Political risk – a definition and an example
Political risk can be defined in a concise way as “the impact of politics on markets”
(Bremmer, 2005, p. 52), or as “political events and processes that can negatively affect doing business” (Alon & Herbert, 2009, p. 127). Alternatively, we can employ a less succinct definition, but one that more or less encompasses a similar wide range of events, as others do
(for example, Jakobsen, 2010) – and as this paper does: here, political risk is conceived as those events, actions, processes, or characteristics of a socio-political nature that have the potential to – directly or indirectly – significantly and negatively affect the goals of foreign direct investors.
Applying such a broad definition ensures that the concept of political risk embraces a multitude of incidents. Thus, cases of political risk will differ markedly with respect to the actors involved, the particularities of each harmful event, the root sources of investor trouble, and the firms or industries affected. Take, for example, the notorious case of Bolivia. On May
1st 2006, Bolivia‟s left-wing president, Evo Morales, kick-started a process of nationalization of foreign-owned petroleum firms that has continued to this day.
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This came about after the country, three years earlier, had been rocked by a series of violent riots and demonstrations by ordinary, poor citizens and radical leftist groups alike. The unrest forced the resignation of the nation‟s pro-American president, Gonzalo Sánchez de Lozada. The purported bone of contention was a planned project under which the landlocked country‟s abundant natural-gas reserves were to be exported to the United States via Chile (Bolivia‟s arch enemy) by multinational companies.
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This project was soon put on hold, though, courtesy of the sociopolitical turmoil.
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Moreover, in a July 2004 referendum on the gas issue, the people of Bolivia voted for a 32 percentage point increase in royalties for foreign companies.
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Since that vote, petroleum firms have seen their tax bills increase and ownership shares diminish even further. 5
Similar troubles have later been bestowed upon mining and power firms.
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In Bolivia, therefore, a series of discrete yet interconnected events proved troublesome for the international companies. The political risk effects or outcomes – that is, the acts of intervention that directly harmed the foreign companies – consisted of tax and royalty increases, forced contract revisions, the sale or transfer of ownership, and project delays. The actors responsible for realizing the risk also varied. It was ultimately the politicians – that is, the president and the Congress – who ordered the tax hikes and the nationalizations. But other socio-political actors were also highly influential in the process, like left-wing radicals and even ordinary citizens. The riots, to be sure, were but one of many root causes or sources of government intervention against the foreign companies operating in the country. Another source was the frequent changes of political leadership, where each change of president led to increased pressure against investors. More abstract forces were also at play, like Bolivians‟ hostility toward Chile. But perhaps the most salient issue at stake was, and indeed still is, the extent to which foreigners should be allowed to control or “exploit” Bolivia‟s natural resources – the nation‟s “patrimony.” Sentiments of economic nationalism loomed large and surely helped realize the risk for foreign companies. Yet, while economic nationalism, frequent changes in political leadership, and foreign policy grievances can undoubtedly precipitate, and ultimately cause, harmful intervention against foreign investors – as they clearly have done in Bolivia – these characteristics and issues do not by themselves create trouble for foreign investors. They can, however, be regarded as typical independent variables in political risk analysis. The dependent variables are the actual interventions by influential host-country actors. For analytical purposes, this distinction between independent and dependent variables – or between sources and effects – is vital.