Conducting Strategic Political Risk Analysis for Global environs ©
By Dr. K. L. Ranasinghé Ph.D., D.B.A.
April 2010
PLEASE NOTE: This briefing – in whole or in part – emanated out of several lectures I have delivered to many of my degree candidates at several universities. If readers of this briefing notice any repetition therefore I do ask their forgiveness. Further, many sources were used as this briefing was conceived and prepared ….thus I am indebted to myriad speakers/researchers and other sources for many thoughts espoused in this mini-briefing. They are numerous such that it is not possible to mention them individually or, in many instances, to recollect who they were accurately. If this mini-briefing incorporates issues of interest and import however …I ask all recipients of this briefing to join me in crediting them …albeit in absentia. :- )) for the wisdom they (often inadvertently) imparted to me.
Not long ago Warren Buffet the world renowned American business expert and head of Berkshire Hathaway said:
“When the economic tide goes out, you find out who is swimming naked.”
Certainly the financial upheaval of the last few years has revealed a number of inadequately clad investors.
Just as every crisis prompts soul-searching about assumptions and standard procedures, banks, other financial institutions, indeed all organizations, are taking a serious look now at how they measure and monitor risk. This is not something which occurs just in the capital markets either. “As Washington policymakers debate reforms to address regulatory gaps revealed by the worst crisis since the Great Depression, there is growing discussion about what are the right lessons to be drawn about managing risk.” (knowledge.wpcarey.asu.edu)
L. Wendell Licon, an Assistant Professor of Finance at Arizona State University has stated that many of the lessons learned are the same as those gleaned from previous crises. The problem, he says, is that American business leaders, and investors, get caught up in the “irrational exuberance” of rising markets and forget fundamental risk management principles. “There are basic points: don’t ignore remote possibilities; do your own risk analysis: if you don’t know how to strategise, to price a security, then you probably shouldn’t do it or buy it; Importantly you MUST understand both the risks and benefits of the herd mentality in investing.”
Recipients of my humble thoughts in this forum have – in the main – all indicated an abiding interest in the global arena and many expect to function in the international business world. With a view thus to what I know about most of the kind folk who are participant in our global endeavour, I feel that it is important for you to consider Risk. To this end this simple briefing is as something of a primer for you, just in case you are not experienced in this area, hopefully you will find it useful. You may even wish to hold onto it for future reference.
As some of you will be aware, apart from other global activity, I am regularly called upon to instruct at various universities. In most of my Graduate classes, wherein I have the privilege of tutoring degree candidates at either Masters or Doctoral level, I inevitably require that they respond to these questions:
What means can an Executive – a company Director or manager (either American or from other nations), one charged with some aspect of strategic responsibility for his/her employer entity – use to specifically assess risk?
What do you feel – realistically – is the relative effectiveness of the methods currently used in assessing such risk?
For instance, in an increasingly-interlinked global (economic and professional ) environment – can political risk – not just for one’s own domestic arena but for the vast panoply of nations and target regions that make up the global environment (which daily becomes more a part of our area of interest) be “managed”?
If so, with what methodology?
Over time it has become apparent that whereas most of us can address risk per se… the matter of, for example, political risk – either in the domestic or international environment – is an area we know little about and, specifically, we know even less about a means with which to assay it.
With a view to the fact that in that inextricably-interlinked Global Business arena I just mentioned global politics, geo –politics, does tend to intrude in our daily, domestically-constrained, lives – as we (or the individuals who have charge of our money, our pensions, our retirement largesse J)) ) make arrangements to invest in different parts of the world, or we make plans to despatch staff around the world, or suddenly have to draw in and employ the incredible talent – and care for – new residents in our own domestic firmament, I thought this little mini-briefing might be useful.
The Significance of Political Risk Analysis
Increasingly, in a strategic, Global business environment, business decisions are becoming influenced and determined by actions of governments. Political risk analysis involves understanding the legal and regulatory parameters within which a firm must operate…whether in its domestic environment and/or in a host country overseas.
