A unified model of political risk

Journal article

Political risk is a complex phenomenon. This complexity has incentivized scholars to take a piecemeal approach to understanding it. Nearly all scholarship has targeted a single type of political risk (expropriation) and, within this risk, a single type of firm (MNCs) and a single type of strategic mechanism through which that risk may be mitigated (entry mode). Yet "political risk" is actually a collection of multiple distinct risks that affect the full spectrum of foreign firms, and these firms vary widely in their capabilities for resisting and evading these risks. We offer a unified theoretical model that can simultaneously analyze: the three main types of political risk (war, expropriation, and transfer restrictions); the universe of private foreign investors (direct investors, portfolio equity investors, portfolio debt investors, and commercial banks); heterogeneity in government constraints; and the three most relevant strategic capabilities (information, exit, and resistance). We leverage the variance among foreign investors to identify effective firm strategies to manage political risk. By employing a simultaneous and unified model of political risk, we also find counterintuitive insights on the way governments trade off between risks and how investors use other investors as risk shields.

Authors: Johnston, N; Benjamin Graham; Allison Kingsley

• Publication status: In press
• Peer review status: Peer reviewed
• Publisher: J a i Press Inc.
• Journal: Advances in Strategic Management
• Publication date: 2015-05-01
• DOI: 10.2139/ssrn.2533701
• ISSN: 0742-3322
• Keywords: political risk; game theory; foreign investment; emerging markets; strategy