POLITICAL RISK

MANAGEMENT

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POLITICAL RISK

Political risk is a type of risk faced by investors,

corporations, and governments. It is a risk that can be
understood and managed with reasoned foresight and
investment.

For investors, political risk can simply be defined as

the risk of losing money due to changes that occur
in a country’s government or regulatory environment.
 TYPES OF POLITICAL RISK

Macro Political Risk

Micro Political Risk

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Macro Political Risk

A macro political risk affects all international

businesses in the same way. Expropriation,the seizure
of privately owned assets,as farm or a factory ,by
government with little or no compensation to the
owner.
Impact of political risk on
international business
Macro Risk
Barriers to repatriation of
profits
Confiscation of properties
Loss of technology or other
intellectual property
Mandatory labour
legislations , inflation
Civil wars
Currency devaluation
Impact
No motivation to improve
efficiency
Loss of assets and future
profits
Loss of future profits
Increased operating costs
Destruction of property,loss of
sales, increased security cost
Reduced values of repatriated
earnings 5
Micro Political Risk
A micro political risk affects specific foreign
business.
It includes industry regulation, taxes kidnapping and
terrorist threats.
Example:
India’s decision in 1975 to reduce foreign equity to
40% and Peru’s decision to nationalise its copper
mines.
Impact of political risk on
international business
MICRO RISK IMPACT

kidnappings., Disrupted production,

terrorists,threats,etc. higher security cost,
reduced productivity
Increased taxation Reduced after tax profits

Officials dishonesty Loss of business,

increased operating cost

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Ranking of countries
2006 2007
Hungry 78 77
South Koria 76 75
Poland 74 72
Bulgaria 70 69
Mexico 67 67
China 66 61
Brazil 66 64
Turkey 65 64
Argentina 66 64
South Africa 64 65
Russia 63 61
India 62 62
Thailand 61 60
Egypt 60 58
Algeria 59 59
Saudi Arabia 57 57
Indonesia 57 55
Colombia 56 55
Ukrain 56 57
Philippines 55 56
Iran 51 49
Venezuela 50 52
Nigeria 48 47
Pakistan 45 50

Source: GPRI by Eurasia group

 Criteria for evaluating political
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risk

Political economic environment

 Stability of the political system
 Imminent internal conflicts
 External threats to stability
 Realibility of the country as a trading partner
constitutional gurantees
 Effictiveness of public administrations
 Labour relation and social peace
 Criteria for evaluating political
risk
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Contd..

Domestic-economic conditions
 Size of the populations
 Per capita income
 Economic growth over the last five years
 Potential growth over the last three years
 Inflation over the past two years
 Avalibility of high quality local labour force
 Criteria for evaluating political
risk
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Contd..

External-economic relations
 Import and export restrictions
 Restriction on foreign investment
 Restriction on monetary transfer
 Balance of payment situation
 legal protection for branch and products
Managing Political Risk

 Avoiding investment
 Adaptation

 Threat

 Lobbying

 Terrorism Consultants

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 POLITICAL RISK ASSESSMENT
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 Approaches for
managing political risk

Relative bargaining power

Integrated techniques

Proactive and defensive techniques

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 Establish a good relationship with your
workforce
 Be alert to what is happening in your host
country
 Don't underestimate the potential benefits of
using Political Risk Insurance (PRI) to manage
your political risks.
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 Bibliography
• International business by K.Ashwathappa;3rd
edition;2008;the mc-graw-hill companies

• International business by Pradeep Sinha;1st

edition;2008