It is my observation – derived from speaking to many in-work professionals – that most corporations do not invest adequate time and effort into the task of political risk analysis and most leaders/managers/executives understanding of political risk tends to be subjective and superficial. Yet this subject is becoming more and more important to every global corporation.
So to reiterate “What means can an Executive (American or from elsewhere, whether in the global arena or otherwise) use to strategically assess global political risk?
First, the point needs to be made that today – as we progress through 2010 – any, indeed all, Executives have more information available to them than ever before. This is information so easily available by conducting a computer search – information with which not only to evaluate political risk, but also business risk in general.
To start an Executive should conduct an environmental scan of the intended target region (whether it be here in the United States or in an intended host nation overseas) . This exercise will yield some very basic information as to the stability and viability of conducting business there.
Information collected should include:
current political landscape;
number, size and type of competing US entities in the state …
or MNCs if it overseas …all of whom are currently doing business there;
taxation policies; investment rules and regulations;
societal climate;
any labour unrest;
unfamiliar administrative procedures;
any and all labour laws which would have an impact on staff moved from one part of the nation to another .
Then if the target region just happens to be overseas, there needs to be further additional investigation of issues which may have an impact upon:
host nation staff, third country nationals and expatriate staff and their families, ;
profit remittances and exchange controls; and ….
the image of the firm – your firm ( if there is any image, any environment of thought about it at all) in that country.
Effectiveness of Conducting Political Risk Analysis
By performing the initial external environmental scan, an Executive will obtain an overall “big picture” as to the dimensions of the environment, the complexity of doing business in the domestic area ( or overseas target nation/region)… and the dynamism of the political and business climates.
However, in addition to the scan, some quantitative methods should also be employed.
Such quantitative analysis will allow the strategically-inclined/aware executive to understand and to rate specific variables of the intended area of – for instance America – against other parts of the United States.
Again if it is overseas it will allow the executive to rate specific variables of the intended host country against those of other countries. In both instances to obtain a relevant evaluation.
Some of the quantitative models, which have been developed to assess political risk, include; Charles McClelland’s World Events Interaction Survey [WEIS]; and Haner’s Business Environment Risk Index.
On a macro level, some risk models include The Futures Group, who produce a political stability index based on destabilising events and economic deprivation.
Perhaps the most widely known and used is the Arthur D. Little and H.C. Johnson’s model called [ADL], with which risks are related to the unevenness of political development, social achievement, technical advancement, resource abundance, and domestic peace.
While the various means with which to assess political risk, as mentioned above, can be very useful and effective in enabling corporations to strategically plan their business ventures into different parts of our own nation …and other countries…it must be remembered that other means also exist.
An executive who, or a corporation which, uses political risk analysis forecasting tools should understand that these tools only provide an educated guess as to the future course of events [or lack of events] for the region, state etc … or the country… they are studying.
Do always bear in mind that texts/models like the Arthur D Little and H.C. Johnson item are only as good as the time when they were `put to bed’ at the publishers. The world is changing much faster then most publishers can handle.
As I prepared this item for your consideration however the focus of my attention was to share how you all might set out to analyze internal and external environments which were of interest to you – as you might have to do were you to be actually “living through a real-world circumstance which required you to consider risk factors.
Your varied professional activity will be far too wide-ranging for me to suggest specific tools expressly created for every professional circumstance. However generally I would suggest that you look up tools such as ( the world renowned) Dr. Michael Porter’s five forces, the BCG Matrix or the Boston Consulting Group. Do also, as your needs demand, consider Strategic group mapping, supply chain and value chain management and the ubiquitous SWOT analysis.
Do remember that all of these are methods mainly used to gauge the economic environment while only briefly touching on the subject of political risk if at all.
This is sad because the impact of political risk on an organization attempting to ‘go global’ is significant …and is hard to ignore. As I mentioned earlier, today, in 2010, ours is an increasingly- interlinked Global Economy. In such an environment global politics, geo-politics, does tend to intrude as we make our arrangements to take our businesses to new national audiences, to work in different counties, to invest in different parts of the world, to despatch our staff around the world, or care for overseas staff in our own domestic firmament.
