A Unified Model of Political Risk

Advances in Strategic Management, Forthcoming

50 Pages Posted: 5 Dec 2014 Last revised: 19 Jun 2017

See all articles by Benjamin A. T. Graham

Benjamin A. T. Graham

University of Southern California - School of International Relations

Noel P. Johnston

University of Oxford

Allison Kingsley

University of Vermont - Grossman School of Business

Date Written: May 9, 2015

Abstract

Political risk is a complex phenomenon. This complexity has incentivized scholars to take a piecemeal approach to understanding it. Nearly all scholarship has targeted a single type of political risk (expropriation) and, within this risk, a single type of firm (MNCs) and a single type of strategic mechanism through which that risk may be mitigated (entry mode). Yet "political risk" is actually a collection of multiple distinct risks that affect the full spectrum of foreign firms, and these firms vary widely in their capabilities for resisting and evading these risks. We offer a unified theoretical model that can simultaneously analyze: the three main types of political risk (war, expropriation, and transfer restrictions); the universe of private foreign investors (direct investors, portfolio equity investors, portfolio debt investors, and commercial banks); heterogeneity in government constraints; and the three most relevant strategic capabilities (information, exit, and resistance). We leverage the variance among foreign investors to identify effective firm strategies to manage political risk. By employing a simultaneous and unified model of political risk, we also find counterintuitive insights on the way governments trade off between risks and how investors use other investors as risk shields.

Keywords: political risk, foreign investment, MNCs, firms, transfer risk, expropriation, war, war risk, FDI, portfolio investment

JEL Classification: F21, F23, G15

Suggested Citation

Graham, Benjamin A. T. and Johnston, Noel P. and Kingsley, Allison, A Unified Model of Political Risk (May 9, 2015). Advances in Strategic Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2533701 or http://dx.doi.org/10.2139/ssrn.2533701

Benjamin A. T. Graham (Contact Author)

University of Southern California - School of International Relations ( email )

3518 Trousdale Parkway
VKC 330
Los Angeles, CA California 90089-0043
United States
8586996306 (Phone)
2137420281 (Fax)

HOME PAGE: http://https://dornsife.usc.edu/graham

Noel P. Johnston

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Allison Kingsley

University of Vermont - Grossman School of Business ( email )

302 Kalkin Hall
Burlington, VT 05405-0158
United States
8026563464 (Phone)

HOME PAGE: http://allisonkingsley.com

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