Learning to fly: The evolution of political risk analysis

Global Society

Volumn 21, Issue 1, 2007, Pages 5-21

  Jarvis, Darryl S L ^a   Griffiths, Martin ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

CONCEPTUAL FRAMEWORK; INTERNATIONAL RELATIONS; POLITICAL PROCESS; POLITICAL THEORY; RISK ASSESSMENT;

EID: 34347207203     PISSN: 13600826     EISSN: 1469798X     Source Type: Journal    
DOI: 10.1080/13600820601116435     Document Type: Article

References (80)

1. United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2003 (New York and Geneva: United Nations, 2003).
2. Ibid.
3. Further analysis of this trend can be found in Darrel Mahoney, Marie Trigg, Rocky Griffin and Michael Pustay, International Business: A Managerial Perspective (Englewood Cliffs, NJ: Prentice Hall, 2001).
4. Jonathan Perraton, David Goldblatt, David Held and Anthony McGrew, "Economic Activity in a Globalizing World", in David Held and Anthony McGrew (eds.), The Global Transformations Reader (Cambridge: Polity, 2000), p. 296.
5. World Bank data, GNP 2002, available: .
6. As quoted in the Detroit Free Press (8 July 2003) available: (accessed 18 May 2006).
7. Notable exceptions include Rose McDermott, Risk-taking in International Politics: Prospect Theory in American Foreign Policy (Ann Arbor: University of Michigan Press, 1998)
8. Yaacov Vertzberger, Risk Taking and Decisionmaking: Foreign Military Intervention Decisions (Stanford: Stanford University Press, 1998).
9. A classic example is David Korten's polemic When Corporations Rule the World (San Francisco: Berrett-Koehler, 1995).
10. See also, for example, André Gunder Frank, The Development of Underdevelopment (Boston: New England Free Press, 1966)
11. Harry Magdoff, The Age of Imperialism: The Economics of US Foreign Policy (New York: Monthly Review Press, 1969)
12. Richard J. Barnett, Global Reach: The Power of Multinational Corporations (New York: Simon & Schuster, 1975)
13. Susanne J. Bodenheimer, "The Ideology of Developmentalism: American Political Science's Paradigm Surrogate for Latin American Studies", Berkeley Journal of Sociology, Vol. 15, No. 3 (1970), pp. 95-137.
14. However, see Robert O. Keohane and Van Doorn Ooms, "The Multinational Firm and International Regulation", International Organization, Vol. 29, No. 1 (1975), pp. 169-209
15. Lorraine Eden, "Bringing the Firm Back In: Multinationals in International Political Economy", Millennium: Journal of International Studies, Vol. 20, No. 2 (1991), pp. 197-224.
16. See, for example, Stephan H. Robock, "Political Risk Identification and Assessment", Columbia Journal of World Business, Vol. 6, No. 4 (1971), pp. 6-20
17. Stephan H. Robock and Kenneth Simmonds, International Business and Multinational Enterprises (Boston: Richard D. Irwin, 1989)
18. Richard J. Herring (ed.), Managing International Risk (Cambridge: Cambridge University Press, 1986)
19. Bent Flyvbjerg, Nils Bruzelius and Werner Rothengatter, Megaprojects and Risk: An Anatomy of Ambition (Cambridge: Cambridge University Press, 2003)
20. Howard K. Lax, Political Risk in the International Oil and Gas Industry (Boston: International Red Cross, 1983).
21. The exploration of risk as a feature of late modernity has been a central motif for recent sociological work by scholars such as Ulrich Beck, Risk Society: Towards a New Modernity (London: Sage, 1992)
22. Anthony Giddens, The Consequences of Modernity (Stanford: Stanford University Press, 1990)
23. David Harvey, The Condition of Postmodernity: An Inquiry into the Conditions of Cultural Change (Cambridge: Blackwell, 1990)
24. Peter Bernstein, Against the Gods: The Remarkable Story of Risk (New York: John Wiley, 1996). It should be noted that political risk does not exist merely as a feature of inter-state activity. The constitution of modern polities into distinct sovereignties also creates political risk for domestic economic actors and subjects. The centralisation of power and the ability to wield this power in ways that enhance the juridical reach of the state and its ability to shape the regulatory structure of markets allows political sovereigns to create risk for other actors. Political favouritism, unintended policy consequences, and the illegitimate use of state power are as much a source of risk for domestic actors as they are for international non-state actors.
25. The causal mechanisms facilitating financial liberalisation during this period have been most clearly elaborated by Eric Helleiner, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s (Ithaca, NY: Cornell University Press, 1996).
