Political Risk

12 Key excerpts on "Political Risk"

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  eBook - ePub

  Public Private Partnerships in Nigeria

  • George Nwangwu(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  4

  Second, Political Risk has been viewed as arising out of government or sovereign action. In this regard, Political Risk may be described as “any activity of the state resulting in the reduction of companies’ value and capital”.5 It may also be defined in this regard as “arbitrary or discriminatory actions taken by home or host governments, political groups or individuals that have an adverse effect on trade or investment transactions”.6 This category of definitions of Political Risk has been criticised for looking at Political Risk only from the angle of negative unwanted consequences of political activity from host governments.

  The assumption that Political Risk is always negative may not be a universally valid assumption as the occurrence of a Political Risk event may also lead to positive outcomes.7 As Robock explained, “yet as in the case of other types of risks, Political Risk can result in gains as well as losses”.8 Haendel supports this position in his definition of Political Risk as “the probability of the occurrence of some political event that will change the prospects for the probability of a given investment”.9 This perception of Political Risk is consistent with the general appreciation of risk in this book as having both a negative and a positive effect. An example of how a positive outcome can result from the existence of Political Risk is given by Kobrin regarding the increase in business for companies involved in the armoured car industry as a result of the political instability in Argentina.10

  The third category of definitions views Political Risk in terms of changes in the business environment. According to Robock and Simmonds, Political Risk in an international investment exists when three factors are present: (1) when discontinuities occur in the business environment, (2) when they are difficult to anticipate, and (3) when they result from political change.11

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  Rethinking Political Risk

  Concepts, Theories, Challenges

  • Cecilia Emma Sottilotta(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  laissez-faire government has lost much of its appeal to business theory and practice.

  The third definition is perhaps the most precise from the semantic point of view, because it rightly considers Political Risk not simply in terms of events but rather in terms of the likelihood of events (harmful to an MNE’s operations). If the aspect of probability calculation is overlooked, by conceptualizing Political Risk in terms of mere ‘events’ which can have an impact on a firm,6 one might end up behaving like the proverbial fool who, when a finger is being pointed at the moon, only looks at the finger. Political Risk calculation is an intrinsically forward-looking task (on this point, see Chapter 2 ), and Political Risk may well be structurally high, and be perceived as such by a firm, even in the current absence of possibly harmful events.

  The fourth category of definitions is broader, since it focuses on the business environment rather than on the individual firm. The influential definition provided by Robock (1971) deserves a closer look:

  Political Risk in international business exists (1) when discontinuities occur in the business environment, (2) when they are difficult to anticipate, (3) when they result from political change. To constitute a risk these changes in the business environment must have a potential for significantly affecting the profit or other goals of a particular enterprise

  (p. 7)

  The idea of an existing, observable discontinuity in the business environment is quite common in definitions of Political Risk. Once again, it is important to underscore a point: even situations which apparently look stable – and that have been so for a relatively long time – may in fact be extremely risky. The notion of latent variables in statistics effectively illustrates this concept.7 Risk can be thought of as the likelihood of a certain event taking place. What is subsequently observed is, in fact, a binary outcome: either the event does take place or it does not. The idea behind latent variables is that they are generated by an underlying propensity for a particular event (say, a general strike, a revolution or a mere act of expropriation) to occur. The political scenario in a country may look stable because it actually is stable, or, paradoxically, it can look stable in a given moment notwithstanding the fact that the political regime in force is about to collapse. A quite effective example thereof can be provided by recalling that, on December 31, 1977, President Carter famously toasted the Shah of Iran for representing “an island of stability in one of the more troubled areas of the world” (Carter, 1977). In the wake of the subsequent and unforeseen Iranian revolution and of the Soviet invasion of Afghanistan, however, PR analysts and scholars such as Brewers had to acknowledge the fact that “the past stability of an authoritarian regime should not be taken as a predictor of future stability” (Brewers, 1981, p. 8). This lesson has proved valid also for the Middle East and North Africa (MENA) countries which experienced drastic political change in the form of revolution in early 2011 (on the Arab Spring as a PR case study, see Chapter 3

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  Foreign Investments And The Management Of Political Risk

  • Dan Haendel(Author)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  my firm?”

