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1 – 10 of over 63000In this study a relationship between the fluctuation of a nation's monetary reserves and political risk is established. A least square regression model is used for the 1972–87…
Abstract
In this study a relationship between the fluctuation of a nation's monetary reserves and political risk is established. A least square regression model is used for the 1972–87 period and monetary reserves fluctuations of nineteen countries are analyzed. It is concluded that monetary reserves data can be used as a cost efficient proxy for political risk in moderate risk non‐oil exporting countries. Less politically risky countries also exhibit a positive relationship but the results are not statistically significant. This study has special implications for small and medium‐sized corporations. Further, the limitations of this study are discussed.
Multinational firms account at present (1976) for almost 15% of the aggregate gross national products of the western world; their total foreign investments are in excess of 320…
Abstract
Multinational firms account at present (1976) for almost 15% of the aggregate gross national products of the western world; their total foreign investments are in excess of 320 billion dollars and the aggregate market value of the foreign assets under their control is very likely about four to five times as large. The value of these assets is affected by various risks, i.e. the probability of a loss, that can be broadly classified as economic and political risks. This separation is certainly open to question since there can exist a close interdependency between the factors that constitute economic and political risks. A distinction is, nevertheless, appropriate since political risks stem from changes in (assumed) policy positions whereas economic risks are associated with changes concerning market, competitive, and technological factors that diminish the firm's effectiveness and profit potential. In addition, the factors responsible for political risks becoming an actuality are more easily identified than those forces which are responsible for the economic risks becoming an actuality.
There is an extensive research stream devoted to evaluating host country political risk as it relates to foreign investment decisions, and in today’s geopolitical climate, this…
Abstract
Purpose
There is an extensive research stream devoted to evaluating host country political risk as it relates to foreign investment decisions, and in today’s geopolitical climate, this type of risk is becoming increasingly salient to business leaders. Despite notable advancements related to understanding the importance of government-related risk, inconsistent conceptualizations and findings remain. Thus, the purpose of this paper is to offer a comprehensive overview of how host country political risk has been conceptualized, measured and studied in relation to multinational enterprises' (MNEs’) investment decisions. After reviewing the relevant literature, five major aspects of non-violent (government type, public corruption, leadership change) and violent (armed conflict, terrorism) political risk were identified. The organization and review of each aspect of political risk provide insights on fruitful directions for future research, which are discussed.
Design/methodology/approach
To identify research articles on political risk and foreign investment, 13 leading management and international business journals were searched using relevant keywords (January 2000 to January 2023). Moreover, reviewing articles from these journals led to locating and reviewing additional relevant articles that the authors cited. Keyword searches were also conducted on Google Scholar and Web of Science in an effort to identify relevant articles outside of the 13 targeted journals.
Findings
Both violent and non-violent aspects of host country political risk have been studied in relation to MNEs' investment decisions. Specifically, five major aspects of host country political risk were identified (government type, public corruption, leadership change, armed conflict and terrorism). Although the general consensus is that risk related to the government often creates obstacles for MNEs, conceptualizations, measures and findings in prior research are not uniform.
Originality/value
This paper provides a comprehensive overview of host country political risk and foreign investment. In doing so, the aspects of political risk are identified, organized and overviewed.
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Di Fan and Chengyong Xiao
Uncertainties caused by political risks can drastically affect global supply chains. However, the supply chain management literature has thus far developed rather limited…
Abstract
Purpose
Uncertainties caused by political risks can drastically affect global supply chains. However, the supply chain management literature has thus far developed rather limited knowledge on firms' perception of and reactions to increased political risks. This study has two main purposes: to explore the relationship between extant risk exposure and perceived firm-specific political risk and to understand the impact of firm-specific political risk on firms' vertical integration and diversification strategies.
Design/methodology/approach
The authors developed a unique dataset for testing our hypotheses. Specifically, the authors sampled manufacturers (SIC20-39) listed in the United States from 2002 to 2019. The authors collected financial and diversification data from Compustat, vertical integration data from the Frésard-Hoberg-Phillips Vertical Relatedness Data Library and political risk data from the Economic Policy Uncertainty database. This data collection process yielded 1,287 firms (8,329 observations) with available data for analysis.
Findings
A two-way fixed-effect regression analysis of panel data revealed that firms tend to be more sensitive to political risk when faced with income stream uncertainty or strategic risk. By contrast, exposure to stock returns uncertainty does not significantly influence firms' sensitivity toward political risk. Moreover, firm-specific political risk is positively associated with vertical integration and product diversification. However, firm-specific political risk does not result in higher levels of geographical diversification.
