The Idea in Brief
To navigate globalization’s choppy waters, every business leader analyzes economic risk when considering overseas investments. But do you also look beyond reassuring data about per-capita income or economic growth—to assess the political risk of doing business in particular countries? If not, you may get blindsided when political forces reshape markets in unexpected ways. Iran’s parliament, for instance, passed legislation in 2004 complicating foreign companies’ ability to plant stakes in that country’s telecom sector.
Appraising the myriad shifting political influences on your global investments isn’t easy—because political risk is hard to quantify. For example, how do you measure the impact of a national leader’s personality quirks on his country’s economic landscape?
Your strategy? In addition to analyzing economic risk, assess the four dimensions of political risk: Examine the stability and strength of government in nations where you’re exposed. Assess social trends such as growing income gaps and unemployment levels. Evaluate security by discerning how prepared a country is for natural disasters. And consider economic factors, such as a nation’s debt and openness to foreign investment.
By blending political and economic risk analysis, you make savvier investment decisions—seizing valuable opportunities around the globe while avoiding danger zones.
The Idea in Practice
To minimize risk in your overseas investments, assess the following dimensions of political risk:
Government
How strong are the government and the rule of law? Early in 2005, for example, Turkey’s government was powerful and cohesive, and had gained popularity thanks to economic recovery and the European Union’s decision to open membership talks to Turkey. These developments indicate a relatively high level of political stability.
Also consider the level of corruption in government. You’ll need proxy metrics: For example, to evaluate the integrity of a country’s judiciary, ask, Are judges paid a living wage? Do programs exist to inform them about new legislation? Are judges often targeted for assassination?
Society
How much social tension exists? How disaffected are the nation’s youth? How secure do individuals feel? To find clues, study the percentage of children who regularly attend school. Compare police and military salaries relative to criminal income opportunities. Assess young people’s access to medical care, unemployment rates, and imprisonment rates.
Persistent or widening socioeconomic inequalities—such as those in Turkey—can also signal possible social unrest leading to political instability.
Security
How stable are the country’s geopolitical alliances? How prepared is the nation for emergencies, natural disasters, and internal strife? Example:
Turkey’s security has come into question, owing to the continued presence of Kurdistan Workers’ Party militants in northern Iraq. The Turkish government worries that Kurds—empowered by the Iraqi elections—may seek to regain control of the oil-rich northern Iraqi town of Kirkuk. This could provide the financial basis for an independent Kurdish state near Turkey’s border—which in turn could fan separatist flames in Turkey’s own Kurdish population. Turkey’s concerns over growing Kurdish strength in Iraq have also strained its traditionally close ties with the United States—suggesting potential obstacles to American investments in that country.
Economic
What are the country’s fiscal position, growth and investment, and debt? How economically open is the country? Does its political openness match its economic openness? If not, instability may ensue. Example:
Economically, China is opening rapidly—as diplomats and negotiators globe trot in search of new trade relationships to feed the country’s growth. But China is still politically closed: This police state exerts absolute control over public expression. It’s also marked by corruption and inefficiency. Simultaneously, reforms are straining relationships between national and regional leaders, increasing the probability of an economic shock—followed by a political one.
Countries in turmoil elbow one another off the front page at a dizzying pace: Lebanon follows Ukraine follows Sudan follows Argentina. Companies, meanwhile, fear unpredictable change, even as they seek profit from the opportunities change creates—a freshly privatized industry in Turkey, recently tendered oil blocks in Libya, a new pro-Western government in the former Soviet republic of Ukraine. To help weigh dangers against opportunities, corporations mulling foreign ventures routinely consult economic risk analysts. But basing global investment decisions on economic data without understanding the political context is like basing nutrition decisions on calorie counts without examining the list of ingredients.