Political risk is one of three factors measured in Political Risk Services’ International Country Risk Guide, or ICRG. The three factors are political risk, economic risk, and financial risk. Political risk is determined by thirteen determinates while economic risk is determined by only six, and financial risk by only five. This illustrates that although all three factors are important, political risk is the greatest factor of them all. Political risk is associated with the country’s willingness to pay while economic and financial risk is associated with the country’s ability to pay. This measurement of the country’s willingness to pay could slow down a company’s progress, hurt a company’s profit margin, or even crush expanding companies. The way political risk is determined is by hired staff analysts interpreting subjective information about the country.

Foreign countries have several techniques to control foreign companies within its borders. The worst case scenario would be if a foreign country confiscated a company’s assets. This means to seize the company’s assets without any type of compensation. The companies that are affect by this action the most are natural resource companies such as coal or oil. Expropriation is the seizure of a company’s assets, but the government offers some type of compensation; usually much less than the actual value of the assets. Embargos prohibit trade with foreign countries. This strictly limits a company’s operations which can be detrimental to the company’s profit and success. Protective tariffs force companies to pay more for any type of imports or exports. Governments do this to make local materials and products more competitive in market. The last technique that is mentioned in this article is currency controls. Currency controls have a negative effect because it represents overvalued currency. When governments change the value of the currency, it decreases the certainty of worth thus making it more risky to own. Any question in currency value can lead to a capital flight, or rush to exchange a local currency to a foreign, more stable currency.

References:

B.cook9. (2009) Risk Foreign-expanding Companies Face Caused by Governments. Retrieved from http://thecsem.org/content/risks-foreign-expanding-companies-face-caused-governments

Brink, Charlotte. Measuring Political Risk: Risks to Foreign Investment. Page 148