ABSTRACT
Whether dealing with debt issues in the Euro-zone, geopolitical developments in the Middle East, fast-changing investment prospects in emerging markets, or potential disruptions in patterns of global trade, the identification, assessment and measurement of political risk (PR) are recurring issues for businesses and governments today. According to the most recent World Investment Report, although total global foreign direct investment (FDI) in 2014 slightly declined vis-à-vis the previous year, it still amounts to $1.2 trillion and, most importantly, accounts for over 40 percent of external development finance in developing and in transition economies (UNCTAD, 2015). The role and impact of multinational enterprises (MNEs) in today’s globalized economy remain highly controversial (Oatley, 2011), yet considering that FDI can have beneficial effects on host countries going beyond the mere inflow of financial capital – for instance, in terms of employment, accumulation of human capital and technology transfer – it comes as no surprise that countries from both the developing and the developed world compete to attract it (see for instance Barros & Cabral, 2000; Vukšić, 2013; Campisi & Sottilotta, 2015). On the other hand, when making long-term investment decisions, MNEs face a number of risks deriving from multiple sources – many of which fall outside the scope of ordinary business risks but are connected rather to changes in government policies after up-front investments have been made (Shotts, 2015), or to regional economic and political instability which may negatively affect an expected upturn in FDI. In fact, broadly speaking, political risk to foreign direct investment can be defined as “the probability that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action” (Matthee, 2011, p. 2010).
