Table Of ContentMEASURING 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
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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.