26. For further analysis of this shift in the global risk environment, see Theodore H. Moran, "The Changing Nature of Political Risk", in Theodore H. Moran (ed.), Managing International Political Risk (Oxford: Blackwell, 1998), pp. 7-14.
27. For an excellent overview of this process, see Gerard Epstein, "The Triple Debt Crisis", World Policy Journal, Vol. 2, No. 4 (1985), pp. 625-657.
28. See, in particular, Gregory Noble and John Ravenhill (eds.), The Asian Financial Crisis and the Architecture of Global Finance (Cambridge: Cambridge University Press, 2000).
29. A good discussion of the Brazilian situation can be found in John Minor, "Mapping the New Political Risk", Risk Management Magazine, Vol. 50, No. 3 (2003), pp. 10-18.
30. See Gerard Epstein and Herbert Gintis, "International Capital Markets and National Economic Policy", Review of International Political Economy, Vol. 2, No. 4 (1995), pp. 693-718
31. Jeffry Frieden, "Invested Interests: The Politics of National Economic Policies in a World of Global Finance", International Organization Vol. 45, No. 4 (1991), pp. 425-451.
32. Robert Looney has estimated the costs for the private business sector (US$14 billion), the federal government (US$0.7 billion), state and local government enterprises (US$1.5 billion), and for the cleanup operation in New York (US$11 billion). See Robert Looney, "Economic Costs to the United States stemming from 9/11 Attacks", Strategic Insights (Monterey, CA: Center for Contemporary Conflict, Naval Postgraduate School, August 2002), available: .
33. See also Dean Alexander and Alexander Yonah, Terrorism and Business: The Impact of September 11, 2001 (Ardsley, NY: Transnational Publishers, 2002).
34. Anna Zakada-Fraser and Campbell Fraser, "Risk Perception by UK Firms Towards the Russian Market", International Journal of Project Management, Vol. 20, No. 1 (2002), p. 99.
35. See also Fred V.Weston and Bart W. Sorge, International Managerial Finance (New York: Richard Irwin, 1972), p. 60.
36. For a good example of such a list, which refers to 14 discrete activities, see M. Anaam Hasmi and Turgut Guvenli, "The Importance of Political Risk Assessment Function in US Multinational Corporations", Global Finance Journal, Vol. 3, No. 2 (1992), pp. 137-144.
37. See Stephen Kobrin, "Political Risk: A Review and Reconsideration", Journal of International Business Studies, Vol. 10, No. 1 (1979), pp. 67-80
38. David Blake, "The Political Environs of Multinational Corporations", in Ingo Walter and Tracy Murray (eds.), Handbook of International Business (New York: John Wiley, 1982).
39. For a good example of how these assumptions inform political risk analysis, see David W. Conklin, "Analyzing and Managing Country Risks", Ivey Business Journal, Vol. 66, No. 3 (2002), pp. 37-41. Conklin argues that political risk correlates positively with market intrusion and government regulation. His analysis is consistent with the ideological predispositions informing the work of policy think tanks such as the Fraser Institute in Canada and the Heritage Foundation in the United States. For an excellent critique of these organisations' respective Indices of Economic Freedom, see Lewis Snyder, "Comparing Measures of Economic Freedom: The Good, the Bad and the Data", in Jerry Rodgers (ed.), Global Risk Assessments: Issues, Concepts and Applications, Book Five (Riverside, CA: Global Risk Assessments, 2004), pp. 181-228.
40. The classic work in this field is Karl Polanyi's The Great Transformation (New York: Octagon, 1975).
41. For further analysis of this shift in attitude towards the role of good governance, see Sanjaya Lall, "East Asia", in John H. Dunning (ed.), Governments, Globalization and International Business (Oxford: Oxford University Press, 1997), pp. 414-423.
42. See also Rafael La Porta, Florencio Lopez-de- Silanes, Andrei Schleifer and Robert Vishny, "The Quality of Government", Journal of Law and Economic Organization, Vol. 15, No. 1 (1999), pp. 222-279.
43. See World Bank, Reforming Public Institutions and Strengthening Governance (Washington, DC: World Bank, 2000).
44. See, in particular, Louis W. Pauly, "National Financial Structures, Capital Mobility, and International Economic Rules: The Normative Consequences of East Asian, European, and American Distinctiveness", Policy Sciences, Vol. 27, No. 4 (1994), pp. 343-363
