Political Risk

and Political Risk Assessment

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Political Risk Analysis

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gefinition of Political Risk

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dain aypes of Political Risks
a) Expropriation
P ^ orced divestment of equity ownership of a foreign
direct investor´ (dinor 1994)
P Peaked in the mid-
mid-70s; almost nil now
P dostly Africa till 1980, then Latin America
P geclined since:
 ÿey sectors already nationalized
 Economic need = > privatization
 Regulate rather than expropriate
P dany hosts have joined d
A (dultilateral

nvestment uarantee Agency)
P Some controversy over future:
 is free enterprise here to stay, or will there be a backlash when
privatization, etc. fails to provide widespread benefits?
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dain aypes of Political Risks (Continued)
b) aerrorism
P aerrorist acts infrequent, but spectacular
- L. America #1 esp. kidnappings
- U.S. ± owned corps. Esp. targets, U.S. public institutions
- China,
ndia, aurley,
srael etc.
-sept 11,
raq
P Little research-
research-seems to be primarily groups denied a voice
in legitimate channels
P Symbolism particularly important (dacgonalds, etc.)
c) Selective
ntervention
P dost risks are less dramatic changes in the rules of the
game.
P Some areas of government policy affect foreign-
foreign-owned
companies more than most domestic ones £
dain aypes of Political Risks (Continued)

Restrictions on Cross-
Cross-Border Transfer of Resources
P aariffs, Nas inhibit sourcing, exporting
P  controls limit repatriation
P Capital controls
P Labour regs

Taxation Concerns
P Restrictions on transfer pricing
P Unitary taxation policies
P Withholding taxes
P Availability of tax holidays and other incentives

+
dain aypes of Political Risks (Continued)
învestment Restrictions
P Sectoral restrictions
P Requirements for JVs, local ownership
P aransparency of licensing procedures
P Requirements for disclosure of technology
P Requirements for forced divestiture

 erating Restrictions
P limits on expansion, ownership of land, etc.
P giscriminatory access to labour, inputs
P Restrictions on local market access
P Performance requirements (e.g. employment & export
levels, etc.)
P Unequal access to government procurement *
dain aypes of Political Risks (Continued)

Ôon-Ôeutrality of the Legal Environment

Ôon-
P Judges or other arbiters insulated from political
pressure
P
nternational and regional conventions
P
nternational conventions re compensation
P uarantees of national treatment

Regulations with Differential Effects on Foreigners

P Some may be much harder for foreign companies to
comply with

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dain aypes of Political Risks (Continued)
d) ^Crossfire´ Problems
P Activities may lead to international or home country
sanctions or consumer boycotts against the country or
firms that deal there
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hat kind of cross-
cross-fire roblems associated with îraq wine-
wine-
makers in the Bordeaux region faced?
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 Political Risk
Empirical Relationship
P dost studies examine correlates of expropriation
P dinor (1993): no link with stability
P Positive correlations (more risk)
- extractive, service and key sectors
- JVs with the host government
- host countries with pervasive governments
(^hands
(^hands--on´)
- medium
medium--technology
- need for scapegoats
- ^obsolescing bargains´
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Empirical Relationship (Continued)

P Negative correlations (less risk)

- integrated subsidiaries that depend on rest of

network
- low/high tech
- lobbying

P dakhija (1993): information indicating

convergence of dNC actions and government
economic objectives

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 orecasting aechniques
P ^old hands´ = ask experts for gut instinct, personal
evaluations
- taps expertise, but may be dated, subjective or
irrelevant

P ^grand tour´ = send executives for personal visits

 access to top decision makers, first-
first-hand exposure, but
superficial
 may hear self-
self-interested pleading

P quantitative
 gelphi: obtain expert views, aggregate and give to same
experts for chance to revise their views given what others
think; repeat until consensus
 tends towards ^conventional´ predictions
 econometric: use historical data, macro-
macro-orientation, but
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low--cost, may be helpful for initial screening
low
m9
ahe Economist dethod
Political Risk Service (PRS) -- 100 points
33 points economic factors:
falling gP/per capita
high inflation
capital flight
decline in productivity
raw materials as percentage of exports

50 points politics:
bad neighbours
authoritarianism
staleness
illegitimacy
generals in power
war/armed insurrection

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ahe Economist dethod
Political Risk Service (PRS) -- 100 points

17 points society:
urbanization
race

slamic fundamentalism
corruption
ethnic tension

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Political Analysis

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Example of Rational Actor Analysis: A ocus on
overnment oreign usiness Relationships

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danaging Political Risk (counter moves)

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