How important is managing political risk in the international business context Essay Example

appearances of innovative ways of governance were new in the international context. The permanent clash of western ideals, the post-war era (WWI and WWII), the constant shadow of a cold war, and the turmoils of new economic forces that started to guide country decisions; show that political risk management to investors was underlying and should be taken seriously. A chain of events such as expropriation, confiscation and nationalisation became major concerns to investing companies in developing countries around the world.

"We have moved from a system where western powers, though often democratic at home, were authoritarian and hierarchical in their systems of rule as applied in the developing world. While some new states adopted this style of governance, others chose to depart from it explicitly. To escape from that rigid and elite-centric system, newly independent countries often fell back on support from other governments in the Communist and Socialist worlds. Relying on the ideology of those systems, these new governments often developed political processes that, in representing entire populations, propagated a system in which property governments for the population held ownership, especially of major industries. In order to get from the colonial to the socialist structure, these governments often expropriated and directly interfered with businesses operating within their borders". (Howell, 1994)

Later between the 1980's and 1990's with the decay of the Soviet Union and communism, the consolidation of the European Union, and the hegemony of western ideals such as privatisation and liberalisation represented by the United States, a new globalise economy started and despite the less involvement of the government in the economic forces, the relation between politics and business has created a high impact that

must not be underestimated.

According to the literature, by political issues that can involve risk we can understand: "Political means having to do with: a) the governance system of a country (political structure); b) the nature of particular governors (authority); c) the response of the population to the government (legitimacy); and d) the nature of the society being governed (culture, social phenomena)." (Howell, 1994). There are different ways of analysing the assessment of the mentioned factors by Howell, other authors, companies, private institutions and government organisations. However analysts have found it is not always easy to measure political risk and standardised it. Different interpretations of the context analysis of a country arise and derived on many conclusions. Duncan Meldrum describes that difficulty within interpretations of political risk, "Unfortunately, no comprehensive country risk theory exists to guide the mapping process.

In practice, most country-risk services create risk measures using an eclectic mix of economic or socio-political indicators based on selection criteria arising from their analysts' experiences and judgment. The services usually combine a variety of factors representing actual and potential imbalances into a comprehensive risk assessment that applies to a broad investment category" (Meldrum, 2000). Perhaps one of the most commented articles on this matter, on how to measure and what factors must be included when analysing political risk appeared in The Economist 1986 'Countries in Trouble' in which they considered the following variables as key factors when determining the political situation of a country for investors, they also gave to them a maximum negative numerical value.

The 10 points that The Economist brought to analyse political risk have been related and compared with other studies of government and

independent that started their own analysis and studies; firms such as Bank of America World Information Services, Business Environment Risk Intelligence (BERI), Control Risks Information Services (CRIS), Economist Intelligence Unit, Euromoney, Standard & Poor's Rating Group, Political Risk Services' Coplin-O'Leary Rating System (PRS), and Moody's Investor Services.

Political Risk Services' Coplin-O'Leary Rating System (PRS), and Business Environment Risk Intelligence (BERI) created other measuring systems that cover other factors than the ones described in The Economist, however we must clearly understand The Economist was among the first to review a measuring system and others followed their guidelines. When having a look to each of the 10 points review by The Economist we must try to understand the context and what each one of them means.

The Economist Model

Bad Neighbouring: It implies that despite domestic efforts to build a well structure and independent internal policy, the country is submerged into a region or area that undeniably will interact and external decisions from its neighbours will be influential. "Location or Neighbourhood Risk includes spill over effects caused by problems in a region, in a country's trading partner, or in countries with similar perceived characteristics" (Meldrum, 2000).

Authoritarianism: It could also be totalitarian regimes, and is a very important key point when understanding political risk. The counterpart of any authoritarian regime is a democracy, where a majority elects governing leaders. By this I am trying to also relate point number 4) which is Illegitimacy in which a vast majority of the population accepts the state, on the other hand, the government positions could be democratically elected or could be authoritarian and at the same time they can be legitimate or illegitimate.

Controversial? Indeed.

When analysing political risk, possible investors can see authoritarianism as a positive fact towards their investment as they would find alliances from the government, but at the same time it is also an uncertainty as any latent risk would be. I must be clear on this, I am not taking a position of considering authoritarianism as an option, and I must say I am against it, however the business morale always finds alliances on all types of systems without taking consideration what kind of establishment it is, and not all the time thy consider it as a risk.

Staleness, by this I understand that a government can get out of date, in other words, their governing period may be very long and its commitment for developing programs may possibly decay. This definitely creates an unstable climate when power changes from hands or during a transition period.

Generals in Power, again it can be considered a double morale controversy, however I am not going to run into discussing it, instead I will stick to what common sense can understand and has proven that military officers who reach the power in most of the cases not by elections, and their period while governing is considered as a dictatorship depending on the means they use to reach the power. Its legitimacy is not conceived by a vast majority and therefore is also a key issue when discussing political risk.

Strife and Warfare. War is undoubtedly what causes a great impact in political risk analysis and I would describe it as the ultimate or final expression of many negative problems within a country. By this, it is comprehensible that war causes instability

and any attempt of investment is subject to the conflict, how long will it last, its origins etc., and for sure it will bring completely uncertainty.

Urbanisation is one of the aspects that I would understand as the concentration of people in cities, and by that, all the kind of problems that appear by a rapid and uncontrolled urbanisation. Indeed it can be a controversial factor when analysing political risk, but it sure can be explain in a different context because underneath the title of urbanisation what they are try to explain is a whole different problem derived from the concentration of people and that can obey, or would fit more to a social issue which within the patterns of political risk can be considered a problematic factor.

Islamic Fundamentalism: the way I understand Islamic Fundamentalism under political risk analysis is that they are considered to be an important matter based on the way they can affect internal affairs of a country. However, this must be looked under the perspective that any religion that enables its followers to act under a fanatic premise in internal affairs can be considered as a threat due to the way its participation may possibly affect any political and state decision. In other words it is not only Islam, it could be any religion depending on their degree of interaction with government and politics.

Corruption, the way I understand it, it is something that can be present in all types of organisations. Decisions are always influenced on the search of the proper scheme, but since political decisions are no longer political, but more business or money decisions, or made of link of multiple

factors that will incline any decision towards the economic benefit of the involved parties, corruption can be considered as major problem and its degree varies depending of maturity of and commitment of nations.

Ethnic Confrontation; I understand by ethnic confrontation within political risk analysis a confrontation between races in which culture and religion are also involved that can threaten and create an unstable climate for investors.

In response to the Key Points exposed by The Economist we have the Coplin- O'Leary model used by Political Risk Services and the BERI Model from Business Environmental Risk Information that can give a more detailed review on how to measure political risk through other and sometimes similar factors.

First of all they all approached the analysis of the factors from a social and political perspective even though the Coplin-O'Leary Rating System, Political Risk Services (PRS) focuses on 'projections of most likely regime, level of turmoil, transfer risk (currency convertibility), investment risk (restrictions on equity ownership), and export risk (risk to exporters to the country)' (Coplin-O'Leary) and examines direct government and economic functions which makes a difference with The Economist and BERI models. Taking The Economist model we can see that within the factors of the other models they are some similarities that can be understood and follow the same pattern of the ones exposed by The Economist.