Magazine article Management Review

What Executives Should Know about Political Risk

Magazine article Management Review

What Executives Should Know about Political Risk

Article excerpt

What Executives Should Know About Political Risk

Life was simple. For decades the American business community had conducted its international activities within the cozy confines of U.S. foreign policy. Out there were the good guys, the bad guys and an amorphous and constantly changing middle group representing various gradations of risk.

The Cold War defined much of what the U.S. corporate executive could accomplish abroad; it qualified the countries in which a company could invest and those with which it could trade, as well as the goods that could be sold. If Washington's policy changed toward a traditionally hostile nation, then that country suddenly became an immediate opportunity for the business community. After President Nixon's visit in 1972, China was transformed from frog to shining prince to the ensuing regret of a number of firms that pursued this prospect without first conducting a realistic appraisal.

In this environment American businesspeople were satisfied with the simple political measure of "safe" and "unsafe" and were secure in selecting foreign projects against traditional commercial and financial benchmarks. Little or no effort was made to probe and analyze the political equation within a country or region in terms of how events might affect the success of the venture.

The astounding political changes of recent years, however, are forcing the U.S. business community to face up to new and confusing uncertainties. For example, the naive but happy presumption that the end of the Cold War meant the end of political conflict was quickly laid to rest by the Iraqi invasion of Kuwait and the eruption of intramural violence in Eastern Europe and the USSR.

FALLEN POWERS

These changes began well before the unleashing of perestroika and glasnost. The seemingly sudden demise of the powerful and friendly Shah of Iran at the hands of what was assumed by many to be a small minority of religious fanatics is a case in point. Iran had been an eager, cash-up-front customer of American goods and services, and the end of the Shah's regime adversely affected many American companies that had assumed that profits from Iran were an eternal phenomenon.

Remember, also, how the markets of Mexico, Nigeria and other OPEC members expanded geometrically under the beneficence of upwardly spiraling crude oil prices? That is, until mismanagement, corruption and the decline of oil prices destroyed their economies and caused irreparable harm to foreign creditors, foreign suppliers and foreign investors.

Fortunately, companies are beginning to recognize the impact of political issues upon international ventures, and that a sure-fire opportunity in a foreign country can deteriorate into a tremendous headache--affecting the safety of personnel as well as of profits--if political factors are not measured and provided for along with traditional market and investment perspectives.

Let's identify a variety of issues that fall within the political rubric, and then consider what a company can do on its own to identify and cope with these problems.

Political problems range from catastrophic events such as revolution or war, through a broad range of destabilizing issues including endemic corruption, labor unrest, crooked elections, religious violence, coups d'etat and incompetent economic management by government agencies, and then on to narrow but nevertheless dangerous matters such as the political leverage of your competition or ethnic conflict within a specific worksite. All of these phenomena spell trouble if not considered in advance.

Identifying these issues within a country and measuring their impact on political and economic stability requires an alertness to changing events and a healthy respect for reality. This becomes self-evident when we realize that more than one-third of the world's governments change hands each year, many by processes that would not qualify as democratic. …

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