Forecasting Political Risk

Although not usually government initiated, violence is another related risk for multinational companies to consider in assessing the political vulnerability of their activities. The State Department reported 3,200 terrorist incidents worldwide in 2004, up dramatically from previous years given a new approach to counting. Terrorism has many different goals. Multinationals are targeted to embarrass a government and its relationship with firms, to generate funds by kidnapping executives to finance terrorist goals to use as pawns in political or social disputes not specifically directed at them, and to inflict terror within a country as did September 11.

In addition to qualitative measures of political vulnerability a number of firms are employing systematic methods of measuring political risk. Political risk assessment is an attempt to forecast political instability to help management identify and evaluate political events and their potential influence on current and future international business decisions. Perhaps the greatest risk to international marketers is the threat of the government actually failing, causing chaos in the streets and markets. Foreign policy magazine use 12 criteria to rank countries on their Failed States Index. The list of criteria include demographic pressures, human flight uneven development and the like.

Risk assessment is used to estimate the level of risk a company is assuming when making an investment and to help determine the amount of risk it is prepared to accept. In the former Soviet Union and in China, the risk may be too high for some companies but stronger and better financed companies can make long term investments in those countries that will be profitable in the future. Additionally, one study found that compared to American and Japanese managers market entry decisions appear to be more influenced by concerns about political risk in foreign markets. Early risk is accepted in exchanged for being in the country when the economy begins to grow and risk subsides.

During the chaos that arose after the political and economic changes the Soviet Union, the newly formed republics were eager to make deals with foreign investors, yet the problems and uncertainly made many investors take a wait and see attitude. However as one executive commented, If US companies wait until all the problems are solved, somebody else will get the business. Certainly the many companies that are investing in the former Soviet Union or China do not expect big returns immediately; they are betting on the future. For a marketer doing business in a foreign country, a necessary part of any market analysis is an assessment of the probable political consequences of a marketing plan, since some marketing activities are more susceptible to political considerations than others.

Even though a company cannot directly control or alter the political environment of the country within which it operates, a specific business venture can take measures to lessen its degree of susceptibility to politically induced risks.

A company can open up new employee pools for housewives and physically disabled that might provide a more cost competitive and higher skilled workforce. It will allow organizations to provide 24X7 services to customers without additional running costs. Space and infrastructure investments will also be comparatively less.

In today’s scenario, organizations give their employees the option to work from home. This is not only beneficial to employees, but also helps firms reduce overhead costs. It helps organizations ramp up productivity and provides flexibility to employees for managing work life balance. Thus a company can gain political acceptability and a positive image on a foreign soil.