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Political Risk

Most firms are comfortable assessing the political climates in their home countries. However, assessing the political climate in the other countries is far more problematic. Experienced international business engage in political risk assessment, a systematic analysis of the political risks they face in foreign countries. Political risks are any changes in the political environment that may adversely affect the value of firm´s business activities. Most political risks can be divided into three categories:

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  ownership risk, in which the property of a firm is threatened through confiscation or expropriation,
  
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  operating risk, in which the ongoing operations of a firm and/or the safety of its employees are threated through changes in laws, environmental standards, tax codes, terrorism, armed insurrection, and so forth,
  
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  transfer risk, in which the government interferes with a firm´s ability to shift funds into and out of the country.
  

Political risk may affect all firms equally or focus on only a handful. A macropolitical risk affects all firms in a country; examples are civil wars that tore apart Sierra Leone, Zaire, and Rwanda in the 1990s or recent conflicts in Afghanistan, Iraq, and Liberia. A micropolitical risk affects only a specific firm or firms within a specific industry. Saudi Arabia´s nationalization of its oil industry in the 1970s is an example of a governmentally imposed micropolitical risk, as is the Venezuelan goverment´s recently annouced requirements that foreign oil companies renegotiate thier contracts with government. Non-governmental micropolitical risks are also important. Disneyland Paris and McDonal´s have been target of numerous symbolic
protests by French farmers who view them as a convenient target for venting their unhappiness with U.S. international agricultural policies.
Table 2.1 Examples of political risk