The identification and measurement of political risk : toward a firm-centric approach

Master Thesis


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University of Cape Town

Political risk analysis is the study of economic and social discontinuities and changes which result in speculative constraints and opportunities for transnational business. This paper explores the problem of establishing definitional congruity at conceptual and operational levels of analysis and recommends the adoption of firm-centric approaches to assessing risk originating in the political environment. Conclusions are arrived at by means of partial induction, based on a rigorous comparative examination of a comprehensive body of literature. The first section delineates various fiduciary frameworks, historical and definitional issues, covering the foundational concepts of certainty, uncertainty, chance and risk. Current definitions of political risk are compended, and a new definition is suggested, compatible with the day-to-day operations of globalised firms. Models and methods for the measurement and identification of political risk are reviewed in the second part of the paper. Conceptual and operational incongruencies are investigated from a perspective which aims at establishing the need for a firm-specific conceptual schematicisation of political risk. Approaches based on aggregation by macro or micro distinction are rejected in favour of the proposed conceptual model. Finally, the remaining part of the paper considers current and past models which place the firm at the centre of the analytical procedure. An abstract model of the firm is described for the purpose of including constraints on business interests, norms, rules, practices and procedures, profitability and other goals. Some empirical data is discussed with a view to confirming the necessity for adopting firm-centric approaches. The conclusion recommends further research in the form of empirical case studies which consider risk in relation to the individual firm.

Bibliography: pages 168-181.