Title: Political risk
1Political risk
Chapter 13
2Introduction
- Country risk analysis examines the chances of
non-market events (political, social and
economic) causing financial, strategic or
personnel losses to a firm following FDI in a
specific country market.
3Generic PEST framework
- The generic political, economic, social (or
socio-cultural) and technology (PEST) framework
is used to - map out particular competitive environments or
investment contexts for firms at the regional or
national level. - compare country conditions.
- build future scenarios to understand short-term
and long-term threats and opportunities.
4Figure 13.2 PEST framework for country analysis
5Political risk
6Political risk
- Political risk The probability that political
forces will negatively affect a multinationals
profit or impede the attainment of other critical
business objectives. - Examples?
- Expropriation
- Corruption
- Breach of contracts
- No contract law, no property right, or no
enforcement
7Levels of political risk
- Macro political risk a risk that affects all
foreign enterprises in the same way. - Micro political risk a risk that affects
selected sectors of the economy or specific
foreign businesses.
8Types of political risk
- Legal/governmental risks are potentially harmful
to foreign businesses but are the product of, or
permissible within, the existing political,
economic and legislative system. - Non-legal or extra-governmental risks lie
outside the system and are a violation of
existing laws.
9Figure 13.3 Types and levels of political risk
10Country analysis and politicalrisk assessment
11Quantifying risk vulnerability
- All risk is relative.
- The political/legal, economic, socio-cultural and
technological environment of a foreign country
has different implications depending on the type
of international business that a firm is
evaluating. - For example export restrictions are more
important if a firm is seeking to set up a plant
to produce goods for exports than if the products
are for the local market. - ? Weighted Country Risk Assessment Model
12Table 13.3 The Weighted Country Risk Assessment
Model Sources The approach and the items in the
table draw from prior risk assessment models and
studies, including D. W. Conklin, Analyzing and
Managing Country Risks, Ivey Business Journal,
vol. 66, no. 3 (January/February 2002), pp.
3642 S. T. Cavusgil, Measuring the Potential
of Emerging Markets An Indexing Approach,
Business Horizons, vol. 40, no. 1 (1997) A. I.
J. Dyck, Country Analysis (Boston, MA Harvard
Business School Press, 1997) E. Dichtl and H. G.
Köglmayr, Country Risk Ratings, Management
International Review, vol. 26, no. 4 (1986), pp.
412
13Table 13.3 The Weighted Country Risk Assessment
Model (Continued) Sources The approach and the
items in the table draw from prior risk
assessment models and studies, including D. W.
Conklin, Analyzing and Managing Country Risks,
Ivey Business Journal, vol. 66, no. 3
(January/February 2002), pp. 3642 S. T.
Cavusgil, Measuring the Potential of Emerging
Markets An Indexing Approach, Business
Horizons, vol. 40, no. 1 (1997) A. I. J. Dyck,
Country Analysis (Boston, MA Harvard Business
School Press, 1997) E. Dichtl and H. G.
Köglmayr, Country Risk Ratings, Management
International Review, vol. 26, no. 4 (1986), pp.
412
14Is Canada/North America one of the politically
safest places in the world?Political Risk World
Map by World Bank WGI Project(One of the most
popular indices on political risk)
15Will political risk deter FDI?
16Will political risk deter FDI?
17Why political risk will deter FDI?
- Increases the cost of doing business
- For instance, increase the hurdle rate of return
on investment - Adjust the cash flows of the project
- Adjusted present value (APV) An NPV that takes
into account sources of country risk that might
impact a projects expected future cash flows.
18What can you do about political risk?
- PR analysis
- PR Insurance (mostly home country based)
- Host country engagement or negotiation
19Figure 13.4 Host country attractiveness and
negotiation
20PR is mostly referred to as a host country factor
in FDI, can it be a relevant home country factor
too?
Home-Country Political Risk
Outward FDI
?
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