Forecasting political risks for international operations

lntrmsriond

Journal of Forecasting 4 (1988)

X1-141

%rth-Holland

OPERATIONS

Ahtrflct:

Political risk forecasting has attracted considerable business and academic attention in the last decade. This paper starts with a review of the major findings and approaches to the assessment of political risk in foreign investment situations, particuI~rly in terms of the sptyification of relevant causctl relationships between the sources of risk and corporate contingencies. Next. a comprehensive model of general applicability incorporating these findings is outlined. Finally. we conclude with :1 few comments on the dynamics of political change and corporate strategy that make any such model subject to constant review and evaluation.

In 1985. the world’s stock of foreign direct investment (dcfincd as those firms where 258 or more of the equity was in foreign hands) approached a value of $900 billion. If other assets owned abroad by non-financial corporations, such as bank deposits, securities, inventories and minority {less than 25%) interests, were added to this figure the total may very well exceed $1.500 billion. In addition, world trade in goods and services amounted to more than $2,000 billion in 1985. Given that a significant proportion of these assets are exposed to expropriation. war, terrorism or discriminant government inten.ention at any point in time. the implications for the management of global operations are rather sobering. Surely there is nothing new in this. Trade and investment have been exposed to political risks ever since the first caravans ventured across the Middle East several millennia ago. It is rather the magnitude of the exposure, and the much publicized losses associated with the nationalizations which followed regime changes in post-colonial Africa. Cuba. Iran and Nicaragua, that have thrust the issue of politicai risks to the forefront of business and academic concern. Political change and instability per SC do not necessarily affect the international investor; change may be abrupt and yet leave the fabric of society basically untouched, or gradual but with profound effects. Instead, what must concern the international investor is the impact that any environmental shock, whether the result of a violent change in political regime or of a gradual process of social and l

The authors wish to express their appreciation to Ms. Dororhea Bcnscn for her du;lhlc assistance in the prepnration of this paper. WC arc also grateful to Farihon Ghadar. Skphrn Kobrin tnd Jeffrey Simon for thar critical commcnrs and suggestions. while wc exonerate

016%Z!O70/88,43.50

them from any responsibility

for the final product.

‘3 1988. Elsewcr Science Puhlishcrs B.V. (North-Holland)

political evolution is immaterial, may have on the value of its operations in that country. For this we can distinguish two generally different contingency losses. The first we may define as the involuntaq loss of control (generally meaning property rights) over specific assets located in a foreign country. typically without adequate compensation. Expropriation. nationalization. the ravages of civil war. or wanton destruction by terrorists are all examples of such losses. In fact. much of the literature and analysis on political risks has focused on specific instances of this type of loss, and particulxly on the frequency and extent of expropriations. ’ A second. perhaps more important. yet less well understood contingency concerns a reduction in the expected value of the returns from a foreign-controlled affiliate due to discriminatory actions taken against it. either because of its foreign nature or as part and parcel of ;I general tightening on free-market prerogatives. Some authors [e.g.. Kobrin (1983)] argue that the frequency of espropriation has declined dramaticrtlly since 1976, replaced almost universally by increased regulatory controls over investment behavior. Included here are various forms of discriminatory controls and restrictions often imposed by governments in times of domestic crisis [including foreign exchange and remittance restrictions]. limitations on access to factor markets [financial. labor or raw materials] and on outputs [e.g.. on prices or diversification possibilities]. ;1s kvell as changing rules on domestic value added. taxation or export performance requirements. Another dimension of the exposure to political risks concerns the proximate c;1usc. One possibility is to distinguish between the actions undertaken by Icgitimate [if not necessarily representative or democratically elected] govcrnrnents in the cxtcrcisc of their national prcrogativcs. and those which arc the result of actions undertaken by actors outside the direct control of governmental ;luthoritics. ’ Fig. 1 summ;~rizcs the first level of classification. Altsrnativcly, one can dcfinc the horizontal dinicnsion of the matrix in terms of the indiscriminant or sclcctivc nature of the xtions. This diffcroncc bctwcon ‘macro‘ risks, that is. those which affect all foreign [and. for that matter. many national] corporations in the country in question. and ‘micro’ ri&s. dcfincd xi those which target ;i single or ;I few companies for intcrvcntion on the bais of specific argurncnts about their rcl:itivc contributions to n;itional wclfarc. is one that has ban ma& repcatsdly in the literature [e.g., Robock (1971). Kobrin (1979 and 1981). and Simon (19X2)]. Consider the four types of risks illustrated in fig. 2. Type A consists of the potential for massive expropriations of foreign properties typically related to drastic changes in government, such as those following decolonializution or the triumph of ;I IMarxist revolutionary rebel force. There are often associated with closed systems in developing countries. which e.xplode after a long period of national frustration or discontent. followed by growing repression and a collapse of authority. All foreign investors are subject to the same treatment with rare exceptions as they are closely identified with the previous regime and offer a ready source for the re-birth of national pride. Type B risks. on the other They consist of hand, can occur more gradually and in both industrial or developin, 0 economies. sector-specific or company-specific exposure which can be traced to the particular characteristics of the industry in question [e.g.. its degree of technological sophistication or its oligopolistic nature] as

There

i\ no dcny~ng

been

variody

durmg

the

prnd;

in

plus

inveslmcn(s

in

smck

Simon ;md

1Y72

of

(19X2)

LDCs

during

wholly

and

makes

a slmlls

pactcm.

pohcics. For

more

vduc

of

1960-74

p;trGdty

xc

AS the

summarized numhcr

ovrr

[Hufbaucr firms

ad in

hc~wccn

1~ is

also

induced

Kohnn

of

cxpropriatcd

distinction

entcrnally

this

Iosscs. year

cumulatlvcly the

owned

axions. or

on

(hex

1% per

rcprcxcn~ the

govcmmcnl-lnspirrd

govcrnmcnl

of

10: affccr

1960-77

invcs[mcnt

1976

(hc ~mport;lnce

estimated

(1979).

the

Brigs

(lY75)]: the forces

IO make

CVCIIIS. and ;1 grdud

xrire

;1

ad

rhc

[box

that

;L distinction evotuuon

for

wrcd

the

SIW~ of forclgn

;! cumulative

[lY60-761

AUCIS [Kohnn

(IYXO)[.

cmcryc

hclwccn along

of

nsk

ha.5

coun~nes [LI>Cs[ d~rccl

IO 1.6% of rhc 1o1;11vduc of U.S.

amount

xcoun~ of

in ICM dwclopd

~OIA of 1X.X%

(IY75)[:

vdw [i.e..

and Inouc (19X4). [h c’ cxpropnar~un

affihdtcs

pcrwd

[William

plus

‘soae131

Burton

hy foreign

lY56-71

aswts

LDCs

imporranl

of

a more

from sudden or

less

gcnurai

w&l

changes prcdicrahlc

in

4 4%

of

the

phcnomcna[ govcmmcnlr. xx-x-pollrical

Loss may be the

Contingencies may incllude:

The actions legitimate government a-thoritles

of

result

of:

Events caused by actors outside the control of government

The Lnvoluntary loss of control over specific assets without adequate compensation

-Total or partial expropriation -Forced drvestiture -Confiscation -Cancellation or unfair calling of performance bonds

-War -Revolution -Terrorism -Strikes -Extorslo"

A reduction in the value of a stream of benefits expected from the foreigncontrolled affiliate

-Non applicability of "national treatment-RestrIction in access to financial, labour or material markets -Controls on prices, outputs or activities -Currency 6 remittance restrictions -Value-added and export performance requirements

-Nationalistic

buyers or suppliers -Threats and disruption to operations by hostile groups -Externally induced financial constraints -Externally imposed limits on imports or exports

Loss continq_ncLcs An involuntary loss of control over specrflc assets without odcquatc

Type

A:

ML1.SRLVC expropriations

compensation

Type Heduction

in the expected value of the benefits to be derived from the forelqn offlliate

C:

General deterioration of the investment climate

Yacro

risks:

Sudden convulsive chances that threaten most of :hc population of foreiqn direct investors within the country.