45. Louis W. Pauly and Simon Reich, "National Structures and Multinational Corporate Behaviour: Enduring Differences in the Age of Globalization", International Organization, Vol. 51, No. 1 (1997), pp. 1-30.
46. On this point, see in particular Michael Loriaux, "Capital, the State, and Uneven Growth in the International Political Economy", in Michael Loriaux, Meredith Woo-Cumings, Kent Calder, Sylvia Maxfield and Sofia Pérez, Capital Ungoverned: Liberalizing Finance in Interventionist States (Ithaca, NY: Cornell University Press, 1997), pp. 208-229.
47. The most famous scholar of economic modernisation was Walt Rostow, who distinguished between five stages of economic growth. See Walt W. Rostow, The Stages of Economic Growth: A Non Communist Manifesto (Cambridge: Cambridge University Press, 1960).
48. In political science, modernisation theory was championed by scholars such as Samuel P. Huntington, Political Order in Changing Societies (New Haven, CT: Yale University Press, 1968)
49. Gabriel A. Almond and G. Bingham Powell, Comparative Politics: A Developmental Approach (Boston: Little, Brown, 1966)
50. Gabriel A. Almond and James S. Coleman, The Politics of Developing Areas (Princeton, NJ: Princeton University Press, 1960).
51. See, in particular, Talcott Parsons, Economy and Society: A Study in the Integration of Economic and Social Theory (London: Routledge & Kegan Paul, 1956)
52. Talcott Parsons, Structure and Process in Modern Society (Glencoe, IL: The Free Press, 1960).
53. See, for example, Shmuel N. Eisendstadt, The Protestant Ethic and Modernization: A Comparative View (New York: Basic Books, 1968)
54. Henry Bernstein, "Sociology of Underdevelopment versus the Sociology of Development", in David Lehmann (ed.), Development Theory: Four Critical Essays (London: Frank Cass, 1979), pp. 77-106.
55. The quintessential study in this approach is Almond and Coleman, op. cit.
56. See David Mathieson and Leonard Seabrooke, "Risk Assessment and Foreign Investment under Despotic Rule", in George Crowder et al. (eds.), Australasian Political Studies 1997, Vol. III: Proceedings of the Australasian Political Studies Association (Adelaide: Flinders University, 1997), pp. 691-712.
57. For example, Haendel and his colleagues have developed a 15-category model composed of constituent elements which impact on "political system stability". The model is used to generate a "stability index" composed of weighted indicators for socio-economic factors, governmental processes and societal conflict risk indicators. An events approach to political risk analysis is also evident in the work of Bunn and Mustafaoglu, who identify 10 event categories, each with sub-constituent elements that are assumed to have significant operational implications for foreign firms and which originate from imperfect governing structures associated with emerging markets and modernising societies. Likewise, Mortanges and Allers suggest that political risk is composed of events such as social or political unrest, expropriation, labour strikes, and the imposition of currency controls. Dan Haendel, Gerald West and Robert Meadow, Overseas Investment and Political Risk, Foreign Institute Monograph Series, No. 21 (Lexington, MA: Lexington Books, 1975)
58. D.W. Bunn and M.M. Mustafaoglu, "Forecasting Political Risk", Management Science, Vol. 24, No. 15 (1978), pp. 1557-1567
59. Charles Pahud de Mortanges and Vivian Allers, "Political Risk Assessment: Theory and the Experience of Dutch Firms", International Business Review, Vol. 5, No. 3 (1996), pp. 303-318.
60. See also Janice Monti-Belkaoui and Ahmed Riahi-Belkaoui, The Nature, Estimation, and Management of Political Risk (Westport, CT: Quorum Books, 1998).
61. For an attempt to integrate qualitative assessment methods with quantitative multivariate analysis in predicting instability in Indonesia, see Rudolf J. Rummell and David A. Heenan, "How Multinationals Analyze Political Risk", Harvard Business Review (January-February 1978), pp. 67-76.
62. See, for example, Dan Haendel, Foreign Investment and the Management of Political Risk (Boulder, CO: Westview, 1979).
63. Stephen Kobrin, "Political Risk: A Review and Reconsideration", Journal of International Business Studies, Vol. 10, No. 3 (1979), p. 71.
64. A similar argument is made by Robert Poirier, "Political Risk Analysis and Tourism", Annals of Tourism Research, Vol. 24, No. 3 (1997), p. 677.