  Although identifying the sources of “Political Risk,” Franklin Root skirts the problem of definition. He notes that a company investing abroad faces “a wide spectrum of Political Risks that are generated by the attitudes, policies, and overt behavior of host governments and other local power centers such as rival political parties, labor unions, and nationalistic groups.”14

  Greene defines Political Risk as “that uncertainty stemming from unanticipated and unexpected acts of governments or other organizations which may cause loss to the business firm.”15 This definition of Political Risk assumes loss to the business enterprise, but, as pointed out earlier, the definition advanced here includes the possibility of loss but also the opportunity for gain.

  These varying definitions of the same term obviously suggest that there is considerable ambiguity, if not confusion, over what Political Risk is. Clearly, the distinction has not been made between the probability of occurrence of an undesired political event(s) and the uncertainty generated by inadequate information concerning the occurrence of such an event(s). Yet this distinction, which some have termed an objective as opposed to a subjective risk estimate, is crucial to Political Risk assessment.

  Knowledge of the political environment in which the business operates or will operate can reduce the uncertainty involved in decisions about overseas investment. Although the processing of the information is unquestionably subjective, this knowledge allows the businessman to make better calculations regarding the probability that certain types of undesirable political events will occur. Moreover, the businessman should also be monitoring political events that would allow his firm to undertake profitable ventures. The isolation and identification of political factors that can adversely or positively affect the foreign investor is a difficult task, which must be followed by the equally difficult task of measuring and aggregating these factors in a manner allowing for forecasting. If the businessman considering an investment overseas wants knowledge of comparative Political Risk across countries, he encounters the additional methodological problem of standardizing risk estimates across political systems.

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  People, Risk, and Security

  How to prevent your greatest asset from becoming your greatest liability

  • Lance Wright(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  55 © The Author(s) 2017 L. Wright, People, Risk, and Security, DOI 10.1057/978-1-349-95093-5_5 5 A Primer on Political Risk and Terrorism The thoughtful business executive or organization leader who wishes to understand the world of Political Risk and terrorism has to successfully navigate waters that are populated today with newspaper and television sharks looking to capitalize on the next sensationalist event to boost rat- ings or sell their publications. The waters are also populated by intel- ligence and security professionals who see a potential terrorist lurking behind every bush or building because of their training and their personal experiences that may sometimes have included dangerous encounters. Political Risk has been around for a very long time. So has terrorism, as we will discuss a little later in this chapter. Leaders of caravans in far- away deserts thousands of years ago had to contend with Political Risk. Centuries ago, British merchants interested in expanding the reach of their mercantile activities dealt with Political Risk. The United States Marine Corps hymn contains the lyrics, ‘To the shores of Tripoli’. It is a reference to the military intervention in 1805 in support of American merchants whose ships were often the seized by pirates along the Barbary Coast of North Africa. In more recent times, large multinational busi- nesses have normally been subject to Political Risk. However, today’s 56 global business village (with its cyber connections) means it is possible that smaller companies may be subject to Political Risk as well. The Basics of Political Risk Political Risk is a specialty field within risk management that looks at the impact that government actions or political actions can have upon a business’s investment(s) or operation(s) in a country or region. The politi- cal climate in a country or changes in the politics can impact business operations. Political Risk can also be impacted by military action within a country.

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  Managing Country Risk in an Age of Globalization

