Introduction to Political Risk Analysis. Learning Packages in the Policy Sciences, PS-24
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DOCUMENT RESUME ED 247 186 SO 015 806 AUTHOR Coplin, William D.; O'Leary; Michael K. g TITLE Introduction to Political Risk Analysis. Learning Packages in the Policy Sciences, PS-24. :NST1TUTIOR Policy Studies Associates, Croton-on-Hudson, NY. REPORT NO ISBN-0-936826-19-3 PUB DATE 83 NOTE 121p. AVAILABLE FROMPolicy Studies Associates, P.O. Box 337, Croton-on-Hudson, NY 10520 ($5.75). PUB TYPE Guides - Classroom Use Materials (For Learner) (051) 0 EARS -PRICE MF01 Plus Postage. PC Not Available from EDRS. DeSCRIPTORS Annotated Bibliographies; Charts; Comparative. Analysis; Decision Making; Higher Education; International Relations; Learning Modules; Measurement Techniques; *Political Influences; 0 Prediction; *Predictive Measurement; *Risk; Tables IDENTIFIERS ypt; *Political Analysis; Prince System; World P itical Risk Forecast ABSTRACT This package introduces college students to the kind of analysis that multinational corporations undertake to assess risks to their business operations due to political and economic conditions. Designed to be completed in 3 weeks, the four exercises enable students to (1) identify the major sources of political risk; (2) determine what social, economic, political, and geographical background factors need to be considered in conducting a political risk analysis; (3) forecast the likelihood of a change in regift, occurrence of political turmoil, or restrictions on international business; and (4) calculate risk ratings that can be used to compare the relative risks in different countries. The methods presented are those develope6 by the authors for Frost and Sullivan's "World Political Risk Forecast," which uses country studies produced by experts. An annotated bibliography and sample country study on Egypt (1983) from Frost and Sullivan's service are included in the appendices, which comprise over half the document. In addition, students are provided with Prince charts (a system for making political forecasts and devising strategies), decision structure' charts, a description of. risk ratings for three business sectors, a summary of an 18-month forecast, and a worksheet for calculations. (LH) *********************************************************************** Reproductions supplied by EDRS are the best that can be, made from the original document. *********************************************************************** LEARNING: PACKAGES IN U.S. DEPARTMENT OF EDUCATION NATIONAL INSTITUTE OF EDUCATION EDUCATIONAL RESOURCES INFORMATION CENTER IERICI THEPOLICY SCIENCES H This document has been reproduced as 1, received from the person or organization )(originating Minor changes have been made to improve reproduction quality. Points of view or opinions stated in this docu ment do not necessarily represent official NIE position or policy. "PERMISSION TO REPRODUCE THIS MATERIAL IN MICROFICHE ONLY HAS BEEN ANTED BY INTRODUCTI ON TO TO THE EDUCATIONAL RESOURCES PQLITICAL RISK ANALYSIS , INFORMATION CENTER (ERIC)." bY William D. Coplin and Michael L O'Leary .POLICY STUDIES ASSOCIATES INTRODUCTION TO POLITICAL RISK ANALYSIS by - WilliamD. Coplin and Michael K. O'Leary Portions of this package arereproduced with the permission of Frost & Sullivan,Inc., New York V V LEARNING PACKAGES IN THEPOLICY SCIENCES PS-24 Policy Studies Associates P. 0. Box 337 Croton-on-Hudson, NY 10520 VPublic Affairs Program,Syracuse University, 1983 ISBN 0-936826-19-3 TO THE INSTRUCTOR ANDSTUDENTS ON THE OBJECTIVES AND MATERIALS: THE PRIMARY OBJECTIVE: This package will provideyou with the is you will need to conduct a generalpolitical, risiinalysison any country._ 4 UPON COMPLETION OF THIS PACKAGE,YOU WILL BE ABLE TO: Identify the majorsources of political risk.: Determine what social, economic,political, and geo- traphical background factorsneed to be considered in conducting a political riskanalysis. Forecast the -likelihood ofa change, in regime, occur- rence of political turmoil, restrictionson internation- al business and trade,or other government decisions that might affect internationalbusiness. Calculate,risk ratings thatcan be used to, compare the relative risks in differentcountries. T:Th ee /7eks. t ii TABLE OF CONTENTS. LISTING OF FIGURESAND TABLES iv CHAPTER I: WHAT IS' POLITICAL RISK ANALYSIS? A. Regime Change 2. B. Political Turmoil 4 C. Government Restrictions D. Economic Policies EXERCISE 1 8 CHAPTER II: GUIDELINES FOR A GENERAL COUNTRY STUDY EXERCISE 2 16 CHAPTER III: MAKIN 9 POLITICAL FORECASTS WITH THE PRINCE SYSTEM 17 A. Prince Charts 19 B. Decision Structure Charts 20 24 C.. Probability Calculations D. 