48. What are the objectives of political risks analysis? Are they different from the objectives of international political environment analysis?

The effort to determine the causes or sources of risk and to map the relationships between causes.

Objectives in PRA: the primary one is to forecast the losses of risk; a secondary is to suggest means of managing the risk or avoiding the loss.

Analysis involves identification of variables, determination of their relationship to each other, establishing their contribution to a particular situation (data), and then projecting the future for purposes of a specific application.

There are predictors in the social, political or international system that could tell us something about the likelihood that a particular type of loss will occur. The challenge to the political risk analyst is to determine which variables and which combinations are likely to result in the threat of loss to the investor.

49. What are the elements of risks that should be formalized? Explain the methods of political risks analysis.

(1) Source: Risk from what?

(2) Target: Risk to whom or to what?

(3) Effect: Risk of what?

(4) Mechanism: How changes in the source cause changes in the probability of effect on the target.

Method 1 backwards from the risk

- potential loss or harm is identified (e.g. higher import tariff rates)

- The analyst then tries to determine under what might cause that loss or harm (e.g. higher tariffs may arise when limited foreign currency reserves cause the government to limit imports).

- Methods to track those causal conditions are identified (e.g. track foreign currency reserves)

- Estimates of likelihood of all causes are made to determine the total likelihood of the loss or harm.

- This analysis is then used to develop strategies that either mediate the cause-to-loss relationship or arrange corporate operations to be less affected by the loss

It is used for such types of risks:

- Commonly occurring

- Where the process by which the risk arises is relatively clear

- When causal factors can be tracked

- Typically risks that can be tied directly to financial effects (e.g. tax changes, inflation issues, blocked funds)

Method 2 Work Forwards from Potential Changes

- Identify a trend or potential shift in business context (e.g. an increasing concern with health issues or a change in party in power)

- Determine how those changes will affect policy or priorities in the society (e.g. a rise in attention to pollution)

- Clarify how the business environment might be affected by that trend or shift (e.g. more stringent

pollution regulation)

- As with Method 1, this analysis is used to either develop strategies that mediate the cause-to-loss

relationship or arrange corporate operations to be less affected by the loss.

It is used for such types of risks:

-Novel trends or changes or those that are expected to have a discrete rather than a

marginal effect.

- Relatively broad changes in the social, political, or economic environment

- When there is evidence on how people relate to those changes or what they want to arise from those changes ( e.g. public interest group

policy statements)

Method 3 General National Assessment

The objective: gauge a general measure of business risk or perhaps of broad

categories, such as financial risk, risk of violence, etc. at the national level.

- May be based on expert ratings or tracking of key variables (e.g. foreign currency

reserves, interest rates, etc. to gauge financial risk)

- This method is typically used to determine investment level in a country. Companies either stay out of risky countries or withdraw or limit investment in those.

50. What are the major trends in political risks analysis nowadays? Explain them. In your opinion, what is the difference between reactive and proactive approaches to international political risks management?

Trends: Analyses track changes that have led to loss in the past, either in the target country or others like it.

Example: A high level of unemployment creates problems,

but more issues arise as unemployment rises. Then, civil society tends to become disruptive. Analysts would track unemployment rates.

Proactive Motivations

• Profit advantage

• Unique products

• Technological advantage

• Exclusive information

• Managerial urge

• Tax benefit

• Economies of scale

• Minimization of competitive risk

• Attractive markets

Reactive Motivations

• Competitive pressures

• Overproduction

• Declining domestic sales

• Excess capacity

• Saturated domestic markets

• Proximity to customers and ports

• Clients go global