensate for the losses in one market ( Armingeon, & Baccaro, 2012) . For others, they might consider hedging their risk in a particular market by purchasing contracts to buy the required exchange currency at a specific rate of exchange. The changes in the exchange rates minimize the threat of a loss for the contract and also decreases the upside possibility of a benefit as well.
Political threats can be managed by comprehending that they are critical to be considered in business as they assist in the maintenance of a differentiated portfolio. Even if the offshore company in question keeps all of its investments in Argentina, they will still be exposed to decisions made in other Latin American countries ( Baum, Schäfer, & Stephan, 2016) . Therefore, the company should contemplate on the maintenance of a portfolio that s diversified to avoid particular political threats that are essentially affecting the overall portfolio. Due to the political and consequent economic risks, the US company experiences a reduction in its Net revenue from USD 402.50 to USD 347.13 even as its landing cost also reduces from USD 226.50 to USD 195.26.
For overall protection against political threats, the company should get insurance against the risks through government bodies or other global insurance firms. The insurance will protect the company from events might lead to a loss like global or local political violence and unrest, sovereign debt default, acts of expropriation, and capital repatriation ( Peksen, & Son, 2015) . Furthermore, political risk can be managed better by protecting the logistics operations and supply chain from the threats associated with the politics of the native country. Political instability can impact on the company’s supplier operations like trade bans, inflated tariffs, and delays in delivery. Thus, the company should have in place a list of suppliers operating in other regions as a backup plan that will ensure the continuous production of expensive goods without any interruptions.
Findings
Apart from exporting that is heavily impacted by the exchange rate, the country can adopt a different mode of market entry. By establishing a local manufacturing plant, the company can have the advantage of dominating the Latin American market. Moreover, the company can instead of customizing its market programs, standardize them. Big multinational companies such as Coca-Cola, Henkel, and Gillette among others have been effective in their marketing programs and subsequent market their products by regulating their global and local markets ( Peksen, & Son, 2015) . By standardizing their market program, then they can enjoy the benefits of leveraging. Thus, the luxury goods company will manage duplication of some of its operations and costs of development among other gains.
The company can further improve on its distribution channel by ensuring that they adopt technology and reduce the unnecessary costs incurred by the distribution chain that is long and makes the product drag in reaching the customers. Selecting direct selling between the company and the consumer for its toothpaste through internet marketing could reduce significantly some of the risks that lead to its decreased profitably ( Reinhart, 2002) . Additionally, internet marketing will help the company not only ensure the fast delivery of the goods but also minimize the costs of marketing. The retailers can then be used to penetrate the more rural markets that cannot be accessed by technology.
References
Armingeon, K., & Baccaro, L. (2012). Political economy of the sovereign debt crisis: The limits of internal devaluation. Industrial Law Journal , 41 (3), 254-275.
Baum, C. F., Schäfer, D., & Stephan, A. (2016). Credit rating agency downgrades and the Eurozone sovereign debt crises. Journal of Financial Stability , 24 , 117-131.
Kohler, K. (2017). Currency devaluations, aggregate demand, and debt dynamics in economies with foreign currency liabilities. Journal of Post Keynesian Economics , 40 (4), 487-511.
Peksen, D., & Son, B. (2015). Economic coercion and currency crises in target countries. Journal of Peace Research , 52 (4), 448-462.
Reinhart, C. M. (2002). Default, currency crises, and sovereign credit ratings. the world bank economic review , 16 (2), 151-170.