Type

B:

Solectlvc nationalizations

Type

D:

Restrictions tarqeted to key sectors

Micro

risks:

Interventions generally motivated by specific consideration closely related to the economic and social conditions prevailing at the time, and to specific industry and firm characteristics.

uell as to the current situation in the host country with regards to the saliency of the investment relative to national priorities and objectives. Thus. drastic changes in governments or political retimes mav or mav not result in massive expropriations. just as the gradual evolution of national goals and industry characteristics may bring certain sectors of economic activity under sudden scrutiny by non-radical government authorities eager to bring key economic sectors under national control for what appear to be legitimate objectives. ’ On a less dramatic level. a change in government orientation. either in the course of a freely-held election or in response to external threats. can result in increases in taxation. new requirements in terms of domestic equity participation. lower remittance allowances, etc.. all or any or which can substantially alter the post-tax. home-currency present value of the benefits realized by the firm’s foreign affiliate [Type C risks]. Similarly. Type D risks entail considerable potential for loss. As LDC governments strive for a greater share of the fruits derived from foreign company operations in their territory, case-by-case analysis and lengthy negotiation on domestic value added. export performance, ownership limitations and the like will be more and more the rule than the exception. Of course. the evaluation of the potential benefits of the investment and the split of the spoils will be greatly dependent on the sector and the company involved. and not only on what the country has to offer. as has been argued elsewhere [de la Torre (19X1)]. It is this latter category that we believe may be most prevalent in the future. Political risk can then be defined as ‘the probability distribution that an actual or opportunity loss will occur due to the exposure of foreign affiliates to a set of contingencies that range from the total scizurc of corporate assets without compensation to the unprovoked intcrfcrencc of cttcrnal agents. and pcrformancc expcctcd from with or without governmental sanction. with tho normal opcratinns the affiliate’. Whcthcr the loss is caused by Icgitimatc govcrnmcnt acts or not. whcthcr it is the result of forces acting internally within the host country or cmanatin g from the home or global cnvironmcnt, and whcthcr all foreign companies arc equally affcctcd or not. are important rncthociologic~II questions. The next section reviews some of the major findings and approaches to the assessment of political risk, particularly in terms of the specification of rclcvant causal relationships between the sources of risk and corporate contingencies. Ncnt, a comprchcnsivc model of gcncral applicability which incorporates these findings is outlined. Finally. we conclude with a few comments on the dynamics of political change and corporate strategy that make any such model subject to constant review and evaluation.

2. Empirical

evidence

and practice

Empirical data on socio-political events and their impact on international business are hard to come by [for recent summaries see Kobrin (1982). Simon (1982) and Robock and Simmonds (19X4)]. large number of First. the collection of data over long time periods and covering a sufficiently countries presents substantial problems of accuracy, validity and comparability. Second, while the and confiscation most dramatic impacts are readily reported in the press [e.g.. major nationalizations of assets), the quality of the reporting is not always homogeneous or reliable. Third. there arc no time series or data banks that report on the multitude of minor inconveniences and obstacles imposed on foreign companies on a daily basis by governments and other environmental actors. In fact, this information is seldom collected systematically by individual corporations. thus limiting the possibili-

ties of case study methodologies. Fourth. the application of quantitative methodologies to political phenomena is a relatively new development. as attested by Gillespie and Nesvold (1971). Armstrong (1978). Choucri and Robinson (1978). Heuer (1978) and Simon (1982). Finally. and perhaps most critically, there has not been sufficient theoretical work until recently that allowed for the specification of causal relationships between political. social. and economic data. and the contingencies faced by firms. -7.I. Expropruflon

There have been a number of serious studies attemptin g to explain the incidence of expropriation across countries. time and industries [see Burton and Inoue (1984)]. Truitt (1970 and 1974) and and service sectors were more Hawkins et al. (1976) concluded, inter alia. that the extractive vulnerable to expropriation. that certain organizational characteristics. such as size and ownership structure. were associated with a higher frequency of takeover. and that economic motivations. and not the ideological rhetoric designed for public consumption. dominated public policy as expropriations were directed at controlling economic activities vital to the nation. Bradley (1977) cast doubts on the widely held belief that joint ventures reduced political risks, and showed that very high and. surprisingly, very low levels of technological complexity stem to be a deterrent against cxproprintion. Bradley’s data also indicated that those nffiliatcs which were highly integrated into a multinational system were less likely to suffer expropriation. particularly if cutting them off from the parent company network would rcndcr them of littlc value. Four more rcccnt studiss have covcrcd sonic of the same ground as those ahovc itsing larger data hascs. and have tcstcd for further hypothcsi/.cL! relationships among country. corporate and contingcncy variables. Jodicc (1980) found littlc cvidcncc that willingness to cxpropriatc was associatccl with the level of economic dcvclopment of the host country, but instead confirmed that the ‘capacity’ of the state [as measured by the ratio of central govcrnmcnt revcnuc to GDP] was strongly correlated with the incidcncc of expropriation. In addition. hc established that governing elites tend to USC expropriation as a mean of distracting attention from their own shortcomings in times of increasing political turmoil. A Kobrin (1980). using the same data base, focused on industry and corporate specific factors associated with the incidence of forced divestment. Hc found that in most instances of ‘selective’ (as opposed to wholesale) expropriations, countries acted mainly in the more highly sensitive sectors, that is, those such as agriculture. mining and petroleum where national priorities and sensibilities were the largest. 5 He also confirmed that technological complexity and global integration of the subsidiary help reduce vulnerability to takeovers, while the level of industry maturity encourages it in the case of manufacturing affiliates. Burton and Inoue (1984) examined an even larger data base consisting of 1857 cases of expropriation which included for the first time the experience of Japanese investors. Their findings related sectoral patterns of expropriation to the country’s stage of economic development. Their ’

The Jodice (1980) and Kobrin (1980) paper5 have a wealth of d;tu on the history and regional distrihutwn

of expropriatwns

in rcccn~ years. They show. among other things. that some of the smaller countries. e.g.. Iraly. the Nerherlands. C;rnada, have suffcwd

a much higher ratio of share of expropriations

Fmnce. Also. Afnca and the Middle

Est

to share of FDI

show a grcz~ccr relative propensity

IO

than the United

expropriate

Belyum

and

States. Bncain or

than Asia or [the luwe~~!] Lattn

America. ’

An interesting dtvcrgencc between the Kobrin pant.

