Political Risk Analysis of U.S. Firms: A Theoretical Framework and an Empirical Analysis

This paper review the literature on political risk analysis by classifying them into different research streams. Also, an empirical analysis of political risk analysis practices of U.S. firms conducted through a questionnaire survey. The survey indicated the increasing importance of this function in firms involved in international trade. Future research directions are also suggested. INTRODUCTION Concomitant with markets becoming global is the realization among businesses of the need to assess the risks of doing business in a particular country. This concept of "political" or "country" risk analysis gained increased importance especially after the advent of the Khomeini regime in Iran. It was estimated that, following the fall of the Shah of Iran, U.S. businesses lost approximately a billion dollars in expropriated assets (Kennedy, 1985). Businesses realized the necessity of continually assessing the risks of doing business in foreign countries. The objective of this paper is to examine the current practices used to assess the political risks of doing business abroad. Specifically, the paper seeks to assess the importance attributed to he political risk analysis function in U.S. organizations, the techniques used in the analysis, and the variables that are assessed. The paper is organized into four sections. The first section reviews the literature on political risk analysis. This is done to provide a frame of reference for the current study. The second section discuses the methodology used in the study, while the next section presents the study results. Finally, the implications of the study's findings (both for managerial practice as well as for theory building in this area) are discussed in section four. REVIEW OF LITERATURE The large amount of research done in the area of political risk analysis can be conveniently grouped into four research streams. Table 1 breaks down the extant research under the four streams. (Table 1 omitted) The first stream deals with the definition of political risk and certain conceptual issues dealing with the measurement of risk. The second stream covers the entire gamut of normative studies done mainly by practitioners. These studies deal with the importance of political risk, both to the overall organization as well as to individual functional areas of the organization. The third research stream is concerned with developing conceptual models for assessing political risk. The fourth stream, which can be considered to be the culmination of all research in this area, deals with the assessment of current practices in political risk analysis by companies both in the U.S., as well as in other parts of the world. Figure 1 portrays the interrelationships among the four streams of research. (Figure 1 omitted) RESEARCH STREAM #1: DEFINITION OF POLITICAL RISK Sethi and Luther (1986) argue that research on political risk analysis is hampered severely because of a lack of consensus on the definition of the term This feeling is also echoed by Fitzpatrick (1983), who is of the opinion that a variety of definitions has lead to an uncoordinated, and often disjointed, evolution of the body of knowledge in this area. Robock (1971) emphasized the differences between "macro risk" and "micro risk. " While the former occurs when "unanticipated and politically motivated actions" (Rice and Mahmoud, 1990: 89) of the host government are directed at all foreign enterprises, "micro risk" affects only certain enterprises. Finally, Kobrin (1979, 1984) is of the opinion that the definition of political risk often determines the choice of variables that are studied by a firm. RESEARCH STREAM #2: NORMATIVE ISSUES This stream of research focuses on those studies that describe the importance of political risk analysis, as well as provide normative suggestions for institutionalizing risk analysis in an organization. Normative suggestions for risk analysis include: the need to use objective measures of risk to complement subjective methods currently in use (Blanden, 1988); the importance of comprehensive, all-inclusive risk models (Taylor, 1991); the need for a proactive, rather than a reactive approach to risk analysis (Weiner, 1992); the importance of political risk factors in international marketing (Friedman and Kim, 1988); factors that must be considered in selecting a risk consultant (Belcsak, 1997); and the need for accuracy in country forecasts (Merrill, 1982; Simon, 1982; Haner, 1987). …