Slide 13.

Chapter 13

Political risk

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.2

Introduction
• 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.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.3

Generic 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.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.4

Figure 13.2 PEST framework for country analysis

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.5

Political risk

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.6

Political risk
• Political risk: The probability that political forces will
negatively affect a multinational’s 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

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.7

Levels 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.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.8

Types 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.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.9

Figure 13.3 Types and levels of political risk

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.10

Country analysis and political

risk assessment

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.11

Quantifying 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

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.12

Table 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. 36–42; 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. 4–12
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.13

Table 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. 36–42; 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. 4–12
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.14

Is 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)

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.15

Will political risk deter FDI?

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.16

Will political risk deter FDI?

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.17

Why 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
project’s expected future cash flows.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.18

What can you do about political risk?

• PR analysis
• PR Insurance (mostly home country based)
• Host country engagement or negotiation

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.19

Figure 13.4 Host country attractiveness and negotiation

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.20

PR 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

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 13.21

Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009