Analyzing Political Risk for Global Growth

(This article is the first in a series on global business development)

Globalization has brought two things with it: a greater connection of markets and increased risk from political struggles in far off countries.

Just recently, Citigroup and the Carnegie Europe think tank joined forces to produce a report on Global Political Risk, which notes, “Political events and social trends are becoming increasingly interconnected; links can easily be made between tensions in the Middle East, terrorist attacks around the world and the migration crisis,”

What this suggests is that a company looking to expand anywhere in the world—whether through entering a new market or investing in an office on the ground—should understand and monitor the political risks you might face.

And not just the big stuff either.

Everyone knows to be wary of large-scale conflict or widespread outbursts of protest, but what other political problems can affect a business?

1.       Smaller protests in the country could interrupt the delivery of products or services, as well as supplies you need for production.

2.       Government institutions could limit the amount of money entering or leaving the country.

3.       Political elite involvement in the economy could make the business environment challenging for foreign-owned companies.

4.       Conflicts in nearby countries could lead to a refugee crisis that increases social, economic and political pressures in the society.

To mitigate such risks, companies need to be aware of them beforehand and monitor their development over time. This is why a company or organization looking to enter a market in a new country needs to ensure they have examined the political risks thoroughly.

Tips for Conducting Political Risk

A company with the money to hire a political risk firm should do so, but smaller companies can get a sense of a country’s political environment by looking at the following:

1.       Each year Freedom House puts out its Freedom in the World, report. In fact the report for 2016 has just come out. Look at the past few years to see what direction the country is moving. Is it becoming freer? Less free? Is the country a hybrid regime—one composed of elements of democracy and authoritarianism? While all forms of government have their own challenges, hybrid regimes tend to be more susceptible to political strife.

2.       Find out what the GINI index is for the country you are entering. A number of studies have shown that a large disparity between the haves and the have-nots can increase political dissatisfaction and lead to increased protest and conflict.

3.       Conduct research on how citizens in the country dissent. The fact that citizens take to the streets is not necessarily a bad thing. Citizen involvement is actually healthy. Small protests can lead to the government’s addressing problems in society before they grow too large to handle. A country with very little dissent, on the other hand, could be achieving this through oppression, which means that smaller problems go unsolved and tend to grow into big ones. Look into how the government deals with dissent. You can expect the risk of a heavy-handed Happy Valley will increase exponentially as stressors increase, whereas a country with periodic, small demonstrations will tend be much more resilient.

4.       Take a look at articles on corruption and the government’s involvement in business. Regulations themselves are not the end of the world if they are well targeted. But vague regulations or regulations that contradict each other could serve to support corruption. Are government bodies at the same time regulators and competitors? Are there reports that government officials have a large share of the economy? Do citizens view corruption as being a problem in the country? The Corruption Perceptions Index published by Transparency International can help here.

5.       Understand ethnic divisions in the country. Ethnic strife can quickly flare up in a country and turn to political turmoil. Knowing what these ethnic divisions are and how they ethnic groups interact or are represented in the government can help you assess the potential for interethnic conflict.

6.       Look at the issues in nearby countries and those that have close ties to the country you are seeking to enter. Countries don’t exist in a vacuum. Risks from other countries can spill over into those around them. A rich country may be relatively risk free on its own, but that doesn’t mean it can’t be pulled into its neighbor’s conflicts or economic woes. Economic and political problems in nearby or connected countries can lead to challenges from the influx of refugees or economic migrants, and these can increase political pressure in the country you are seeking to enter. Recent economic and political woes in Russia resulted in workers from Central Asia having to return home where there weren’t enough jobs for them. This increases the political pressure on these countries.

7.       Read political risk reports that are out there for free. Even a report that is a year old is better than having no information at all.

8.       The final and most important thing: focus on the risk, but don’t let it paralyze you. Every country will have some amount of political risk. The goal of Political risk analysis is to challenge your thinking and help you prepare for eventualities. It is not necessarily a go-no go situation. Risk is calculated as probability times expected harm. Let this idea guide you in your decision making. If you assess the probability as high, but the harm as low (or the other way around), maybe these are still viable options, particularly if you can put some safeguards into place that will help mitigate them.