Political Risk: Countering the Impact on Your Business

by Ian Bremmer for QFinance, October 21st, 2010.

Introduction

Over the past several years, and across a broad range of companies, corporate decision-makers seeking opportunities overseas have learned that it is not enough to have a knowledge of a foreign country’s economic fundamentals. They also have to understand the forces and dynamics that shape these countries’ politics. This is especially true for emerging markets, where politics matters at least as much as economic factors for market outcomes. Of course, understanding that political risk matters is one thing. Knowing how to use it is another.

Executive Summary

• Business decision-makers must understand the political dynamics within the emerging market countries in which they operate.
• We can measure a state’s stability—the ability of its government to implement policy and enforce laws despite a shock to the system.
• Essential to managing any type of risk is the development of a detailed and effective hedging strategy.
• Companies should not accept too much risk exposure within any one country or region.
• Rules of the game can change quickly in developing countries, and the cultivation of “friends in high places” isn’t always a strong enough hedge.
• Operating in some developing countries comes with reputational risks at home.
• Too many companies have historically relied for insight into local politics and culture on employees who have lived in a particular country for only a short time—or have even merely traveled there. (…)
• Political risk can be managed. It should not be avoided altogether.

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