So, at this juncture, let me share some further thoughts about the different tools I mentioned earlier in this briefing. If it seems that – after mentioning these sources I am then eviscerating their worth J)) – I would be derelict in my academic honour to you, fine global exponents all that you are, if I did not cast a jaundiced eye even on my own suggestions J))
I admit that the tool/model that I am inclined toward is Haner’s Business Environment Risk Index/Intelligence. This is actually a firm that is operated by the founder – Haner. When last I checked on their offerings I understood that they – upon working with you – will prepare a 7-10 page report on political risk of your target country/region. The cost is approximately only a few hundred dollars, and they produce it within 5 business days. As you may agree a few hundred dollars is peanuts when one considers the huge investment organizations would need to make as they begin to function in the global arena.
In providing you with their assessment the Haners organization consider the following factors:
“The Basic Sections are:
Ø Business Environment for Foreign Manufacturing and Service Operations
Ø Most Probable Political Scenario
Ø Political Developments and the Basis for the Forecast
Ø Economic Performance, Developments and the Forecast Table
Ø Financial and Currency Developments
Ø Ratings Table for the Operations, Political, and Remittance Factor Indexes and the Labour Force Evaluation Measure
Ø Government System and Current Political Structure”
Also, I understand that prior to shipping out the report to the client, it is reviewed by Dr. Haner himself
As you might notice their list is similar to that I mentioned earlier, in terms of the information that needs to be collected to better investigate the political stability of a nation/region, its socio-cultural/religio climate and its possible impact on the host nation employees as well as expatriates from the parent nation.
My Global organization has been using our own version of these factors in all our work to date.
Furthermore, there are other publications available for subscription such as BRS (Business Risk Service) that covers qualitative and quantitative ratings of 50 countries based on Political Risk Index, Operations Risk Index, and Remittance & Repatriation Factor.
I believe that any tool which provides this sort of information (Haner’s BERI for instance) is ideal to use for global purposes as they have the know-how and the necessary intelligence networks with authoritative offices and embassies already established. Such an all-encompassing effort would otherwise take much longer-involving slower speed and a smaller strategic payoff—for an individual entrepreneur or an executive of an MNC to assess and create such intricate networks and detailed reports in-house. This is especially so when they should, instead, focus on better developing their core distinctive competencies.
If any of the recipients of this briefing were inclined to use any of the tolls I have mentioned do bear this in mind. You need to be assured that any such tool provides useful on-going global monitoring systems – which can map and track the nature and frequency of cooperative and “conflict” events within and abutting upon different target nations. At a minimum any such tool should be able to provide you with impartial analysis and forecasting about foreign conflicts and crises by having quietly collected different event data on the internal and foreign conflict of different countries and regions which might be of interest to you, or your organizations future plans.
What I find interesting is the fact that many of these tools (their parent organizations) gather their data from public sources such as the Daily New York Times or New York Times Index!! Research shows that NY Times or its Index proves sufficient as they capture most major events. The only downfall is that newspapers and news channels or web-based news avenues often “omit events in the middle or lower range which can be found in regional sources such as Middle East Journal or Asia Recorder”.
Additionally, I find the following link interesting as it shows the Political and Economic Risk (world) Map. If you click on the link:
http://www.aon.com/uk/en/risk_management/insurance/political_risk/default.jsp
You will be able to find – a button/icon for the Risk (world) Map, in adobe acrobat format.
Today – in 2010 – with the state of the world in regularly-volatile flux – Executives, Global executives or Executives having financial charge for some aspect of their organizations global endeavour should probably use one or more of the models to assess the potential political risk in order to forecast and establish strategic objectives and to strategically plan their future business ventures going into different parts of a host country or parent country.
Having said all that, Ladies and Gentlemen, please do always remember that nothing quite takes the place of actually conducting a strategic site visit (preferably after studying the results of the quantitative analysis outlined above) to gauge things for oneself.