(19X0) and Burton and lnoue (1984)

While the former argues that mass expropriations

using csscnridly

the same CICIILI base. conclude that Ixge sccllc nalionalizations

The discrepancy

arises from the use of 3~1s [by Kohrin]

appcns

that selcctiwty is on the rise.

[discussed hclow] studies concerns this

account for slightly over 10% of 311 takings m his sample. the latccr. xcount

for mow than 70% of all firms taken.

versus firms [by Burton and Inouel.

although

in both analyses 11

however.

analysis.

is limited

by the fact that no relative

by the lack. of bass data on the stock of several

large scale takings

data base are not specified. increases

The

with

the host

drxth

confirm

on foreign Lnll

[e.g..

and Streeten

(1977)

the obsnlescent formtx

factors

rcccnt

rclation+ip

optimal firm.

cornpanics

cnti:iIion

bring

cnccd g~xcrnriicnt 1970 and 1975. operational

Fagrc

country]

On

intcrvunti~ln

of foreign

informed

on

sornc

to firms

the studies

models

Robinson

powxx

mndcl

and

the other

hand.

on

First,

and its assumptions investment.

analysis.

to the opportunities plnctx

Penrose

and its corollary.

foreign

cost-benefit

The

for specifying

to do this.

model

to

above.

(1976).

can he used

dependency

of social

impossible

cited

ample basis

(1973).

the dcpendrncia

xivantagcs

of

Wells

2nd

They

thcsc

(19S?,)

xccss

for

;I premium

The

suhJect

on

to the

internalizing non-txonomic

[both

complouity

the suhhidiary

firm\

opaltin,

who pursue

aggrasivc

winds.

but

I’ovntcr

(19SZ) and

f
hxi

hctwecn

g of production

to provide

insurance

important

fields

Finally.

lowering

inputs

A high

f’oyntcr their

of

apcri-

of harassment

also

stems

volume]

3 sample

which

intervention.