'Using the Prince Model 26 EXERCISE 3 32 CHAPTERAt. CALCULATING A RISK RATING 35 A. Meaning of the Indicators 35 B. Calculating Risk Indicators 37 EXERCISE 4 40 APPENDIX I: ANNOTATED BIBLIOGRAPHY ON POLITICAL RISK ANALYSIS 43 APPENDIX II: SAMPLE COUNTRY REPORT'-- EGYPT 55 iii r. LISTING OF FIGURES.AND TABLES , Figure1: PtOce,Chart: The Continuation of 'the Marcos Megime (Actors' Positions) 21 Figure2 Decision Structure: The Continuation of, the Marcos Regime 23 Figure3: Prince Chart: The Continuation of the Marcos. Regime (Probapility EqUation) ,25. TABLE1: DESCRIPTION OF RISK RATINGS FOR THREE,BUSINESS SECTORS '36 TABLE2: SUMMARY OF EIGHTEEN -MONTH°FORECAST 38 TABLE WORKSHEET FOR CALCULATIONS 39 CHAPTER I: WHAT IS. P6 ITICAL RISK ANALYSIS? . .., The term "politicalrisk analysig" is used to identify the .analysis of political events. and conditions that could, cau e loss to internationalbusiness.*It is usually con-. dUcted bybusinessmen or outside consultants to determine what precaUtions,they should_Aake inprotecting their businesliinvestmets. The study of political risk analysits isusefUl to Under- graduate and graduate social science students becauseit is . an example of, "applied socialscience." Along with public opinion polls used to guide' election candidatesand econo- metric techniques to forecast businesstrends, political risk analysis represents the integration of academictheory and method with the practical-need ofdecision-makers. Un- fortunately, like :the other applied social sciencetools, political risk aRAlysis does not have theprecision and legitimacy of the engineering and natural sciences. However, it still represents a systematicapproach to collecting and analyzing information so that people can make more decisions. Political risk analysis is used in a widevariety of ways. Some analySts find it valuable inhelping them to estimate commodity and currency prices. For example; the Falklands war in Argentina could have slowed theshipment of wheat from Argentina and therefore haveled to increased wheat prices. The election of a left (wing governmentusually means that the currency ofthat country will decline. Banks use political risk analysis tohelp them decide how much money to lend a'country. Although they may decide to lend` money to a country where politicalinstability is forecasted, the knowledge that such instability is arisk will help them deCide how much 'interest-to charge and how manyother banks they should gettp help them share the risk. Companies that export goods to a buyer in another country areworried about 'whether or not they will receive paymentfor the goods. They have credit managers whose job it is toestimate the risk of non-payment or payment delays, and to securebank guarantees or' whatever is necessary tomake sure the payment is received. 1 2 Countries like Zambia and Turkey havepayment delays of up to two years in part because ofpolitical problems. Other individuals in corporations thatuse political risk analysis include marketing people whoseresponsibilities are to see where their products might be sold,risk managers who buy political risk insurance to protectinvestments, corporate security officers whose responsibilityit is to insure the safety of employees and propertyof their company, and stra- tegic planners whqOadvise thecorporation-on what new busi- ness opportunities and risks existover the long run. There are so many uses for politicalrisk analysis that most high-level government andbusiness officials think about political riskson a day-to-day basj.s. It is often necessary to produce general country studiesthat all of those concernedcan read in orderto get the necessary back- ground to ask specific questionsabout their own particular problem. Once they do this, they then conductanalyses on more specific questions. The tools presented in this learn- ing package can be used for bothgeneral and specific analy- ses. In the remainder of this chapter,we will identify four, sources of political risks: 1 A. Regime Change B. Political Turmoil C. Government Restrictions D. Econoknic Policies Each has a different iipacton international busidesses. `v. A. 'Regime Change 4 A change in regime refers toa major shift in the poli- tical leaders responsible for runningthe country. The / change may occur through scheduledelections or through such extra legal methodsas 'assassination, military'coup_, orrevo- lution. (In some countries, ofcourse, the extra legal and the legitimate blend intoone. Bolivia has had nearly 200 regime changes during,t0years of independence.) The threat posed by regime changeis both the circum- stances surrounding the change itselfand the economic and political consequences resulting fromthe change. An extra legal change in government or a defensive reaction against , an attenIthed overthrow can disrupt normaleconomic activities. Banks, custom houses, and bordersmay be closed. Bureaucracies 8 3 7 can stop processing papers. In cases where a civil war