65. Claude Ake, "Modernization and Political Instability: An Explanation", World Politics, Vol. 26, No. 2 (1974), pp. 576-591.
66. Kent Miller, "A Framework for Integrated Risk Management in International Business", Journal of International Business, Vol. 23, No. 2 (1992), p. 314.
67. As Stefan Robock observes, "political instability, as represented⋯ by an unexpected change in government leadership, may or may not involve political risk for international business". Stefan Robock, "Political Risk Identification and Assessment", Columbia Journal of World Business, Vol. 6, No. 4 (1971), p. 8.
68. As José de la Torre and David Necker note, the environmental turbulence of the period "gave extraordinary impetus to the development of in-house capabilities in political and economic assessment among the world's largest international corporations". José de la Torre and David Necker, "Forecasting Political Risks for International Operations", International Journal of Forecasting, Vol. 4, No. 2 (1988), p. 229.
69. Moran, op. cit., p. 8.
70. See also J.M. Chermak, "Political Risk Analysis: Past and Present", Resources Policy, Vol. 18, No. 3 (1992), pp. 167-178.
71. The decline in political risk arising from expropriation is evident from surveys conducted in 1992. Out of a total of 14 political risk factors, expropriation was ranked at number 12. See M. Anaam Hashmi and Turgut Guvenli, "Importance of Political Risk Assessment Function in US Multinational Corporations2", Global Finance Journal, Vol. 3, No. 2 (1992), p. 141.
72. See, for example, David Hertz and Howard Thomas, Practical Risk Analysis: An Approach through Case Histories (Chichester: John Wiley, 1984).
73. David Bergner, "Political Risk Analysis: An Asset Now, Soon a Must", Public Relations Quarterly (Summer 1982), pp. 28-31.
74. Perhaps the most well-known attempt to construct such a data set was constructed by The Economist in 1986. In an article entitled "Countries in Trouble", The Economist provided 16 variables that described current political, social, and economic circumstances in which investors would face risks. The variables were weighted to result in a potential accumulation of 100 "risk" points for any of the 50 countries analysed. The Economist used proximity to a trouble spot or superpower, extent of authoritarianism, degree of legitimacy of the government, staleness of the regime, involvement of the military, and extent of current war or civil strife as predictors of future harm to the foreign business. As social circumstances portending trouble, it chose rapid and concentrated urbanisation, extent of corruption, degree of Islamic fundamentalism, and level of ethnic tension as critical predictors. Each, it was argued, foretold problems for the investor. Among these 10 variables, only war was likely to cause direct losses. The other variables are simply precursors to war or other forms of damage. See "Countries in Trouble", The Economist (20 December 1986), pp. 25-28.
75. For a full discussion of this approach, see Llewellyn D. Howell, Syed Rizvi and Chris Cogswell, "Political Risk in Southeast Asia: A Perspective through The Economist Model", Journal of Asian Business Vol. 9, No. 2 (1993), pp. 19-36
76. and Llewellyn D. Howell, "Political Risk and Political Loss for Foreign Investment", The International Executive, Vol. 34, No. 6 (1992), pp. 485-498.
77. See, for example, Monty G. Marshall and Keith Jaggers, Polity IV Project: Political Regime Characteristics and Transitions, 1800-1999 (College Park: INSCR Program, Center for International Development and Conflict Management, University of Maryland, 2000), available: .
78. PIOOM (Interdisciplinary Research on the Root Causes of Human Rights Violations), available: . (Global Information and Early Warning System), available: .; GEWS (Global Early Warning System), available: .; GEDS (Global Event Data System); available: .; FAST (Early Recognition for Tension and Fact Finding), available: .; ICG (International Crisis Group), available: .
79. CIFP (Country Indicators for Foreign Policy), available: .
80. Whilst long-range forecasting of political risks cannot be assessed in terms of empirically demonstrable accuracy, fourth-generation risk forecasts can be viewed as competitions among developmental sequences cast in provisional terms rather than as general laws. For an epistemological defence of this approach to forecasting, see William Ascher, "Beyond Accuracy", International Journal of Forecasting, Vol. 5, No. 4 (1989), pp. 469-484.