ABSTRACT
Kobrin, 1978; Fitzpatrick, 1983; Simon, 1984; Friedman & Kim, 1988; Chermack, 1992; Jarvis, 2008). Yet, as a first step in trying to achieve more clarity in this field, it is possible – indeed useful – to analyze the use of the term in its historical evolution. In the 1960s, when financial and economic actors began to develop country risk analysis, the political scenario worldwide was shaped by two complex and intertwining processes: the Cold War, with its inherent ideological contraposition between capitalism and socialism – that is, between free market and planned economies – and the beginning of decolonization. The likelihood of events such as the 1956 Suez crisis or the 1960 Congolese upheaval that could suddenly and drastically change the political as well as the business environment considerably increased. Political risk, however, sometimes also referred to as ‘non-economic risk’, 3 was predominantly considered to be a feature of ‘underdeveloped’ or ‘modernizing’ countries (Zink, 1973; Green, 1974; Green & Korth, 1974): as Jodice puts it, first-generation political risk analysts were mostly concerned about investment disputes deriving from so-called ‘economic nationalism’: the trend, typical of developing countries, to confiscate or expropriate foreign property in the name of public interest (Jodice, 1985, p. 9). The 1970s were marked by two events, both – unsurprisingly – with a relevant impact on the business world’s perception of political risk: the 1973 oil-shock and the 1979 Iranian revolution. The occurrence of such grand-scale events highlighted the importance of political risk assessment and management, and the political risk industry began to flourish, with the proliferation of consulting firms as well as of applications for political risk coverage, provided both by public and by private insurers (Simon, 1984). The 1980s saw another shift in the implications of political risk, with a new focus on the problem of debt management by host countries. 4 Since the 1990s, however, and particularly after the attacks on the World Trade Center in New York City, terrorism has become a major source of concern for international investors and has emerged as a significant form of political risk (Berry, 2010). The scope and breadth of political risk analysis has also evolved in geopolitical terms from being mostly performed by and in the interest of Western (largely American) MNEs, to becoming a truly global activity. Firms in emerging economies invest in risky markets more than their global counterparts (Satyanand, 2011), and in light of the financial (and political-economic) crisis which began in 2008, developed countries do not look as devoid of risk to foreign investors as they had in the past. Thus, political risk is no longer seen as an exclusive attribute of least developed countries (LDCs). Generally speaking, it can be said that the term political risk has come to designate a component of country risk, the latter being defined as “the ability and willingness of a country to service its financial obligations” (Hoti & McAleer, 2004, p. 1). However, it should also be noted that ‘country risk’ today commonly refers to a wider array of risks, not only financial but also operational in nature: “country risk is of a larger scale, incorporating economic and financial characteristics of the system, along with the political and social, in the same effort to forecast situations in which foreign investors will find problems in specific national environments” (Howell, 2007, p. 7).