of lobbyin, 0 for in

cxamincd

government

intt’rvcntion.

~~~cctuicd

the

diffcr-

and clport

Kenya,

over sourcin

17 in strategically

policies

in

pcAicics of multin;l-

tran\fcr5

to minor

to hat

arcas

[I<& I>/ s;llc.\]. product

IndoncGa

that control

aboveavcrqc

txpcricncc

of the political

of

large

pokvcr.

expropriation

the propositions

dcfincd

on the o\vncrship

technology

intra-corporate

Zambia.

arc a dctcrrcnt

h:lnd.

that

to narrowly

xnd do so in ;I way bvhich is consistent

focusccl

bar gaining

from

ranging

confirm

hypothcscs investor.

conclutlcd

market

companies

the other

make it practically

bargaining

from

on the basis

Lvith corporate

this findings

\vcrc: found

managers better

2nd

and managerial

intcrfcrcncc.

concerns

country

opcratin g in Tan/.;lnia.

to associated

~tnti wlcs

the rtrlative

and nillltin~~tion~~l

/\rncricx

corrclatcd

suhsidiarics

basic

and

the affiliate.

of

Reuhrr

effect

sources

and self-rcliancs.

to hear

[;itlvcrti.\inS/sal~s].

10-t foreign

T~vn

second

latter,

host country

in Latin

;trc signific:lntly

(19SO)].

whose

the view that vulncrabilit>

ho\vever. provides

1977).

from

policy

The

the ;I~OC.C conclusions.

tional

The

for

than e.xpropriation

and

to the host

identity

studies

bctwccn

deriving

losses

the

such as national

Fclur

(1971

(1985).

particularly

responsibility

can be determined

and by the distorting

by Juhl

bvith the confidence

and cnuntrv-sptxific

firm-

within

other

and Frank

paradigm.

and

to judge

of both

transactions

Lvith

gains

attempts

txistcncc

Vernon

of propositic)ns bargain

rclativc

a study

in developin g countries,

relationships

there is the series about

capacity- to assume

of c;1us;11 relatIonships investment

Finally.

of expropriation

and sector.

many of these findings.

of e\-idrnce on contingencies

hypothetical (1976).

supported

intensity

by region

in Cuba and Africa.

countrlr_‘s

the existence

literature

of investment

Ievcl of against

[to the hobt

discovcrcd

that

C;ILISC’S.not only

wt’rc:

the IcvtA of intervention

by the

government. Lccrau intensity.

(19M)

and industry foreign

trstcd

the impact

asset size and export competition]

firm.

control‘.

bargaining

HL’ confirmed

rcx)urccs

on

advantages

xc

positivtzly

on three sets of dcpcndent extended

strength. correlated

the

found

a strong

included companies over

profitability.

relationship

the affiliate.

In contrast.

variables: findings

further

the cxrcise

in

the success

satisfaction

and country] the relationship

with

ownership on

the

of effcctivo

control

of the vcnturr: and

ownership

advertising attrxtivcnr’5s

ownership vari;lble]

impact that

of

unique same

[that

is.

ownership.

corpordtr:

firm-specific

control

by thtz

Furthermore,

[;L composite control

held by the and ‘cffcctixr

the

pcrformancc

and the degree of effective hetwccn

[market

actual equity

concluding

results

Icadtxship,

advantages

cvcn in the abscncc of maljority

bctwtxn

manclgement

in the same industry

previous

went

with

ovc‘r key ;l.~pc’cts of the venture]

[technology

and country-corrected

but

p:lrent

linear

ad\,antagrs

as well as country-specific

SLICC~‘SS[a firmand

bargaining

of firm-specific

intensity]

variable rclativo

the parent

and SLICC~‘SS was

to

hc which other

txerciscd

J-shaped.

with

50/50

arrangements

look

faring

the worst.

Finally,

at the level of industry

competition

to the degree of government

intenention

Kim

(1985)

e.xtended

and the ‘political in the firm’s

Poynter’s

responsiveness’

analysis

with

a detailed

of the subsidiary

relative

operations.

2.3. Palirical assessmenr models Until

very

recently.

country

to casual

and

such

to

most

occasions

If management

postponed.

or

probability

of loss.

catastrophe

occured,

In

one

of

a ‘risk

the earliest

for

sophistication.

‘go/no

Root

(1968)

confirmed excessive

subjectivity

Much fifteen

essentially specific

although

value

component

Delphi

to

in a

purpose.

was

being

be cancelled

account

for

proposition:

the

unless

or

higher a major

to be reassessed. this

area,

methods

Stobuugh

involving

Finally,

can play

reported

assessment and

stcrcotypos and often

of

(1978)

method

approaches

Old

or

by U.S.

Heenan

as a preferred

a vital

a

quantification

to risk

Rummel

officials

misleading.

(1969)

little

approaches

corporate

measure

assessment different

More

which

varied

with

suffer

foreign

distorting

of

from

xxi&es. role

in the

risk’

different suggests external

practices.

efforts

that

of

global

the

obligations]

identified

by the borrowing

nation.

of

macroeconomic elcmcnts

direction

1984)

time

assessment

and a ‘transfer’ Mascarrnhas

four

major

and structural

both

a ‘structured of the size of

in a discounted

be divided risk

into

consisting

and Sand

organizational

to be

involving

proposed

over

data.

needed

an assessment

borrowers

to less country

in this

and

that combines

type

to pay. Finally.

in technical

debt

in the Iaht

lcntling

sovereign

analysis

(1979

in

they called

of judgmental

on some early Nagy

has occurred

incrcascs

what

of cxtcrnal

subjective

of country for

risks

by dramatic

to systematic

recently,

of the ability

bank

itself

some

reported

(1985)

U.S.

and economic

spurred conccrncd

lend

to honor

a

of a

(1985).

in a

approaches

to

sophistication

and which

produced

of ‘expert

assessments,

typically

results. of these general

as the end methods.

(1976)

the will

of

political

or rescheduling that

measures.

Krayenbuehl [i.e.,

review

group

default involved

of occurrence

and a liquidity

A second

and mind,

this

would

idiosyncratic/impressionistic

banks.

to the quantification

model.

comprehensive significantly

these

were primarily

for

Van Agtmarl

present

risk

in

climate

in for

commitment

calculations

companies.

trusted

of macro

recognition

and qualitative

political

obtained

1974.

the probability

solvency

that

by

or individual

of the risks

approach

with

country

since

was gencrul

as well.

qualitative

risk’

sent

financial

as an ongoing

practice

French

international

the prospects

there

included

the

the political

the investment

was unlikely

for

can be dangerous

major

nature

quantitative

to

the lack of systematic for

:lnd modclling

The

countries

risk,

or

of

hands’

process.

’

The

saying

that

formalization years.

dcvclopcd

loss

(1981)

the corporate

decision-making

corporate

‘premium

‘old

to be high.

conceived

rating

obsenation

It goes without

in either

of or

also showed

Marois

the use of casual

assessment. rooted

as did

go’

exercise

analysis

investment

risks

be added

political

surveys

the

multinationals.

was this

the country’s

their

or corporate

new

political

would

premium’

limited

experts’

a particular

perceived

Seldom

firms

by ‘local

when

considered.

prevalence

international

observations

product

Some

of

of

these

surveys

consist

of a number

a multi-stage

consultation

reports

include

might

process

econometric

that

may

or

may

not

data

as well.

but

their

involve major

characteristic explicit

and consists political.

produces

countn’s

The

of a rating

operational.

panel of experts also

rankin, 0 of a lrtrgs

is the progressive

logic of analysis.

Competing [the LVorld

system

located

rating

throughout over

systems Risk

utilizing

of different

or include

variables

Count?

T~vo

Credit

respectively. Political

entry

environments flexibility

circumstances. cxpcrts

the

weight

the

and scvcral

that

may not ncccssarily they rcprcscnt

future.

The

most

socio-ccorloillic rating’s

utility models

TWX)

prim;lrily

dcvclopcd

Stability

Index

number

of

first

directly riots,

index

however.

is claimed

the model’s which

model,

the

(1971)

that

a high

aspirations

of

level

;1 people

foreign-owned

sector,

serve

scapegoats

as useful

political

yearnings

Regardless these ment

measures intervention

risk

modified

hc

their

with

e?cpert

of different

as

degree of

to suit

which

different

go into

‘cstahlishmcnt’

their

private

thcsc ratings

sector

arc st:itic

may hear no rcl;ltionship

long

as

in the cxpcrts’ such

explicit

the

hctwcen

cv:tlu2tion

no

by

to the

relationship

minds

causal

the bat

of the

and kiter

