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The purpose of this article is to develop a qualitative, structured model for analyzing comparative political risk at the host country level. To achieve this purpose, we review the literature of political risk, putting special emphasis on the causes and sources of political risk. We use this information to develop a macro political risk assessment framework. According to this framework, the sources of political risk are internal and external and related to societal, governmental, and economic factors. Our model posits macro political risk in several environmental contexts, consistent with the broadening conceptualization of the political risk construct.
INTRODUCTION
Political risk assessment by multinational corporations is increasing in importance. One study reported that all surveyed multinational corporations are assessing political risk for their affiliates (Hashmi and Guvenli 1992). Managing risk became one of the most important functions of a multinational company (Miller 1992). Political risk assessment has grown in importance because foreign direct investment by US multinationals has proliferated since the 1960s, political events have emerged unexpectedly, as in the case of the Iranian revolution, and the impact on the profitability of foreign operations has been swift and powerful. Consequently, the number of political risk assessment firms has increased and more firms have instituted political risk analysis in their strategic plans.
The stock of US foreign direct investment (FDI) reached 1.3 trillion dollars in 1995, according to the Economic Report to the President (Council of Economic Advisors 1997, table B-105). Since much of this investment is vulnerable to expropriation, confiscation, terrorism, discrimination, and nationalization, assessing political risk is of critical importance. To help in this task, this article provides a macro political risk assessment model. This model has a number of advantages: (1) it is forward looking allowing managers to be proactive to their political risk environment, (2) it is parsimonious, (3) it is comparative in nature, (4) it can be used to assess many different political and economic systems, (5) it differentiates between causes and symptoms of political risk, and (6) it allows the political risk analyst to change the weights or importance of the variables in order to adjust the evaluation to company specific concerns. Therefore, this article develops a structured qualitative approach to assessing the political risk of a country in...