The term “political risk” has two meanings, often used interchangeably, but actually different from each other. The first meaning of political risk is the risk of a change in the political environment that affects business investments and operations. This type of political risk can include changes in a countrys laws and regulations, or changes in a companys access to or cost of key inputs such as labor or taxation.
The second meaning of political risk is the risk of a particular political decision, or action, being taken that could impose direct costs on the business. This type of political risk includes risks associated with the new election or changes in government policies, as well as unexpected events such as strikes, civil unrest and terrorism.
Political risk can take many forms, some of which are more difficult to predict and manage than others. Unfortunately, many political risks are out of a company’s control and may have an adverse effect on its operations and finances. For example, national disasters and wars can cause supply chain disruptions, making a country inhospitable for trade and business. Political instability can also create an atmosphere of unpredictability, deterring investors and harming a country’s prospects for economic development.
In addition, local laws, policies and politics can significantly impact business operations. These risks can take the form of changes in taxation, import and export policies, or labor regulations. The political risk management must then balance the costs and benefits of each decision against the risk of changing politics.
Political risk can also arise from the activities of state-owned enterprises, or SOEs. For example, an SOE may have exclusive rights to certain products and services, or preferential access to government resources. This type of political risk can be very difficult to manage, as SOEs can often operate above the law and use their power to acquire assets or create competitive advantages.
For any company operating internationally, or considering international investments, it is important to take into account the risks associated with political risk. These risks can have a significant effect on the long-term viability and profitability of the venture, and therefore must be carefully considered and assessed.
In recognizing political risk, businesses should have a thorough understanding of the politics, policies, and social environment of the countries in which they operate or invest, and then assess and quantify the risks that could arise.
Furthermore, companies should strive to build relationships with key stakeholders, such as political leaders, in order to ensure access to policy makers and ensure that changes in policy are made in the business’s favor. It is also important to understand the legal system, economic policies, and currency risks for a clearer picture of the political risk landscape.
To manage political risk, companies should develop risk assessments and contingencies, and consider insurance options. Companies should also monitor political developments and be prepared to adjust their strategy and operations as needed.
To mitigate the potential impact of political risk, companies should have a plan in place to respond quickly to changes in the political climate. The plan should include strategies for addressing potential disruptions, managing risks, and communicating with stakeholders.
Overall, political risk is an unavoidable reality in business. However, with careful consideration and preparation, businesses can protect themselves from the potential impact of political events. By understanding the political environment, forming relationships with key stakeholders, and having an appropriate risk management strategy in place, companies can minimise the risks and remain successful in the long term.