Icgislative inferences

clahor;~tccl

reality

will

both

exist

dynamic

first

there

concepts.

If

political

is

others],

the

escape,

its structure

put

and

of confidence The

forth

second by Gurr

~1 gap between

combined

bvith

or expropriation. order

[e.g.,

cannot

and each country.

whenever

Icad to intervention

of the existing

among One

in both

the notions

(1979).

cnvironmcnt

was the addition

for each component on

in ~Iarndcl

and social

distortions.

represents

rely

anJ

of thchc is the Political

effectiveness. or

of the model

is based

rclation.ships

known

of the political

innovation

frustration

risks.

investment

would most

tend

of the model’s

environmental

and largely

;I given under

on

and

scores

may

can

that

that

countries

Group:

ordering

as the judgments

et al (1975)

approach,

frustration

116

models

0 rank

Furthcrmcxc.

that it accurately

welfare.

and

distribution.

to utili1.c

Perhaps

of judgmental

to the failure

of estimating

oriented

of

their

formal

to

Investor’s

3s foreign

to satisfy

the

;I visible firms

the economic

and

of the people.

of project-specific

threatening

national

of the thoroughness

methods

macro-risk

of

is

components

to the index

and

such

datx

fragmentation.

‘ecological’

in

superior

Institutional 109

hlost

the weight

mailc.

by Iixnclcl

assumption

(1974)

a flood

implicit

based

objcctivc

may alter

is by the Futures

of permittin, criteria

3s

scnsc

be

In this sense. ;I major

were assigned

Knudsen

various

rcmain5

of discrctc

a

Sr Sullivan

considered

the

covering

field

and conditions

this

are

data

dispassionately.

can

to be free

implicit

Index

rating

users

whenever

noting

the tcndsncy

197Oh xc

described

;I scriss

the choice of variables. estimates

the

ethnolinguistic

resulting

in

other

and

Resources

also allo~v. in some c;~sL’s. for a significant

the

notcd

risk

;1pplic;rtion in

on cconomctric

measuring

They

view cvcnts

criticism

for ;I specific

Risk

can hc only

h;lvc

and p~~litical

worth

observational

;I view of past cvcnts

serious

factors

information

systems

Lvith

ranking

observers

by Frost

inde?c on n probabilistic

associated

BERI

evaluating

Inc. [Policon].

assessment

busis.

iteration.

rating

and Data

have the advantage

comparative

risk

have been developed

Country

;1 stability

Jnother

International

combine

techniques

However.

comp
similar

on a fairly

since

reports

highlighting are made by ;1

methodology

rating

Euromoney’s

to produce

and other

back for

and a lending

or less

of these.

five years.

o\vn judgmental

to the ‘expert’

Prospects

opinions

These

System

and

latest

subcategories

and. at least in the case of Policon.

their

to ~1 more

is the oldest

on 48 countries

and sent

countries

service

of four

Judgments

processed

according

Index]

on the basis

certain

similar

oriented

Rating

The

Stability

generated

By

financially

for

Business

on-line

of countries Risk

factors.

the follo\ving

Forecast].

to users

model’s.

countries

the world.

reports

of these are available the

ranks

number

Environment

and nationalistic

forecast

worthiness

Political

[Business

that

financial.

detailed

credit

BERI

ignore

useful flag’

to overstate

circumstnnccs.

specifications share

two

as n first-order

function the

threat

or the accuracy

unavoidable

the need of the individual

Although [a ‘red

risk

as Kobrin to specific

and may fail to anticipate

firm

for

indicator calls

of its measures.

drawbacks.

it].

custom-tailored of

the

exclusive

projects the partial

First.

that

potential reliance

may

losses

they

all are

mcasuredangers on broad

be immune

that would

to

result

freedom facing foreign firms in many developing and from a gradual tightening of operating developed countries. Second, these models are based on historical data that may be totally or partially irrelevant for future conditions. For example. recent high levels of political turmoil leading to a radical change in government may appear under various quantitative indices as evidence of a high degree of political instability. While this may be undeniable for the immediate past. does it signify that instability will continue into the future? Or is the new government more likely to address the root causes of past instability and lead the nation to a new era of prosperity and tranquility? Obviously. no time series analysis can answer these questions adequately. Furthermore. to the extent that the data fed into the analysis are not entirely current. there will be a potentially significant gap between the last period for which data were available and current conditions. Given the rate of change of political and social phenomena in the less developed countries. and the difficulties and commensurate delays in generating reliable data in many of them, this is not a trivial problem.

The environmental turbulence that characterized most of the 1970s. culminating with the fall of the Iranian monarchy in 1979. gave extraordinary impetus to the development of in-house capabilicorporations. A ties in political and economic assessment among the world’s largest international survey conducttxt on behalf of the U.S. Conference Board [Blank et aI. (1 YSO)] confirmed the rise in corporate interest in political risk analysis durin, 0 the dccnde. It concluded. however. that most of thc>c efforts consisted of intuitive and unsystematic atkmpts to translate vague notions of the ‘quality of the invcstmcnt climate’ into rucorllmendations for invc.\tmcnt policy. .A good txamplc of an cxtcnsivc corporate model is tht ESP [for txonomic. social and political] bylrtcrn dcvclopcd by Dow Chemical for their Latin American operations [Miclucl (IY7X ;~nd IYSO)]. Ck~\v’s approach has the advantages that it is .\pccifically tailored to their needs and that it involves lint :uid senior corporate officials in the ;isscs5mcnt, thus assuring lht the results will bc taken rclativcly seriously. It docs not deal, however. with the need for clear specification of causality. relying instc;kcl on the cxpcriencc of the Icaders of the asx~~mcnt tcamh to interpret events correctly and consi~tcntly. It ako implies high costs and ;I large time commitment. thus limiting its applicability to ;i few countries per year at best. Other companies have mudr ue of xxnurio mrthodologics in an attempt to deal with socio-politi~‘31 projections [Kaubitschck (1933) and Wxk (1985)]. .A relarrd approach. much cited in the litcr;Lturc, is that developed by Shell Oil to assess the probability that contracts for tht: exploration. development and production of oil in a certain country will bz muintaincd on an equitable basis for a period of up to ten years. As described by Bunn and Mustsfaoglu (1978) and G&&in. Pearson and Silbrrgh (1978). the Shell approach and its subsequent variants [e.g., the models developed by Risk Insights. Inc. of New York] include a formal specification of th e relationships involved, expert opinions constrained in a fashion designed to limit judgment errors. and ;I sophisticated statistical algorithm to combine the results of both aggregate econometric data and individual assessments. As Kobrin (1981) views it. this is one of ‘the most sophisticated and effective approaches to political risk asxssmcnt that existed 31 that time. Its major limitation is again the cost issue. To apply thz methodology to a large number of countries, or. for that mattt‘r, to ;1 number of industries with diffcrsnt characteristics and risk profiles, would be extrrmsly costly and cumbersome

The multitude multidimcnsionality

of studies and models described above arc indicative of the complexity and implied in measuring political risk which are specific to the foreign activities of

‘30

GENERAL

(KACRO

1

ORIENTATION

L______________

croup:

:Putures ci’ Grand

Tours

I

COUNTR C ES

COUNTHIes

ASPROjSPAIR ESP

individual foreign

firms

invators

the national project polarized comparative for

[cultural.

of bargaining basis the i&xl

countries.

those for

xc

powr. models

a large limitd

Jpproach

The

significant

characteristics.

between

but which

search

many

cnvironmcnt

[structural]

dctcrminants

needs

across

have yizldtxl

politicd. The

in their

the expropriation of conG&xations

2nd

thrust

tcchniqucs of subject gtxgraphic

obviously

analyses

economic]

have been confirmd

gcncral

The

of

of the importance

social

latter

ad

number

various

