Political Risk Defined

While there is no settled definition on political risk, the literature typically identifies political risk as any action or behavior from a state actor that can affect a corporation’s financial or economic well-being. For example Skipper & Kwan’s International Risk textbook identifies political risk as “Any governmental action that diminishes the value of a firm operating within the political boundaries or influence the government.”[1] Similarly, the CEO of one of the leading geopolitical risk consultancies Ian Bremmer defines political risk as “The probability that a particular political action will produce changes in economic outcomes.”[2] Note also that these definitions include “sovereign” risk, which describes direct government interventions in business outcomes, but also other political, economic, and local impact beyond just the state.[3] With such sweeping definitions, it is a wonder that political risk does not get more attention from a business as well as a purely risk management perspective.

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[1] W. Jean Kwon and Harold D. Skipper. Risk Management and Insurance: Perspectives in a Global Economy. Wiley-Blackwell Publishing; Malden, MA (2009).  Page 431.

[2] Bremmer, Ian. The Fat Tail: The Power of Political Knowledge in an Uncertain World. Oxford University Press (2010).

[3] Kesternich, Iris and Monika Schnitzer. “Who Is Afraid of Political Risk? Multinational Firms and Their Choice of Capital Structure.” Journal of International Economics, Vol. 82, Iss. 2 (Nov. 2010> Available here (Links to an external site.).

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