Measuring Political Risk: Risks to Foreign Investment PDF
Preview Measuring Political Risk: Risks to Foreign Investment
MEASURING POLITICAL RISK Dedicated to Sergio, Andre, Lottie, Lorna, Suzie, Di, Hermann, and Karen Thank you. Measuring Political Risk Risks to Foreign Investment CHARLOTTE H. BRINK University of Stellenbosch, South Africa Routledge Taylor & Francis Group LONDON AND NEW YORK First published 2004 by Ashgate Publishing Published 2016 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © Charlotte H. Brink 2004 All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Notice: Product or coiporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Charlotte H. Brink has asserted her right under the Copyright, Designs and Patents Act, 1988, to be identified as the author of this work. British Library Cataloguing in Publication Data Brink, Charlotte H. Measuring political risk : risks to foreign investment 1. Country risk 2. Risk assessment I. Title 332.673 Library of Congress Cataloging-in-Publication Data Brink, Charlotte H. Measuring political risk: risks to foreign investment / Charlotte H. Brink. p. cm. Includes bibliographical references and index. ISBN 0-7546-4229-1 (hardback) 1. Country risk. I. Title. HG4538.B6752004 338.5~dc22 2004047678 Transferee! to Digital Printing in 2012 ISBN 9780754642299 (hbk) Contents List of Figures and Tables vi Preface vii 1 Introducing Political Risk 1 2 Thinking About Political Risk: A Conceptualization 17 3 Thoughts and Examples on Modelling Political Risk Analysis 47 4 Political Risk Factors and their Indicators 77 5 Presenting a Model for Political Risk Analysis 117 6 Managing Political Risk 148 7 Summary and Concluding Remarks 173 Bibliography 185 Index 197 List of Figures and Tables Figures Figure 2.1 The relation of political risk to country risk 24 Figure 6.1 Political risk impact-probability 169 Tables Table 3.1 A comparison of selected risk rating methodologies 57 Table 5.1 Incremental risk scale for investment 119 Preface In light of operating in complex modern global business environments, the ability to analyze and subsequently manage political risk as risk to foreign investment is an essential tool for any decision maker to have access to. Making and implementing complicated choices regarding foreign investment that impact directly on the operationability and profitability of an organization, often takes place under circumstances of extreme uncertainty. The analysis and management of political risk aims to decrease such uncertainty, and to at least offer decision makers an idea of "what is out there". Factors that may threaten the returns on an investment can be recognized; the probability and consequent intensity of the risk factors' impact on an organization can be measured; and contingency plans for managing political risk can be formulated and budgeted for. Foreign investment is by its very nature an activity that takes place in a country or countries other than that from which it originates. Host countries have differing political systems, economic prospects, qualities of human capital, business systems, political cultures and investment climates - yet these form the backdrop against which business is conducted every day. This "how to" book on measuring political risk offers foreign investment decision makers a tool that can be used during viability assessment processes. The methodology offered includes important micro risk factors; is easy to use; is robust in the sense that including or omitting risk factors can take place to best suit the organization's needs; the weights of the factors can be adjusted; the factor motivations are transparent; and the methodology is comprehensive. Short from avoiding threats despite good returns, it also offers risk averse investors a way to plan in the event of certain types and levels of risk occurring. By being able to recognize and quantify something as elusive yet threatening as political risk, investment and entrance strategy can be negotiated; the extent of the capital budget for the investment project can be calculated, as well as the clauses, add-ons, and cost of premiums that are to be included in a contract with a political risk insurance provider. This model for the analysis of political risk can be useful for large corporate as well as smaller foreign investors, for governments and their investment agencies, for non-profit and aid organizations, private lenders and investment banks, for researchers, and for the future pursuit of further improving upon political risk analysis methodologies. Charlotte Brink Stellenbosch, March 2004 This page intentionally left blank Chapter 1 Introducing Political Risk Introduction Political risk and the analysis thereof remains a highly fascinating and extremely interesting phenomenon, and keeping up with the ever-expanding nature thereof is indeed a challenge. This introductory chapter attempts to offer at least some clarity on questions relating to political risk analysis. One of these relates to developing the theoretical and practical ideas and motivations that prompted this book. Apart from placing the topic of the book in context, this chapter also aims to explain why the topic was decided upon, what the importance and uses of this book on political risk can be, as well as its relevance. The term investment implies an expected return. This differentiates the action of making an investment from giving a gift. Yet a return on an investment is difficult to guarantee, if at all. This implies that an investor runs the risk of not receiving expected returns, making fewer gains on the investment, or losing the investment entirely. The cause of such losses is almost always beyond the control of those making decisions regarding investment. Although a more detailed conceptual clarification follows in the second chapter, for a foreign investor a working definition of political risk analysis broadly encompasses the analysis of the probability that factors caused or influenced by the (in)action or reactions of stakeholders within a political system to events outside or within a country, will affect investment and business climates in such a way that investors will lose money or not make as much money as they expected when the initial decision to investment was made.1 These factors can be of internal (from inside the host country) or external origin, and can pose macro (generic) and/or micro (specific) risks. Foreign investment projects are subject to the sovereignty of the host country in which they are active. Such projects can enjoy strong and enforceable protection mechanisms under laws regarding ownership, stable investment codes, tax incentives, guarantees against expropriation, and the guaranteed unrestricted remittance of profits. However, under the very same sovereignty, a foreign investment can be "taken hostage" or "held for ransom" by a looming threat of government reneging on negotiated and seemingly secure contracts, concessions or licenses. The same laws that protect abiding foreign investors as guests in a host country can in fact constrain profitability and operationability.
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