  A Practical Guide to Overcoming Challenges in a Complex World

  • Michel Henry Bouchet, Charles A. Fishkin, Amaury Goguel(Authors)
  • 2018(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  This limited scope ignores the fate of importers and exporters, consultants, contractors, and NGOs, as well as domestic economic agents who are also exposed to Political Risk in their own country. In addition, the restricted focus of this definition reduces the consequences of Political Risk to financial losses only. However, other manifestations of Political Risk are bureaucracy, bad governance, abrupt regulatory changes, opacity, institutional deficiencies, or even crimes and kidnapping. 9.2 Defining Political Risk Whereas political uncertainty refers to instability and threats in the sociopolitical system, Political Risk is the unexpected unfavorable consequences of the arbitrary exercise of power by a government or by nongovernmental actors (including its domestic and foreign ramifications). Overall, political uncertainty stems from a deficit of information and economic intelligence regarding a specific Political Risk. As discussed in Chapters 1 and 2, uncertainty is subjective as the assessment of the likelihood of a specific event depends on diverse perceptions as well as previous experience and risk exposure. Risk, in turn, represents a single outcome associated with a specific event. Exchange rate overvaluation triggers uncertainty whereas a central bank’s devaluation triggers risk. The threat of a general strike generates uncertainty whereas roadblocks and urban guerrillas create risk. A careful information-based analysis will thus transform the assessment of uncertainty into the assessment of risk, thereby creating the basis for risk mitigation strategies, such as reduced exposure or insurance. Unexpected discontinuities that occur in the sociopolitical system can result in a wide range of consequences depending on the specific exposure of domestic versus foreign economic agents. A risk matrix is therefore required to link exposure, timing, and risk as precisely as possible

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  Measuring Political Risk

  Risks to Foreign Investment

  • Charlotte H. Brink(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Chapter 6Managing Political Risk

  Introduction

  Investors put assets at risk to achieve their objectives and the analysis of these risks, including Political Risks, is a key to successful operations. Weighing up opportunities against potential losses becomes possible after an initial Political Risk assessment. Of course, the nature of risks an investor might face depends upon the project; the factors present in a host country’s investment climate that are associated with the project; cultural prevalence; and the individuals that make up the organization. Opportunities and risks are often a double-edged sword, and the management of Political Risks is but one of the challenges a Multinational Company (MNC) faces in a host country.

  A firm’s foreign investment strategy deals with the positioning of the organization in an uncertain host country environment and investment climate. As such, organizational strategic choices determine the size of a firm’s exposure to uncertain environmental and organizational components that impact on company performance. This chapter will attempt to explain how a firm’s Political Risk exposure (the sensitivity of a firm’s projected profitability and operationability in a host country to changes in the investment climate) can be managed and reduced.

  Formulating and designing a Political Risk policy as a means of managing Political Risk is a key point in this chapter. So far in this book, a lot of time has been spent on identifying, analyzing and measuring Political Risk. These are very important to any investor in finding the most viable investment opportunity and being aware of the Political Risks involved. Now that it has been shown that this can indeed be established, an investor can make decisions based on the ways in which the Political Risks in a chosen investment environment can be curbed or minimized, if not avoided.

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  Country Risk Analysis

  A Handbook

  • Ronald L. Solberg(Author)
  • 2002(Publication Date)
  • Taylor & Francis

    (Publisher)

  6 Political-risk analysis for international banks and multinational enterprises

  Jeffrey D.Simon

  INTRODUCTION

  Political Risk has long been an important consideration in international business decisions. Although there is no consensus as to the exact definition of Political Risk, there is agreement on the types of situations that involve Political Risk. Basically, Political Risk refers to those political and social developments that can have an impact upon the value or repatriation of foreign investment or on the repayment of cross-border lending. These developments may originate either within the host country, in the international arena, or in the home-country environment.

  Early conceptual and analytical work conducted in the 1960s and 1970s focused on how to assess the effect of non-economic variables upon foreign investment.1 It was not until the early 1980s, however, that the political-risk industry was formally launched. Revolutions in Nicaragua and Iran at the end of the 1970s caught many international banks and multinational enterprises (MNEs) off guard. The large financial losses associated with radical regime changes in both countries clearly demonstrated the importance of political events in host-country environments.

  Yet expectations about what political-risk analysis could accomplish exceeded the emerging profession’s capabilities. This was the fault mainly of the advocates of the new discipline. Many in the business community remained skeptical about what political analysis could really deliver for assessing financial and economic investments. For professional business analysts and decision-makers accustomed to ‘hard’ data on economic and financial trends, the political world represented uncertain subjective terrain. Political-risk analysts, however, ranging from individual entrepreneurs to large consulting services, offered their expertise to international banks and MNEs and in the process raised unrealistic expectations. This included leaving the impression that, with the right methodological framework or well-placed contacts, Political Risk in a given country could be accurately forecast.