While on a site visit do not just talk to your own contacts. Use every opportunity to speak to all authoritative persons and agencies about the target region. In any state there are always city, county and State Government agencies which are expressly charged with providing information, data, surveys, documentation etc.
For instance, while putting this item together for you all from my American home in San Diego, I ran just a quick search of “Enterprise agencies in California”.
Although I didn’t check them all just a few samples of what I have found in California/San Diego listed were 39 agencies which would be very helpful in providing a myriad of information to suit a vast gamut of business needs. When I called up information for the whole state of California the list just went on and on.
In essence, if we were looking to the United States of America, every state in the nation and all major towns and counties within each of the 50 States has/have “enterprise agencies” which will in turn provide you with leads and direction to begin conducting your own , in-house, strategic analysis / risk assessment of any target area .
What about overseas, is there more than the norm one should do? YES!!!
Among the things I would recommend from my own experience, meet with the trade attaché at your Embassy, garner his/her opinion. Then don’t just be satisfied with that, talk to the people at the British and American Embassy and fellow-businesspeople at the local Chapter of the relevant (British, American or any other) Chamber of Commerce. Gauge their views.
Finally do your own research but do not constrain it to the target nation alone survey circumstances among its immediate neighbours and the region within which it lies
Succinctly, if an individual entrepreneur, or a globally-ambitious company, allocates the time, effort and resources to perform REAL political risk analysis – not just that using the often over-used forecasting tools – it will be rewarded with a significant tool of knowledge it did not previously have. This tool will allow the corporation to make intelligent and informed decisions on a macro strategic level.
More importantly this will distance the individual executive charged with this task and his/ her employer corporation from all the competition. In fact – sadly – it will always provide more then most organizations undertake for themselves in-house.
Speaking to circumstances in the United States of America it is my observation that although political risk analysis should not be unusual or unheard of in some American corporations, and with far too many American executives, it is a relative newcomer to the strategic planning arena.
This always surprises me but I suppose I should never be surprised J.
My amazement stems from the fact that I have always believed, always thought, that it would occur as a matter of course. This is an important facet of strategic planning. Thus I presumed that companies should always perform this, just as they would perform economic, financial and marketing analysis. It is another tool in a company’s strategic planning arsenal.
I believe that political risk can be managed through consistent, continual information gathering, analytical assessment and by having a “big picture” attitude.
Actually a vital aspect of all this is to have, on staff, executives who are outreach-aware, perhaps even globally inclined, NOT just because they need to be, but because they are averse to the insular and have always been `citizens of the world’ as much as they might be proud citizens of their own country .
That being said I think you will all agree that in most organizations this is going to be easier said than done.
Corporate leaders – often themselves insular, arrogant and totally under-educated about the global firmament tend to adopt a siege mentality when faced with the prospect of having to recognise that it is they – themselves – who do not have enough knowledge of how to strategically plan for their organizations survival by venturing into the global arena. They become obdurate, they cast aspersion on those among their staff who have more global experience then they hold, generally they become the very problem they claim to be trying to overcome. This sort of posture – I can assure you from my one-on-one contact with members of far too many Boards of Western organizations ( Federal and State as well as Private) is well nigh impossible to overcome . It’s a Human flaw, we never want to recognise our shortcomings, we fear that it will have an impact upon our continuing progress up the corporate ladders.
With that in mind I pose a simple thought.
Is it possible that we should be considering outsourcing the task of Strategic Global Risk Analysis to another entity?! I think now of other specialist entities which have in-depth skills and know-how to approach such critical assignments. This is especially so when these tasks require in-depth awareness of environments which are volatile, often unstable, constantly changing, often turbulent.
Anyway, just as a company continually monitors its financial performance, marketing conditions and general economic environment, it should also monitor the political environment. If a company is attuned to its operating environment, it can make minor or major operational adjustments as necessary to maximise its strategic performance.
Dr. K. L. Ranasinghé Ph.D., D.B.A.
References : Swimming Naked: Rethinking Risk Management After the Crisis …
Jul 21, 2009 (knowledge.wpcarey.asu.edu);Political Risk Analysis