akkncL:

Ic;ds

of prxticc

LLS well

howcwr.

and those

Fig.

firm.

in the field.

countries, scope.

as in industry,

recent studies

dt measuring 3 illubtrata right-hand

macro which

politicul

arc spccific

this

dichotomy,

corner

of

in both

by the mow

aimed

to the bottom

cxpcrience rood

and

on the

tends

to be

risks

on

a

to ;t firm’s whcrc

of the figure

the

without

much succt’~s to date. I\-lacro models

must

play an important

no guarantc’c of the abscncc with

the probability

of loss.

of potential it remains

role in this r’cposurc

that 755

scorch. to loss.

V.‘hile

it is true

that political

nor

instability

ncccssarily

of all instances

is

of expropriation

have ken

stability

k

associated linked

to

‘31

CTUNTRY

stage

CHARACTERISTICS SOCIAL FORCES

ECONOMIC, POLITICAL

1:

f-c

AND

2

POSSIBLE

LS ZZ

Macro Risks

EL. ~1,

tL

E2, ~2,

t2

. . . * * * En, P",

PROJECT

.

Industry

factors

_ .

rcgimc changes. The ;Incl

ffic

dhility

M~tii~)clolo~icall~, c;tn hc criticizccl ~u~lgnicnts wurccs methods

can lx

risk

changes

dmplc

micro judgments

mltional

making

nanaqerial

Eactors

niodcls

It

is

drprndent

ability

the crisis,

OUTCOttE

Px/L*

tx/1

0x/2.

Px/2*

tx/2

OX/".

Px/n*

tx/n

of measuring

and liniilation~. from

variables

rii;1cro

fixpcrt-had

geographic foreign

concept.

and assess

to predict

potcnli:kl

the difficulty

nccc~x~ry

thr: best each method

both clrments. this

suffer

ILI~L’CI by specific

and project

t,

Ox/L.

c?cplicit and for their

and of limited

that combines

to circumvent

often

-,

rihks

consitlcrations.

5trcngth5

inclcpcnclcnt

timr: consuming on the risks

have the cafxlhility

of project-qccific

c~us:1l rcl:Itiordiips

Econometric

encompass

policy.

factors

g rriocid~ have certain

is both ;t country

in order

Structural

niuht thcrcforc

in terms

approach

of IOU must in

manifcstd.

espensivc.

i.\ an cckctic

ad

Since

Fig.

all cxidln

for not alwrtys

of it5 nicmhcrs.

probability

foreign

approach

thcni

of data for many of the important

ih n~dc’d mxro

prcfcrrcd

to ititcrprct

factors

------

. . .

POSSIBLE

CHARACTl?RISTlCS

. Corporate

WEB-I'S

of securing

for the analy.\is.

covcragc.

It follous

has to offer

affili:lte~.

any model

that what both

’

&signed

alI contingcncics for the survival

current In-house

and incluclcs

ad

to forecast

thtit

;~n emergin g situation

that is essential

sy5tcni5 bias in the

can result

before prosperity

it

is

the from fully

of many

operations. 4 ~ummarires

the structure

2nd str:lightfonwrd.

scrims of natiotxl

although

characteristics

of the wcommcnded its implcmcntation

- awnomic.

social

framework is another

and political

for

awlysis.

matter. forces

Its

It begins

at work

-

logic is rather by e.xamining

;I

that may or may

not be critical

to the issue

importance

of

changes

or

discountinuitirs

political

repression]

note. honever,

high

levels

of

precipitating

or external

the press.

framework.

therefore. xcur;lte

risk

forecasting

politiccll uell

Stagt:

risk

and without.

may precipitate.

This

hclow

should

c~tahli41

we shall

illustrate

~mt:

basic

trends

howcvcr.

industry

of the invcstmcnt. or

rclicf

cvcnt.

given

What require

grater

shocks in

A country

to

the

forces

softening

themselves. its

where

system The

without

institutional

their

ib then as necessary

Mach with

to

depending.

etc.. have achieved

themselves.

forces

filter

It is important impacts

system.

the institutions

of this

scnss

impact

on

to good political

In the end. any number

o\vn probability

of

distribution.

as

to he included

compx-ahIt:

and it should

pos.siblc

The

output

it should

the ;Lrc;Is

for diffcrcnt

identify

of concern

that ma)

altcrnativc

incxlsc

forecast

of dimini.\h

the latter

may

or

may

~)f any potential ;I set of outcomca

not

of bringing

probability into

sharper

negative conxqucnca

probabilities

;~t by the proper

cstcnt

have each ;I ccrt;lin consist5

in the

of the structure

;IS having

the possible

the conditional

can bc arrived

bc xcn

outcomes

risk

proJcct.\. As cstabli~hucl

of characteristics

and prob;tblc

event an

I I of the political

Since

to txonomctric

analysis.

countries.

delimit

in

that they

In the corresponding

in this

xross

role in the likclihoc>d cvcry

carlicr.

at work

events

of it is ;mlen;thlr

dtxcrihcd

as ~vcll AS ;1 numhcr

to estimating

events.

kIuch

to those

co~~scqucncus

factors.

that cithcr

of loss

analysis.

of the forces

and the likely

invcstcxs.

to it. Thcx

Stage

of an asst’ssment effcctivrncss.

that ought

in them.

have Gmilar

it is akin

of possible

risk similar

to foreign

or affiliate,

of the: project

is not ;L specification

considcrahle

an ongoing

involves basis.

investment ;1 total

yieldin

timetable.

have ;I major

of such

more space than availahlc

to ;I specific

analysis

exp~tcd

in

any [e.g..

of various

hc mutually

mathcmaticul

of

contingcncics c.xuclusive.

manipulation

final of the

c’~tim:~ttx f<>llows

appllcahk riA

withstand

of rcfcrcncc

brxxks

arc unique

of the likelihood

probability

institutions.

the financial

therefore.

the variahlcs

ploy ;1 dctcrminant

which

;L number

etirn:lres

will

~nci time horizon. In this

methods

and ccxpcxatc

will

the fcatura

cxh

of national

of

be internal

prices].

capacity

environmental

of ‘country’

threats

for each project

c~mxq~~c~~ccs

export

depend on the

magnitude

could

different

temperin, 0 their

mcxsurcs

and any potential

all uvcnts.

dihtributic>n

trouble

the

dramatically

of the underlying

is the realm

the seeds of potcnti:ll

IO\KY. Thlls.

the

on

huvr

or

forecastin, ~7 consists.

harbor Xot

for

the institutions

current

above rcviav.

to

fabric

and

of

in commodity

of these conditions.

and to the ust’ of e.xptxt

sccticxi

source

establishmtznt.

be able

is the case or not will

to others

timetable.

I of political

mndelllng

fall

activated.

on the qualities

can be the result

;1s a probable

a drastic

as ;L filter

judgement

such

the

and absorptive

35 an understanding

events

the nation

[e.g..

may, whsn

should

acts

Whether relationship

Furthermore,

change in the social

events.

’ An

its

the educational

development

drastic

on

involved.

on the maturity

parties.

stability.

factor.

that these forces

to a large extent. political

of political

the particular

impact

The

project.

;1 comprehe:nGvc ha-c UKI

” Fig.

5 summarizcb

of 11 sets of vuriahlcs

g estimates

project

of

associated

on the consc’qur‘nces

possible risk

model,

an intimate:

.since ohvioubly

knowlcdgc

the approach.

or compo.site

factors

t’vcnts.

prohahility

examines

of political

their

an additional

that

would

of the circumstanocs

The

country

a.\sociatcd

that mubt hc monitored of

occurr‘nct’

16 variables

change on a given

foreign

and

th;Lt arc likely

affiliate.

on the to

3.1.

Counrr?_ Associated

Rusk

An arbitrary but useful distinction can be made between economic and socio-political factors on the one hand. and between internal and external sources of risk on the other. The division is arbitrary because developments in all four areas have interactive effects on the other variables under scrutiny. It is important for the analyst to be sensitized to this web of hidden relationships and not follow the simple structure blindly. Also. it should be noted that many external influences. particularly in the economic sphere. can be systemic to the world. It is in such cases that the institutional elements of the analysis can serve to distinguish between countries in terms of expected impacts. Economrc Fucfors - fnfernul. The analyst must first understand the basic components of the host nation’s economy. its rate of development. and its vulnerability in order to anticipate factors that can affect the general business environment. Six major headings may be useful to organize the data as illustrated in fig. 6a. After this stage of the process. the analyst should have a reasonable picture of Lvhich economic variables are critical for continuity in the country’s current economic development strategy. the vulnerability of the strategy to failure in any of these critical links. the likelihood of such failures and, as a result, the probability that performance will fall short of expectations. The objective is not economic analysis per se:. but a search for what one might call the potential for trouble. Econontrc Furors - E.rrerrrtrl. In order to gain a better understanding of the nation’s economic conditions, the analyst must next turn to its external payments position. What are the country’s international obligations. the extent of foreign indebtedness and servicing requirements, its level of dlvcrsification of export earnings, the exposure to commodity price fluctuations. the rigidity of import requirements. etc. Five headings would bc helpful in organizin g the analysis of thcsc issues [fig. 6a].

