ABSTRACT
This chapter suggests that the discount rate to reflect only financial evaluations, and adjust the cash flow amount in order to reflect political risk evaluations. A major deficiency in the multinational enterprises (MNE) conduct of foreign investment decisions lies in the monitoring of the investment environment after the decision to proceed with the initial investment has been made. MNEs can account for the economic and political risks of overseas operations in several different ways. An analyst monitoring additional information may well seek to reflect political changes in terms of probabilities. Bayesian analysis can be used to revise the probabilities of each of the hypotheses based on this new information. The differences in the methods used to integrate political with financial risk analysis can be best illustrated by a relatively simple example. The quantification, monitoring, and integration of political risk with financial analyses also have the advantage of presenting information to corporate leaders in a more familiar format.
