Political Risk



Political Risk

Globally, political upheavals have affected business operations in most of the sectors. With diverse and unpredictable political movements, organizations find it hard to undertake their businesses in a serene environment. According to Daniels et al. (2001), political risks denote the potential threat that multinational corporations (MNCs) face in case of sporadic or political decisions spearheaded by political bigwigs governing the region. The four main types of these risks include; systematic, catastrophic, procedural, and distributive political risks.

Systemic Political Risks

Organizations that have invested in international markets may be prone to political risks inherited from the bogus and unruly business policies that were initiated by the previous governance. These business policies may be directed to the market structure, aimed at operational niche in the economy, or focused on a given business sector (Devadason). Though most of the systematic political risks are attributed to the national government’s strategies, some of them may originate from global business processes and events. One such issue is the global financial and economic crisis that manifested globally.  Example of this political risk is the currency and capital controls that were initiated in 1998 by the Malaysian government.

Catastrophic Political Risk

The economy may face severe changes in the economic conditions and financial crisis. This affects the business operations in the host country, and, more specifically, the operations of the foreign business enterprises in the host countries. Over the past decades, there has been unpredictable economic changes—with recent and most adverse being global financial and economic recess of 1998. Ideally, it is prudent for the government to safeguard the operations of the domestic business entities, and this creates a loophole of the foreign investors, as they will be faced with hazardous economic crisis. Some of the catastrophic political crisis that an economy may face includes civil war, ethnic and racial clashes, terrorisms, and military conflicts. Though most of these economic crises may arise due to political negligence and inefficiency of the government, some of them may be beyond the government control (Devadason). Catastrophic political risk was realized in the Kenyan economy in 2007 when post-election violence was experienced in the country. Economists had predicted that Kenya was one of the promising economic regions as it had recorder an increasing annual economic growth—5.8%, 6.1% and 7% in the year 2005, 2006, and 2007 respectively.

Procedural Political Risk

Different countries have different procedures that business organizations need to follow. Most of the organizations find it difficult to articulate to these procedures and they end-up deviating from these operational activities; thereby increasing cost outlay. Some of these operational activities may include smooth flow of raw materials, human resources, finances, final products among others. Ineffective government decisions may increase transaction costs and lower efficiency of business operations in the economy (Devadason). In addition, corruption, unsettled court disputes, and government favoritism also increases transaction costs. An example is Albert Stanley, a CEO of Global Engineering Company, was found guilty by a Nigerian court for bribing government officials in an attempt of securing a contract.

Distributive Political Risk

In developing countries, distribution of wealth is crucial in harnessing economic growth and development. Such equitable distribution of wealth will only be realized when local government, private business ventures, and foreign investments ensure that resource allocation is remorseful. Normally, the economic regulations and conditions are favorable to foreign investors; therefore, increasing their profitability. The host government, in an attempt to realize equitable distribution of wealth, may impose revised tax codes, decrease return on investment, revise monetary policy and regulate market structures. Such a scenario was experienced after President Hugo Chavez was reelected into the office where new economic plans were implemented. It ensured that Venezuelan government imposed strict regulations on foreign gas and oil companies.



Daniels, J.D., Radebaugh, L.H., & Sullivan, D.P. (2001). Globalization and Business. New York: Prentice Hall. Ch. 10, pp. 239-243.

Devadason, R. (n.d.). Investment Risk – Political Risk. Retrieved February 5, 2013, from http://www.freecoolarticles.com/FP15.14.htm



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