This set of questions sewes to determine to what extent external constraints will dictate domestic economic policy. A high degree of dependency and instability together with external debt scrxwng difficulties will substrlntiall> increase the r&k of host gwrrnment interfrrencr with foreign investors in the county. both in terms of expropriation and convertibility. In .LIozambiqur, shortly after the revolution, the government. faced bvith severe external payment difficulties, nutionalized those

:

.-.,,_w.

F,.,

-

_

--

snwprisss

that consumed

shortage t;lk

of foreign

control

of

suspensions nerd

the

after

main

of dividend

~rn~unt~

of forsIgn

Somoza’s

sources

of

convertibility

ouster

foreign

during

rxchaqs.

prompted

earnings.

difficult

Likrwisr

And

times

in Xicargua.

the new rewlutionan the

frequent

in countries

the grtlvt:

wvernment =

_

USC‘ of

like

Brazil

to

‘trmporarq’

underscore

the

for such anrtl>sis.

Sac-IO-Po/irrwl

F11crors

potential

for

disparity

brtxesn

the other. should

I

inspirinp

he evident

tlssenticll

that

2nd difficult

fig.

mwt

2nd aspirations 6~

of

thr

six

information

to ev3Iu3te

ntrjcctivcly. it i.s aivisrthle

hl; on-the-field

srtuation

of the host

cohrsiventx

cnuntr)-

groups

and the strength

major

headings

soupht

under

Sources

intimrttci)

that awnal

assessments

that these

xill

out

on

2nd traditions

of

the analysis.

It

hruciings

with

opinion

the

of Iradwship

guide

various

familiar

cspcrt

carried

rtnd its

of the soc~.tl structure.

on the one hand and the quality

illustrates

the

with

and opposition

Thrrefore,

be crossesamined

the politicA

to begin

of government

Again.

to the analysis.

views

understand

To

briisfs

pwver

institutions.

judgmental

/rrttTnui.

change one needs

people’s

the relative

national

their

significant

eschange

is

highly

loccll condititws he c3htaintxi

tt? ;I large rstrnt

a-e

and that

by the firm’s

O=.Il local 5taff. SOCYO-FoIJI~uJI influcnccs pnprtlrttictn. prt47lcrri

FCJC.[II~.Y-

er

;xtxs

thaw

internal

hv lcndrn g moral. ciea-b~

and data sow-cc5 conclusion

E.VICY-IICJ~. Political

can euxwhatc claw

rcquircd

is thins wxrtxntcd

in the ficld.

scrutzny

in3tahility

conditicws financial

or

thi5

2s to the utility

cxtcrnally

on

itlwlogic;~l

suppttrt

as indicattxi

to complctc

is often

by playing

part

the fc;rrs

inductA. or

to ~~ppcGtion

in fig. 62. As xvith thu section of

the

of scckitig

an~~l~~is arc highly

cxpcrt

dclbiw

.-\t hat.

fru.\tr;Ition.s

of

groups.

ahwc.

Five

such

the knctwlcclgc

spccial~red.

supplcnw~tctf

csternal the Ioc:~l

A Gmilar

hv the ucu3

(31

local

management.

financial

It is obvious analysis

for

from

to strive

very

processing

hope

economies

amortize

the

customer

base. Thcrc

macro [i.e.,

cost

ri5ks.

function Their

of concern. The have from,

How

a given

to those

corporation industr);. There quality

who

consists is, however. reality

management

can

specifications

and

with

in this

such

‘I’ For

of the pokics

romc

Vachanr

( lYR5).

the

micro

(19X).

from

There

are

agencies can over

a large

in assessing

used by external perform

analysts a control

or to its component

parts.

to the company’s provided.

political

the

collecting.

function

are suitahlc

by a narrow

Furthcr-

cnvironmcnt

which

is

rungc of political

events.

it

of

their

the

biases

over

these

coordinated

to

within

the

of the realities

two

roles.

of

While

modification

time

to centralize

Monitoring

and adapting of

be appropriately

long

funds

available

periods.

the

them to the operational the

model’s

conducted Given

the

after

value

of

responsibility

accordingly.

risk

forecasts,

has to be carried

to assure

impartiality

may be essential

will

be called upon

The and

to act on

to its conclusions.

(1977). Kohrin

assessment

centrally.

the

but since local management

be party

to repatriate

in terms

services

a given set of country

involvement

risk

events

company’s

internally.

between

only

the

of data only

forecasts

process.

of certain

with

the capacity

political

risk

can

horizon

familiar

the basis

known

relatively

be logical

from

or

by external and

to

and time

on

difference

of

Bdley

for

systems

of the information

of,

only

provided

input

risks

and

perhaps

basis.

should

itself

intimately

function

performed

and projects.

we

those

factors

an

corporate

Ghdar.

only

of the country

it would

they must

in question

and Stonchlll

for

a system

process.

across countries

of the analysis,

by

qualitative

have

agencies

an internal

assessments

the profitability

forecasts

interpretation

the results

(IYRI ). Eltcman

inputs

except

a global

specifications]

to be dctcrminsd

the results

be a function

at the local level. Obviously.

comparability

role

risk

second role, that of evaluating out

from

and specialized

the scope of the macro

and managerial

should

the

memory

available

accordingly.

affect

an important

experience

institutional

any risks

to standardization

forecasting

for

is, once the probability

needs

a second

should

and

considrxable

that

on

to the model

supplied

bc performed

events

and accuracy of country

corporate

for

political

specific

firm.

of the models

and

can bc affected

funclion

of interpreting

g their

thu content

may limit

control

structural

with

data countries,

have to act on the basis

or subsidiary

Therefore.

specialized

requirement

or commitment

or affiliate

certain

up-&tin

suited

to

multiple

assumptions

the cxtornally

can only

will

corporate,

based information

individual

socio-political

across

a genuine

familiar

of the analysis,

project

management.

of forecasting

No

available

constantly

of data.

that

the internal part

and

characteristics

been established,

operations.

and

out such detailed

be prohibitive

of case-by-case

is particularly

data bases.

and

operating

any loyalty

If a given project

second

series

resources

however,

sources

is free from

project

and broadly

of the analysis

the

executives

logic.

facilitate

responsiveness.

of carving would

system

and the provision

g macroeconomic

is to make sure

specific

WOLIICI

duplicate

developing

needs and acccptablc more.

component

remains,

Corporate

which

task

services,

the world

any corporate

betsveen the general

of scale from

of

the internal

throughout

Thus.

of large time

to

analyzin

and

significant

risk

manipulation

can

political

sources.

macro or country large.

philosophy.

that the cost in time and money

corporation.

and evaluation

and contractual

The

management

and each operation

for a compromise rating

the systematic

and

the precedin, 0 list

large multinational

multi-country internal

culture

“’

each country

moderately ought

corporate

policies.

Doz

and

clnd Moran

Prahdad (lYti3).

(1980).

Ghadar

and

Gladwin &foran

and (1944).

Walter and

(19X0).

Shapiro

Encarnation

and

4. Conclusions In assessing distinguish affiliate

is likely

proper

as well

Such

of

strategic

corporate

competition

priorities.

These

with

views

‘investment

ought

intervention attempt

bvhile attempting may call for minimize investment arms-length committing climate,

It should

its

is

tr;msxtions

the firm

of market

prtxncu

to wvncrship prcscrving mxrkct vehicle

Where

i um

hiqh

f ,n..nc,al commitment

indvpendvnt joint

that

system.

such

as the

based

approach

on long

to global

level of risk

accorded

of

and to

to a particular

management

to

risk to

markat token

or hum.a” pornihle:

dintributor venture.

or they

integration

market

the

exists

coexist

contrast. other

markets Lvith

This

the wed

to

an exccllcnt indcpcndcnt

without

unduly

;I bad invcstmcnt

and exposure

such ~1 diversity that

of factors

the challcngc

