1. Objectives of Political Risk Analysis:
Political analysis is like forecasting weather. To be specific, following are the objectives of political risk analysis or assessment:
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i. Should we enter a particular country?
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ii. Should we stay in a particular country?
iii. What to do with our operations in a specific country, where a particular development has taken place?
2. Information Needs:
An International business firm may like to acquire following information to assess the risk:
i. Stability of a country’s political system.
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ii. Stability and longevity of government in power.
iii. Where does power lie? Concentration in one individual or one political party?
iv. Commitment of host government to specific rules of the game.
v. Changes in policies – arbitrary or following rules of the game.
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vi. Change in present government – how would the specific rules of the game change?
vii. What would be the impact of any such changes?
viii. With these happenings in the backdrop what the strategy or tactics be?
The list is not exhaustive. Type of information would vary according to the nature of business and time span required for the investment to yield a satisfactory return. The dimensions of political risk assessment are not limited to host country alone.
It is equally important to study home country politics and the global politics. Global politics includes issues like host and home country relations, host country’s relations with other countries, membership of international organisations – NATO, WTO, IMF, IBRD, UNO, etc. Pulls and pressures of non-governmental organisations (NGOs) are no less important.
3. Organisation of Political Risk Assessment:
To gather or monitor the requisite information about a particular country is known as Country Risk Assessment. There are many techniques or approaches, such as qualitative, aggregates of expert opinions, scenario approaches, decision tree methods, and quantitative techniques, to assess political risk.
Companies use different sources to collect the requisite information. The best source is the company employees-both home nationals and host nationals posted in that particular country. They possess the first hand knowledge of the local political environment. However, there is scope of margin of error due to local prejudices or preferences.
Some of the companies have developed internal staff and in-house capabilities to make continuous assessment. Gulf oil had a small team of analysts and had warned of fall of Iranian Shah several months in advance.
Some companies make use of experts or consultants to make this kind of analysis.
Bechtel had employed a former CIA director, whereas Goldman Sachs and the Chase Manhattan Bank depended upon Henry Kissinger (the former Secretary of State in the US Administration).
The consultants, advisors or experts monitor important trends indicating political change and then develop several plausible scenarios to describe alternative political conditions in the future, well before political issues become news.
Since the 1980s a number of organisations/journals have developed risk assessment measurement systems. Institutional Investor magazine surveys global financial advisors and rates every country on their credit worthiness on a scale of zero to hundred.
The Wall Street Journal, Moody, Standard and Poor, Economic Intelligence and many more have been doing it regularly. Apart from the above, information can be monitored from the press, personal visits to particular country, local business contact, trade associations, Chambers of Commerce, etc.