Originality/value
This study joins the literature that systematically explores the antecedents and implications of firm-specific political risk, thus broadening the scope of supply chain risk management.
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Cathy Xuying Cao and Chongyang Chen
This paper examines the relation between political sentiment and future stock price crash risk.
Abstract
Purpose
This paper examines the relation between political sentiment and future stock price crash risk.
Design/methodology/approach
This study employs firm-level political sentiment from earnings conference calls. The empirical analysis applies panel regressions on 40,254 US firm-year observations between 2002 and 2020, controlling for various firm-specific determinants of crash risk and firm-, industry- as well as time-fixed effects.
Findings
The study identifies a negative association between both the level and the change of political sentiment and stock crash risk. Further analysis shows that the predictive power of political sentiment is independent of either non-political sentiment or political risk and remains consistently strong during periods of either high or low economic policy uncertainty. Moreover, the predictive effect of political sentiment is more pronounced for firms with high litigation risk.
Research limitations/implications
The evidence highlights the important role of political sentiment in predicting stock crash risk. The results are consistent with the signaling hypothesis that managers tend to use their tone in conference calls to convey informative messages on firm outlooks.
Practical implications
The study provides a recommendation on risk management: soft information such as political and non-political sentiment in earnings conference calls is useful in managing stock crash risk. The study findings also call for careful consideration of social costs, such as stock crash risk, associated with political policies. Ill-conceived policies may lead to market crashes, which can potentially outweigh the upsides of well-meaning political reforms.
Originality/value
To the authors best knowledge, this is the first study to identify the effect of time-varying firm-level political sentiment conveyed in conference calls on stock price crash.
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Weiling Jiang, Igor Martek, M. Reza Hosseini and Chuan Chen
Foreign direct investment in the infrastructure (FDII) of developing countries has a history of at least four decades. Bullish demand for foreign infrastructure services in…
Abstract
Purpose
Foreign direct investment in the infrastructure (FDII) of developing countries has a history of at least four decades. Bullish demand for foreign infrastructure services in developing countries, in combination with unstable political environments, has buoyed attention in political risk management (PRM). Even so, research into PRM of FDII remains fragmented and unmapped. Thus, the purpose of this paper is to identify the current body of knowledge in this area, uncover deficiencies and lay the foundation for further practical PRM research in FDII.
Design/methodology/approach
This paper offers a bibliometric-qualitative review of current literature on political risk in foreign infrastructure in developing countries. A 36-year period is identified, from 1983 to 2018. Publication year, area of focus, author(s), institution and country are classified and analyzed through the medium of social network analysis. The tools used are VOSviewer, CiteSpace and Gephi to analyze citation networks of 345 published papers. Out of 345 papers, 94 highly related studies were selected for further content analysis.
Findings
The study identified the research trends in related areas of PRM in infrastructure (e.g. PRM in international construction and foreign direct investment) by bibliometric analysis, which includes scattered researcher collaboration, wide-ranging and unfocused journal selection, unsystematic and discontinuous research themes. The specific research weakness in PRM in FDII is recognized by qualitative analysis from the perspective of PRM process, which reveals a lack of understanding of the impact of political risk factors, subjective risk estimations, lacking application of mature political risk database in FDII, combined with a shortage of complete and effective strategies for PRM in FDII in developing countries.
Originality/value
This paper is the first of its kind, providing a comprehensive benchmark survey of the research to date in PRM in foreign infrastructure investment in developing countries. It proposes a framework of future research agenda on PRM in FDII, including special issues on this topic, identification and assessment of political risk factors with objective methods, proposition of PRM strategies on FDII with proactive and active approaches, completing strategies of PRM with reactive strategies from the perspectives of whole life cycle of infrastructure projects, political risk factors and stakeholders. It also addressed the need to investigate the suitable literature databases for researching in this area.
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Pattanaporn Chatjuthamard, Pornsit Jiraporn, Pattarake Sarajoti and Manohar Singh
The study investigates the effect of political risk on shareholder value, using an event study and a novel measure of firm-level political risk recently developed by Hassan et al.…
Abstract
Purpose
The study investigates the effect of political risk on shareholder value, using an event study and a novel measure of firm-level political risk recently developed by Hassan et al. (2017). In addition, the authors explore how corporate social responsibility (CSR) influences the effect of political risk on shareholder wealth.
