Academic journal article Canadian Journal of Administrative Sciences

Political Risk and the Internationalization of Firms: An Empirical Study of Canadian-Based Export and FDI Firms

Academic journal article Canadian Journal of Administrative Sciences

Political Risk and the Internationalization of Firms: An Empirical Study of Canadian-Based Export and FDI Firms

Article excerpt

Abstract

Political risk analysis primarily receives attention for foreign direct investment (FDI) but only rarely for exporting. We examine how exporters and foreign direct investors evaluate the relative importance of political risk factors. We provide a rationale for exporters to evaluate political risk factors for FDI and for foreign direct investors to evaluate political risk factors for exporting. Survey data were collected from Canadian exporters and foreign direct investors and capture the distinctive nature of salient factors for exporting and FDI. We offer unique insights on the evolutionary character of political risk that are of practical value for both exporting and FDI.

Copyright © 2007 ASAC. Published by John Wiley & Sons, Ltd.

JEL Classification: F23

Keywords: exporting, FDI, internationalization process of firms, political risk assessment, political risk factors

Résumé

L'analyse du risque politique a été essentiellement étudiée en rapport avec les investissements étrangers directs (IED) et rarement en rapport avec l'exportation. La présente examine la manière dont les exportateurs et les investisseurs étrangers directs déterminent l'importance relative des facteurs de risque politique. Elle présente aussi les raisons qui doivent pousser les exportateurs à évaluer les facteurs de risque politique liés aux IED et les investisseurs étrangers directs à évaluer les facteurs de risque politique liés à l'exportation. Les données utilisées ont été collectées auprès des exportateurs et des investisseurs étrangers directs canadiens. L'étude jette une nouvelle lumière sur le caractère dynamique du risque politique et est d'un intérêt pratique pour les exportateurs et les investisseurs directs étrangers. Copyright © 2007 ASAC. Published by John Wiley & Sons, Ltd.

Mots-clés : exportation; IED; processus d'internationalisation des entreprises; évaluation du risque politique; facteurs de risque politique

Formal political risk analysis has received attention only since the 1960s when U.S. multinational enterprises experienced significant losses due to expropriations (Overholt, 1982). Consequently, conceptual studies on political risk definitions focus on foreign direct investments (FDI) ignoring other forms of international involvement such as exporting, outsourcing, licensing, and franchising (de la Torre & Neckar, 1988; Kobrin, 1979; Monti-Belkaoui & Riahi-Belkaoui, 1998; Robock, 1971). Even though practitioners consider political risk to be important for other international activities (Minor, 2003; Price, 2005; Short, 2005), empirical studies take the same approach (Kobrin, Basek, & LaPalombara, 1980; Pahud de Mortanges & Allers, 1996; Rice & Mahmoud, 1990) with only a few exceptions such as Coplin and O'Leary (1982).1

Since political risk can take many different forms, different facets of political risk need to be assessed depending on the type of a firm's international involvement and the firm's stage of internationalization. Political risk is a highly relevant factor during the preentry, entry, and postentry stages of the "process" model of internationalization (Yip, Biscarri, & Monti, 2000). For example, strategic planning, market research, and market selection all consider motivations such as market potential and risk assessment as part of the preentry process; while planning for contingencies and postentry strategic commitment both look at strategic modality shifts from export to contractual agreement or FDI, and vice versa, as part of the postentry process. Focusing on less important facets of political risk may lead to poor decisions.

It is generally assumed that less capital is at stake for exporting and therefore political risk is of lesser importance to exporters (Stapenhurst, 1992). However, the loss of expected future revenues often significantly exceeds the value of the expropriated assets (Gillespie, 1989). …

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