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Political Risk Analysis

Political Risk Analysis

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Published by Murali Daren
Political Risk Analysis
Political Risk Analysis

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Published by: Murali Daren on Dec 01, 2012
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Political Risk AnalysisPolitical Risk Analysis
Dr. Sima MotamenDr. Sima Motamen
Westminster Business SchoolWestminster Business School
March 6, 2008March 6, 2008
 
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Political Risk &Political Risk &Foreign investmentForeign investment
Investors might become exposed to aInvestors might become exposed to arange of political risks when investing in arange of political risks when investing in aforeign country.foreign country.
Political risk refers to the potential lossesPolitical risk refers to the potential lossesto foreign investors from adverse politicalto foreign investors from adverse politicaldevelopments in the host country.developments in the host country.
Political risks cover a wide range of risksPolitical risks cover a wide range of risksfrom outright expropriation of investor’sfrom outright expropriation of investor’sassets, to concern about changes in theassets, to concern about changes in thetax laws that may hurt the profitability of tax laws that may hurt the profitability of foreign projects.foreign projects.
 
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Classification of political riskClassification of political risk
Depending on how firms or investors might be affectedDepending on how firms or investors might be affectedby an incidence, political risk can be classified into 3by an incidence, political risk can be classified into 3categories:categories:
1.1.
Country specific risks (Macro risks)Country specific risks (Macro risks)
Political & Economic stability of the country, attitude of government andPolitical & Economic stability of the country, attitude of government andpublic in the host country towards government of foreign investorspublic in the host country towards government of foreign investorsHost country’s political & government administrative infrastructure. ForHost country’s political & government administrative infrastructure. Forexample, number of political parties, frequency of change inexample, number of political parties, frequency of change ingovernments, (this can cause frequent policy changes, and inconsistentgovernments, (this can cause frequent policy changes, and inconsistent& discontinuous economic and political environment.& discontinuous economic and political environment.Track records of political parties and their relative strength, e.g. whatTrack records of political parties and their relative strength, e.g. whattype of ideology they support, what is the ideology of the main party?type of ideology they support, what is the ideology of the main party?
2.2.
Firm specific risk (Micro risks)Firm specific risk (Micro risks)
Conflict between the activities/goals of firm and those of the hostConflict between the activities/goals of firm and those of the hostcountry as evidenced by existing regulations.country as evidenced by existing regulations.
2.2.
Global specific risksGlobal specific risks

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