by resorting

normal ccmmt:rcial ma jority-aned preferred.

Unrillinq slqnlflcant prefer

to

to .lct

to

activity: poaeiblc.

if

/

*s

a

interest prcaence: possible

without

if

I.,tt*e if nny rFR”IIrcc commttmr”t dcnirnblc: export aa*<*s aqP”tR pr.,fc.rrrd vchiclc for

position

licenalnq term h“dqe.

Little market only

on an

aim

prencnce:

minority

commit rcBo”rces: through

io~nt venture

impinging

of constructing

mdrket

I”“eRtme”ts:

axept rusks: afflliatc

any mark-t Llcenalnq

investor exposure]

these choices.

project

hum‘,”

account

and

in such

its commitments

corporate

In

ventures

prospects

[and

the circumstances.

take into

mnrkct.

Joint

7 summarixs

there

under

the and

reduced.

the foreign

commitments

which

of

upheaval

may he significantly

resource

in

the quality

of political

deteriorates.

as allowahlc

potential.

both

concerning

the risk

to gain a foothold

and

resource

and

sub jcct alecrnatlvc

I”d,ff,.re”t opportunities:

or-

Fig.

hiqh

and

commitment rcrd

the

to the achievement

a high

need for

climate

and control

poor

tend to limit

if at illI.

for commercial wholly-owned preferred.

mintal” tolerance bettsr

factors

competition

critical

priority

that

human

a position

for

of ;L particular

reeour~es

the extent

As the investment

;I useful Lvill

to*cr.*“cr r~skr: .,ff,l,ates

or

the venture

the fit Lvith the company’s

set of assessments

To

may not mnterialize.

have become clear by now

lliqh

to

be to undertake the firm’s

from

of

a differentiated

the

should

in the corporate

a number

opposed

in

higher

2nd

rcsourccs.

profile

the

technological

substitute

transactions,

of the risk

should

by -a second

returns

with

provide

that

market

units

one

the project

the returns

and the more

the greater

in question.

;1 measure

scarce corporate

[as

result

country

subsidiarv.

approaches no

on

of the market.

location

a given

to other

industp-

that

in

the contribution

including

be based

should

follo\vs strategy.

financial,

consistent

climate

the

This

attractiveness.

to retain

it is clar

independent evaluation

to that

unorthodox

exposure

It

global

the expected

to reduce

rsill

g the company

in the country

is high.

strategy.

contributions

a particular

resources.

of the market’s

global

in

forth.

to be tempered

climate’

irrespective

so

attractive

respect

operations

bus to do with

attractiveness’

the more uillin

necessary

contract

first

the size and importance

and

more

in the company’s

and control

or

The

prevalent

markets].

The

the

subsidiary

expand

or competitive

of ‘strategic

objectives.

commit

will

as any synergistic

national

opportunities.

up.

sets of issues.

to make to the corporation’s

global

fragmented

to set

two

an assessment

degree term

whether

between

HO ,ntercst except for

‘lq~fWUC”t~.

in pursue

financial

experts or licensinq

with lonq-

“ccJnI”“al

limited

for

;L

model

single

that

monumental. as predictors in political not

of potential

methods.

of

information.

must

large quantities such

intimate

knowledge

at hand.

And

manner

so as to spot.

approach major A

such

final

measures

political

forccasting

one

desirability

of

more

having

may

it

Thirdly,

risk

the

range

must

analysis

and

the rcquircd

in itself

and

the

timing

profile

is

about and

within

the

for

make all of this

is how

commitment

countries

of possible of

be obtained

elusive through

to the particular

the many

inputs

It follows or areas

level

can reduce

estimates

relevant

in the night.

has been

assessments

can only

to mix

to those

best

standards among

to incorporate has

many

resulted

of

to thu both

the decision

this

in

project

in a coherent

that a systematic

of the world

where

staff

process.

and organizational

into

would

function.

the strategic

discnchantmcnt

corporations.

executives

planning

analysis

significant

multinational

fad’? Most

availahlc

in terms

it into

all.

that

of

in a sea

at the corporate

analysis

qualitative that

a handful drown

to consider

risk

to probabilistic

many

just

would

variables

political

frustration, above

than

analyst

are at stake.

corporate

invcstmcnts

determined

expressed

the risk

and systematic

models.

call

be limited

acccptcd

an input

and incorporate

often

more

of

Modelling

variables

it must

positions

short-lived such

is use

is not easily

investor.

for

when

aspirations

he asked

risk

the

complexity

have limited

and that stability

significantly

the political

lies the challenge.

here must

lack of

and

stability

doubts

complexity

the dog that did not bark

with

hope that

be applied

to accepted causal

national

that

made the ncccssary

this tools.

as flolmcs.

hkcpticism

information

master

good judgement

The

many

and

alter

it demands

process.

to obtain.

to the

that

interaction political

facts that causality

the industry

of quantifiable

or competitive

question

of

variables

Secondly,

as is proposed

investments

planning

can best

of the terrain.

finally.

nature

quantitative

set. Herein

of

The

is difficult

all contribute

possibly

fashion.

as levels

situations.

their

relative

conditions.

of data. according

in an efficient

of their

information

are critical

could

Judgment

to a manageable

trends.

the

represent

in terms

risk.

by standardized

make use of good

events

of

and political

being

Unaided

reduced

measure

Furthermore.

no human

accurately

losses in specific

of the project

same set of economic countries.

and

of countries

that up-to-date

a good

characteristics Yet.

faithfully

rankings

phenomena.

necessarily

existing

will

Rough

Is

readily but

not

political

agree many

and administrative

systems

As cxistin

are pcrfcctcd.

linkages

g models

will

with

firms

to gcncratc

and risk the have the

one might

emerge.

Rcfcrenccs .~rm~trong. J. Scot!. 197X. Long range forccasring (W~lcy. New York). r\whcr.

Wilham

Au~m.

Jama

Ba.Gry.

1982. Pali[ical

E. ad

G.R.

and

Inwrn~~iond

David R.

forccatrng:

B. Yoffie.

tlrulr

The missmg link. Journal of Forecasting

19X4, Political forec;ls[ing as ;I managcmcnl

Dekmqian

1985.

hlNCs

ad

rhc

79-l (Confcrcncc

Burton.

amI M.M.

F.N.

against expropriation.

Mustafaoglu.

and Hisashi

Inouc.

1978. Forecasting

N&i

empiric4

study.

3. 395-408. Management

An cmcrymg funccwn in inrerrx~rional cornpanics. Report no.

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W.

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Harvd

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19X-l. E?cpropria[ions

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An

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David G.. 1977. Mannging

Bun”. D.W.

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Rcvicw 25. 67-75.

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Irarxm

I. 227-239. owl. Journcll of Forccahting

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75-83.

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396-414.

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Theory.

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Foreign invcsrmcnt

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Conflict

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Journal

of Internclrmncll

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133-147. cllmares.

Summary

1Iarwrd

Buvness

of the post World

Rewcw.

Sep.-Oct..

War II cxpencnce

I(H)-IOX.

of Amcncan

Jo& dc I;I TOKRE is I’rofcnsor of Intornationxl Business Strategy at the Gracluatc School of Management. University of California, Los Angeles. Sincc 1974 hc w;ls affiliated with the European Institute of f3usincss Administration [INSEAD] as ;I Professor of International Business and as Chairman of the Strategy and Environment Arca [ 19Sl-851. Prior to that time hc has held various faculty positions at Gwrgia State University, Harvard University. the U.S. Drpartmrnt of Commerce and at several institutions in Latin America. His main research interests are foreign trade and investment and international corporate strategy. David NECKAR is Managing Director of M.J. Marchant Underwriting Ltd., ;1 trading Lloyds insurunce syndicate. He is ;I graduate of Oxford University and of INSEAD. the European Business School. He has been unkwriting political risks insurance since 1978.