Define each of the following terms: g. Repatriation of earnings; political risk
Define each of the following terms:
Repatriation of earnings: A multinational corporation operates in many foreign countries. The cash flows generated in the foreign countries are either reinvested there, or distributed as profits. Sometimes, the company requires to remit the foreign cash flows back to the home country. This process of converting the foreign cash flows into home currency and transferring them to home country is called the repatriation of earnings.
Political risk: Political risks refer to potential action of the host government that would reduce the value of the company’s investment in foreign country. Exposure to political risk depends on the political relation between the domestic country and the host country. Host countries may impose certain restrictions on their foreign transactions which will ultimately affect the assets, investments, or the cash flows of the domestic company. When the host country limits the amount of foreign currency transactions, limited cash flows can be remitted to the parent country from the host country. Such restrictions are known as “Repatriation restrictions''. Parent companies may also face “Expropriation risks”. Expropriation risks arise when the host country seizes the assets of the parent company. Apart from these, the host country also regulates the prices of the products of the parent company. It may also lead to corrupt practises and a rise in expecting bribes.