Design/methodology/approach
The authors exploit the guilty plea of Jack Abramoff, a well-known lobbyist, on January 3, 2006, as an exogenous shock that made lobbying less effective and less useful in the future, depriving firms of an important tool to reduce political exposure.
Findings
The results show that the market reactions are significantly more negative for firms with more political exposure. Additional analysis corroborates the results, including propensity score matching, instrumental-variable analysis and Oster's (2019) method for testing coefficient stability. Finally, the authors note that the adverse effect of political risk on shareholder value is substantially mitigated for firms with strong social responsibility, consistent with the risk mitigation hypothesis.
Originality/value
This study is the first to explore the effect of political risk on shareholder value using a novel measure. Furthermore, it is also the first to show that CSR alleviates the cost of political risk to shareholders.
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Attila Yaprak and Keith T. Sheldon
Introduction During the last decade, political risk assessment has gained significance as a decision‐making variable in multinational firms as the political under‐currents shaping…
Abstract
Introduction During the last decade, political risk assessment has gained significance as a decision‐making variable in multinational firms as the political under‐currents shaping the global environment have impacted international business strategy. Political discontinuities in Chile and Iran, rising waves of instability in Central America and the Middle East, the crises in Poland and North Africa, and the explosive external debt of developing countries have underscored the impact of political events on international business.
Gour Gobinda Goswami and Samai Haider
In today's increasingly globalized world, foreign direct investment (FDI) is a hotbed for discussion. Numerous studies have been undertaken regarding FDI, its determinants and…
Abstract
Purpose
In today's increasingly globalized world, foreign direct investment (FDI) is a hotbed for discussion. Numerous studies have been undertaken regarding FDI, its determinants and benefits, but very few works provide importance to the effect of political risk on the inflow of FDI. Some papers introduce institutional or governance issues in determining FDI inflow, but a comprehensive framework in this respect is non-existent. With this end in view, the authors take 146 countries worldwide over a period of 1984-2009 and then classify countries as OECD or non-OECD members to see whether there is any difference in the nature of the effect. The study keeps other possible determinants of FDI – market size, growth rate of real GDP, trade openness, infrastructural facilities as control variables while considering the effect of underlying political risk factors in deterring the FDI.
Design/methodology/approach
This paper looks at the effect of political risk on FDI by using a systematic approach of factor analysis, in reducing the number of variables into their underlying factors and then generating factor scores. Then it uses a panel regression approach combined with factor analysis to examine which particular aspect of political risk contributes more towards deterring FDI inflow.
Findings
The empirical results of this study refute the conventional notion that government failure is the primary contributing factor for poor FDI inflow. Rather, cultural conflict and the attitude of the partner country towards the host country are found to be mostly responsible for deterring FDI inflow. The result holds significantly even after controlling for traditional determinants regardless of whether it is an OECD member country or not.
Practical implications
It is not just governance failure but the cultural factors and development partners' attitude about the country which mostly determines FDI inflow.
Originality/value
This is the first paper which combines the factor analysis in a panel regression framework to examine the impact of political risk on FDI inflow.
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Fawad Ahmad, Michael Bradbury and Ahsan Habib
This paper aims to examine the association between political connections, political uncertainty and audit fees. The authors use various measures of political connections and…
Abstract
Purpose
This paper aims to examine the association between political connections, political uncertainty and audit fees. The authors use various measures of political connections and uncertainty: political connections (civil and military), political events (elections) and a general measure of political stability (i.e. a world bank index).
Design/methodology/approach
The authors measure the association between political connections, political uncertainty and audit fees. Audit fees reflect auditors’ perceptions of risk. The authors examine auditors’ business risk, clients’ audit and business risk after controlling for the variables used in prior audit fee research.
Findings
Results indicate that civil-connected firms pay significantly higher audit fees than non-connected firms owing to the instability of civil-political connections. Military-connected firms pay significantly lower audit fees than non-connected firms owing to the stable form of government. Furthermore, considering high leverage as a measure of clients’ high audit risk and high return-on-assets (ROA) as a measure of clients’ lower business risk, the authors interact leverage and ROA with civil and military connections. The results reveal that these risks moderate the relationship between political connection and audit fees. Election risk is independent of risk associated with political connections. General political stability reinforces the theme that a stable government results in lower risks.
Originality/value
The authors combine cross-sectional measures of political uncertainty (civil or military connections) with time-dependent measures (general measures of political instability and elections).
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