0 Pooja Sharma Asked: July 16, 2019In: Commerce What is political risk? Discuss the various approaches for assessment of political risk. 0 International Business Finance 1 Answer Voted Oldest Recent Best Answer admin Added an answer on July 16, 2019 at 11:35 pm Political risk is the risk associated with doing business in or with other country having different culture, laws, traditions, customs and having a different currency. All international trade and investments face political risk though in different degrees. This type of risk is that an investment’s returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers, or military control. Political risk is also known as “geopolitical risk”, and becomes more of a factor as the time horizon of an investment gets longer. Political risks are notoriously hard to quantify because there are limited sample sizes or case studies when discussing an individual nation. Some political risks can be insured against through international agencies or other government bodies. The outcome of a political risk could drag down investment returns or even go so far as to remove the ability to withdraw capital from an investment. Broadly, political risk refers to the complications businesses and governments may face as a result of what are commonly referred to as political decisions. One of the major concerns for multinationals intending to invest in other countries is the assessment and measurement of political risk in these countries. Rummel and Heenan identify at least five major approaches which are employed to assess political risk. The first is the grand tour approach wherein a company engages in some preliminary market research towards a country by dispatching an executive or a team on an in-country inspection tour. Once the tour was completed, the team meets with the top management and discusses the potential strengths and weaknesses of the proposed investment. The second is a hands-on approach in which the company places great trust in the recommendations made by academicians, diplomats, business representatives and other outsiders who have knowledge about the target country. The third approach uses the Delphi techniques. The potential investing firm initially lists selective dements which might influence a nation’s political future, such as the size and composition of the armed forces or the history of leadership succession. The firm then asks a number of outside experts to rank the importance of these factors for the country under consideration. The data may then be aggregated and the country ranked on a high moderate or low risk basis. The fourth method uses quantitative methods, somewhat akin to econometric forecasting of economic events. Multivariate analysis is used to predict political trends based on current and historical information. It analyses the relationship among underlying political, economic, sociological and cultural relationships. The fifth approach combines both the subjective and objective approaches and provides a systematic framework for both the qualitative and quantitative interpretation of data. 0 Reply Share Share Share on Facebook Share on Twitter Share on LinkedIn Share on WhatsApp Leave an answerLeave an answerCancel reply Featured image Select file Browse Save my name, email, and website in this browser for the next time I comment.