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  Tectonic Politics

  Global Political Risk in an Age of Transformation

  • Nigel Gould-Davies(Author)
  • 2019(Publication Date)
  • Brookings Institution Press

    (Publisher)

  2

  Today, the situation is fundamentally different. PwC’s 2018 global survey of chief executive officers (CEOs) found that five of the top eight risks that CEOs are “extremely concerned” about are political. It concluded that

  CEOs across the world are increasingly anxious about broader societal threats—such as geopolitical uncertainty, terrorism, and climate change—rather than direct business risks such as changing consumer behaviour or new market entrants.3

  But while the significance of global politics for markets is escalating, the capacity to manage its impact is declining. As a consequence, even though all aspects of business have grown in complexity, the challenges that politics create have risen more than any other traditional source of risk.4 This chapter explores three questions:

  1. How has Political Risk evolved?
  2. Why has Political Risk proved so difficult to understand and engage?
  3. How can Political Risk be better understood and engaged?

  The Evolution of Political Risk

  All of life carries risk, and economic activity is a part of life. Where market actors face risks that are infrequent, low impact, or manageable, they can create value through production and exchange. But frequent, severe, or unmanageable risks will hinder value creation. Production and exchange themselves always carry risks, including process integrity, safety, and changes in price and demand. Such risks are intrinsic : it is impossible to imagine production and exchange taking place without them. They can be better managed or mitigated over time—many have fallen significantly—but never eliminated entirely.5 Production and exchange face extrinsic

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  A Short Guide to Political Risk

  • Robert McKellar(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  A useful conclusion to this chapter is a consideration of the concept of a Political Risk management strategy. Thus far we have considered specific measures and the structures that can be built to implement them, but we should not fall into the trap of thinking about the issue in terms of a series of reactive stopgaps. Political Risk can be dealt with strategically, and every company needs to shape its approach in the context of its business aspirations and unique corporate culture.

  A Political Risk management strategy can be defined as a company’s unique long-term approach to dealing with Political Risk. It provides the parameters that shape our approach to risk in any given context. The strategy consists of the balance between the four main Political Risk management measures (portfolio management, security, relationship-building and risk transfer), and aligns our approach to risk with our international growth strategy and desired corporate identity.

  Take, for example, two international construction companies. One of them aggressively pursues opportunities wherever they arise, and it sees itself as hard-headed, practical and fiercely competitive. The company seeks maximal agility and maintains the lowest possible overheads. Its strategy for Political Risk reflects its character and ambitions. The firm transfers as much risk as possible to insurers and partners, and outsources all security and risk intelligence to a major international supplier. In operations, it insists that expat personnel remain on secured sites and minimise interaction with the host community to reduce exposure as much as possible. The firm allocates only enough to CSR to directly offset its own negative effects on host communities, and generally handles CSR by providing lump sum donations to local NGOs, rather than taking an active role in CSR planning. The company regards its success as a business to be its principal value to society, and carefully controls expectations of its social performance. This formula has worked, and enables the agility which is core to the company’s strategy.

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  Managing Project Risks

  • Peter J. Edwards, Paulo Vaz Serra, Michael Edwards(Authors)
  • 2019(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  For the great majority of Political Risks, qualitative analysis is the only feasible technique, since the nature of any ‘hard’ data, even if they can be collected, will rarely be appropriate for any reliable quantitative assessment. In any event, if political influence is already being exerted over the project, there is no uncertainty about its likelihood of occurrence – only about the potential impact. If nothing political has happened so far, then the probability of a Political Risk occurring is essentially a judgement call for the project stakeholder and will depend on perceptions of the likely source and nature of the event.

  Nor is there much advantage gained by trying to quantify the impact precisely. Other than possible delays to the project, other impacts may be more intangible in relating to difficulties and barriers rather than to direct effects on project costs. Political Risks, if they eventuate, more often than not lead to disruption and turbulence. Both are difficult, if not impossible, to assess reliably and confidently in terms of their magnitude.

