ABSTRACT
Multinational enterprises operating in the present era of low economic growth are likely to feel a substantial impact from political factors affecting their earnings and overall corporate strength. One firm has adopted a “systematic approach” to political risk analysis by determining priorities that reflect the broad areas of political risk it faces. These priorities are nationalization or expropriation, social and political unrest, stringent contractual obligations, negative government policies and tax laws, stringent currency controls and labor unrest. The dramatic expansion of the private insurance coverage provided by companies as Lloyd’s of London and American International Group seems to indicate that certain insurance companies are willing to shoulder more political risk. The Political System Stability Index was developed by using data for the 1961-1966 periods. For every other component that a political risk analyst deems relevant, a similar procedure could be followed until a complete picture of the political risk an investment faces is drawn.
