A Theoretical Perspective on Political Risk
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* Instabilityin foreign political and social systems, changing power structures in INTRODUCTION international relations, and growing demands by host countries for a greater control over the operations of multinationalenterprises (MNEs) have all brought into question the traditionalways of assessing foreign investment opportunities. Market surveys, cash flow and foreign exchange analyses, econometrics, and theories of comparative advantage are not designed to forecast major political and social upheavals such as occurred in Nicaragua and Iranat the end of the 1970s. Nor are they conducive to tracking the less catastrophic, but equally threatening situations that MNEs face in host countries, including labor strife, changes in local content rules, discriminatory taxes, and restrictions on the repatriationof profits, capital, dividends, and interest. Political risk assessment has thus become one of the fastest growing sectors in international business studies. Concerned with the identification, analysis, management, and reduction of sociopolitical risks to foreign investment, the new discipline has flourished as articles appear in journals and magazines, as conferences and professional associations are formed, and as risk assessment positions are created in corporations. With each additional international crisis, the demand for risk analyses proliferates, even though no one as of yet has established a proven track record for forecasting such developments. Within this atmosphere of increased pressure for applied results, it is not surprising that theoretical concerns have laid dormant. Without theory, each new risk situation tends to be viewed as unique to the particularcountry involved, and no attempt is made to identify recurring patterns and trends across nations. Because host countries are part of an interdependent international and global system, in-depth country analyses often miss some of the key determinants of political risk. The purpose of this article is thus to lay the foundation for understanding the complexities of the political and social environments within which the MNEmust operate. After discussing the major obstacles to the development of theory in political risk, the article will focus on the impact that different environments can have upon the formationof risk, as well as the interrelationshipof key actors in the process. Finally, in order to demonstrate how the perspective set forth in this article can be used to analyze an individualcountry situation, political risk in the Republic of South Africa will be explored. inSantaMonica,California. He has written *JeffreyD. Simonis a consultantwithTheRandCorporation extensivelyin the fieldof politicalriskanalysisand is currentlywritinga bookon politicalrisk. Thisarticleis based on a paper presented at the 63rd AnnualMeeting(PacificDivision),American Associationforthe Advancementof Science, Santa Barbara,21 June 1982. The authorwouldliketo thankthe anonymousrefereesfortheirvaluablecomments.
Journal of InternationalBusiness Studies, Winter 1984
123
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