  For example, the promoter of a new ‘fracking’ project to extract natural gas from a rural underground location using high‐pressure water injection might foresee the likelihood that an environmental or agricultural lobby group will carry out some form of protest action to threaten the project itself or the extraction rights approval processes of the responsible authority. The uncertainties associated with this form of Political Risk will relate to questions such as: What group(s), when, where, how often, what form, what intent, and what direct and indirect impacts? Protest actions that occurred in the past may provide only limited and unreliable guidance, since the strategy of most protest groups is to achieve their objectives in radical and news‐grabbing ways that will garner public support or attention.

  Furthermore, it is not safe to assume that Political Risk activity will always happen in the upfront stage of the project cycle. Many ‘landmark’ projects have been associated with politically based risk events at their opening ceremonies. Others have been similarly affected at key milestone points as opposition forces gather strength and momentum and as such points become newsworthy.

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  Principles of Project Finance

  • E. R. Yescombe(Author)
  • 2002(Publication Date)
  • Academic Press

    (Publisher)

  These risks are discussed in detail in this chapter. §10.2 CLASSIFICATION OF Political Risk Political Risks fall into three main categories: Investment risks . The standard “investment” risks are: • currency convertibility and transfer (cf. §10.3) • expropriation of the project by the state (cf. §10.4) • political violence (i.e., war and civil disturbance — also known as political force majeure ) (cf. §10.5) Investors and lenders into the country where the project is situated (the Host Country) are likely to be concerned about these issues if the project is located in a developing country that is politically unstable or has a lower credit rating. These risks may be passed on by the Project Company to the Host Gov-ernment under a Project Agreement or Government Support Agreement, by requiring the Offtaker or Contracting Authority (guaranteed by the Host Government) or the Host Government itself to compensate the Project Com-pany for losses caused by them. However when the time comes the Host Government may simply be unwilling or unable to fulfill this obligation, and some form of Political Risk coverage (cf. Chapter 11) may be required. 204 Chapter 10 Political Risks Change of law risks . Changes in the law, either because of new legislation or changes in regulations under existing laws, may have a serious effect on the viability of the project (cf. §10.6). These risks exist whether or not funding for the project is raised overseas, and may affect a project in both de-veloped and developing countries. Again they may be passed on under the Project Agreement to the Offtaker or Contracting Authority, or under a Government Support Agreement to the Host Government. Quasi-Political Risks . This category includes issues such as contract disputes, which may have a political or commercial background; it illustrates that the dividing line between commercial risks and Political Risks is not a precise one (cf. §10.7).

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  Managing the China Challenge

  How to Achieve Corporate Success in the People's Republic

  • Kenneth G. Lieberthal(Author)
  • 2011(Publication Date)
  • Brookings Institution Press

    (Publisher)

  80 FIVE Managing Risks C hina presents a high-risk business environment in which many of the challenges are those characteristic of most emerging mar-kets. Business ethics are not very well developed; the government actively interferes in the economy, influenced by both national and local politics; the legal system often provides very inadequate pro-tections; and so forth. However, some types of risk have “Chinese characteristics” that are sufficiently distinctive and consequential to warrant relatively detailed attention and specific mitigation strategies. In broad terms, there are six categories of risk: political, repu-tational, ethical, cyber, environmental, and corporate governance. Overall, they grow directly out of the dynamics of the Chinese system and attitudes prevalent in the PRC analyzed in the preced-ing chapters. Political Risks Political Risk can take various forms and is substantial. It grows out of China’s suspicions about Western motives, pervasive enterprise-by-enterprise government engagement in the economy, the one-party authoritarian system, widespread corruption, and weak legal protections. It generally assumes the form of political instability, political interference in business outcomes, and, for U.S. companies, tension in U.S.-China relations. MANAGING RISKS 81 Political Instability Businesses in China face risks from potential political instability. The political system is robust. It is dynamic and flexible, and it has substantial resources—and significant coercive capabilities when needed. It also has delivered an extraordinary improvement in living standards to most of its population in recent decades and is broadly respected for putting China on a seemingly successful path to attain-ing wealth and power. But there are grave underlying problems that may engender serious instability, and instability in China can affect investments and commercial plans in consequential ways.

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