Introduction
According to Daniel Wagner, “The exercise of political power is the root cause of political risks in international business. How political power is exercised determines whether government action threatens a firm's value. For example, a dramatic political event may pose little risk to a multinational enterprise, while subtle policy changes can greatly impact a firm's performance. A student-led protest for political change may not change the investment climate at all, while a change in local tax law can erode a firm's profits very quickly. It is the task of the risk manager or company CFO to identify whether a government action poses a threat to a firm's financial well-being.”
Defining Political Risks
There are various definitions to Political Risks:
“In export financing, the risk of loss due to such causes as currency inconvertibility, government action preventing entry of goods, expropriation or confiscation, and war.”
“The likelihood that political forces will cause drastic changes in a country's business environment that will adversely affect the profit and other goals of a particular business enterprise.”
“The risk that a sovereign host government will unexpectedly change the rules of the game under which businesses operate.”
For multinational companies, political risk refers to the risk that a host country will make political decisions that will prove to have adverse effects on the multinational's profits and/or goals. Adverse political actions can range from very detrimental, such as widespread destruction due to revolution, to those of a more financial nature, such as the creation of laws that prevent the movement of capital.
Types of political Risks
In general, there are two types of political risk, macro risk and micro ris ...