A Unified Model of Political Risk
Advances in Strategic Management, Forthcoming
50 Pages Posted: 5 Dec 2014 Last revised: 19 Jun 2017
Date Written: May 9, 2015
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: Suggested Citation