Academic journal article Journal of Positive Management

Scenario Analysis as a Tool for Country Risk Assessment: A Theoretical Exploration

Academic journal article Journal of Positive Management

Scenario Analysis as a Tool for Country Risk Assessment: A Theoretical Exploration

Article excerpt

1. Introduction

The on-going process of globalisation (even if slightly interrupted due to the economic crisis) requires more and more and ever smaller companies to become active across borders. However, getting involved in another (economic) context is more complex than in one's own country, resulting in additional risks: country risks. 6 * This in turn results in the demand for ways and means of managing these risk.

In his PhD thesis Country risk assessment; A Behavioral Perspective Van den Berg (2013) demonstrates that small and medium sized enterprises that engage in international business use an incomplete set of process steps when they assess the country risks that are potentially present in a foreign market under consideration. Hammond, Keeney, and Raiffa (2002) explain that decision processes should be executed completely (all steps should be taken) because it helps to "manage complexity [of the decision] sensibly". Also, the decision-makers in question use judgmental heuristics in the assessment of country risks, resulting in judgmental bias. An incorrect assessment of country risks in international business decisions, caused by the incomplete execution or the use of judgmental heuristics, may well result in decision errors of type I and IL A type I decision error occurs when a good investment is rejected because based on the assessment the investment looks poor. A type II decision error occurs when a poor investment is accepted because based on the assessment the investment looks good.

This article explores whether the technique of scenario analysis as presented by amongst others Van der Heijden (2011) can be used to improve the assessment of country risks in the evaluation and decision making process in international business engagement. This exploration is initiated based on Schoemakers (2009) categorization of scenario analysis as a means of dealing with an unknown future in an environment of high uncertainty and high complexity. Furthermore, because scenario analysis cannot be considered a forecasting technique (Schoemaker, 2009; Van der Heijden, 2011), the question that will be answered in this article is whether the use of scenario analysis can lead to the minimization or even termination of the use of judgmental heuristics that are used in judgment and decision making under uncertainty.

2. Problem Definition

In the last few years risk management finds itself more and more in the spotlight of both the management literature and the professional field. This development is one of the results of major fraud cases in the beginning of the 2Η century (e.g. Enron, Worldcom, Tyco) and the economic crisis from 2008 onwards. Companies are now more and more required to include processes of operational and financial risk management in the execution of the day-to-day business to prevent the unexpected from happening. As a consequence the attention for country risk management has also intensified. Baird and Thomas (1985) already mentioned in 1985 that "...because risk is a significant determinant of foreign investment there is a need for the relevant decision makers to identify, estimate, and assess the relevant risk and to respond to it". However, scientific research so far did not present a comprehensive framework that is useful for small and medium sized enterprises. This type of enterprises is a specific group because they normally do not have specialists in (country) risk management, are focussed on entrepreneurial aspects of opportunity seeking, and are always under the pressure of limited time and means (Van den Berg, 2012). The current literature mainly shows extensive methods for political and economic risk assessment and often mentions that they are next to impossible to implement without the help of experts.

In his PhD thesis Van den Berg (2013) studies how decision-makers in small and medium sized enterprises execute the process of country risk assessment, the use of heuristics in the assessment of country risks and whether that leads to judgmental bias. …

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