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INTERNATIONAL BUSINESS

MANAGEMENT (BUSI 1346)

Risk Analysis, Political

Lect 5/Wk 6 w/c 25th OctoberDr Michael Wynn-Williamswm97@gre.ac.uk

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COMPONENTS OF ENVIRONMENT

politicalgovt..... philosophy, legislation, world power

balance, et.

economicbudget, exchange rate, tariff policy, credit policy,

gdp growth, population and demographic trends

socialculture invasions, social rigidity, migration,

nuclear family, leisure Vs money,

technologicalinternet, energy, bio-degradability, home working

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RISK VS UNCERTAINTY Knight (1921)/ Chicago

Risk : When probabilities can be identified, eg playing poker, roulette. Degree of aversion to risk largely irrelevant.

Uncertainty : when probabilities are too miniscule, population of events are large and assigning probabilities may not be meaningful.

Opportunities for business Risk – objective judgement, can be researched

and planned, involves existing markets and/or products

Uncertainty – subjective judgement to convert uncertainty to risk, requires entrepreneurs who can forge new directions, involves new markets and/or products

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THE RISK/UNCERTAINTY CALCULUS Scale of potential harm

War Vs local fire

Likelihood of occurrenceEarthquake Vs industrial dispute

Capability to respondCrisis management ; 9/11

Probability of effective deployment of that capability (strategic posture?)Risk taking vs Risk averse :: personality

traits [go back to Hofstede..]

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CLASS TASK You are given a choice of three schemes

You can invest £10 in a bank account for a year, earning 5% interest

You can bet £10 on the toss of a coin, earning £20 if you win, nothing if you lose

You invest £10 in a company providing earthquake insurance in London

Identify the degree of risk and uncertainty in each scheme

As an entrepreneur, how would you convert the uncertainty into manageable risk?

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RISK AND PLANNINGHope of success >>>>

Assured Failure Assured Success

No Risk No Risk

100/0 50/50 0/100

Desperate/ Gamblers’ Risk Managed Risk

<<<< Fear of Failure

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RISK, UNCERTAINTY AND REWARD

Risk is the strategist’s best friendWithout risk there is no rewardThe degree of risk is compensated for by

the size of the rewardWhere information is equally available risk

calculations should be the same by all parties – no opportunity for arbitrage

Uncertainty is the entrepreneur’s secret weaponThe entrepreneur seeks new and exclusive

information The entrepreneur calculates a new, lower

risk factor but benefits from the high returns calculated by others

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TYPES OF UNCERTAINTY Level 1 : past predictive

Predicting the demand for pizzas tomorrow Level 2 : discrete (binary) futures

Predicting outcome of elections next year Level 3 : multiple futures

Predicting technological change in TV Level 4 : true ambiguity

Predicting future of multi media

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UNCERTAINTY TYPES COMPARED…

Type I Type II

Type III Type IV

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RISK ANALYSIS STEPS Step I : Sorting Environmental Data

Performance : GDP, Inflation, BoP etc Strategy: National Goals, Policies, etc Context: Institutional and Ideological

basis

Step II : Relating the data Determining Uncertainty Type

Past Predictive, Discrete Options, Multiple Options, True Ambiguity : Courtney’s Model

Prediction & Scenario Generation

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TYPES OF RISK IN INTERNATIONAL BUSINESS Political Risk : the willingness to pay Economic Risk : the ability to pay Exchange Risk : the ability to exchange

Market Risk Industry Risk : the choice of which

market to enterPositioning Risk : the choice of

positioning

Systemic risk does not affect the relative competitive positioning

Systematic Risk

Specific Risk/ Unsystematic Risk

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POLITICAL RISKPolitical risk is the likelihood that political

events, decisions and conditions will influence commercial investments

Systemic political risk – xenophobia, changes in policy

Procedural political risk – politically created friction in the normal business procedures

Distributive political risk – appropriation of profits made by foreign investors

Catastrophic political risk – disruptives changes in government, rebellion etc.

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POLITICAL RISK ANALYSIS…

Is an attempt to quantify the risk factor Lots of limitations,

linearity, additivity, non-exclusivity etc Of the three components, following

prioritization can be developedPolitical factorsSocial factorsEconomic factors

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INTERNATIONAL RISK ANALYSIS(THE ECONOMIST MODEL) Economics [ 33 points]

Falling GDP per capita, inflation, capital flight etc.

Social [17 points]Pace of urbanization, corruption, ethnic

tension etc.

Politics [50 points]Geographical proximity to trouble maker, 3Authoritarianism, 7Longevity of regime, 5 Illegitimacy, 9Generals in power, 6War/ insurrection, 20

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PROBLEMS WITH INTERNATIONAL DATA Availability

Public DomainCost of data

ComparabilityExchange rates (period average or end-of-

period)Time period differences (Apr-Mar or Jan-

Dec)Definitional differences (GDP at fc or GNP

at mp)

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SUMMARY

Strategic choices have to be made about

Political RiskEconomic Risk => systemic

risk

Industry RiskPositioning Risk => specific risk

No getting away from market research & hard decisions !

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SEMINAR QUESTION FOR NEXT WEEK

Read up on Afghanistan and SwitzerlandRead up the History, Geography etcCome prepared with a PEST analysis for

both countries

We will be attempting a Political Risk Analysis for Afghanistan and comparing it to Switzerland

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SOURCES DRS Chapter 3 PricewaterhouseCoopers: “Integrating

Political Risk into Enterprise Risk Management” <http://www.pwc.com/en_GX/gx/political-risk-consulting-services/pdf/praermfinal.pdf>

Princeton political risk map <https://qed.princeton.edu/public/images/MG/risk/WPOL.1986.gif>