Political Risk and Risk Management: A Comprehensive Overview

This report delves into the intricate relationship between political stability and business operations, emphasizing the impact of governmental decisions and societal turbulence on organizational performance. It defines political risk, differentiating between macro and micro-level risks, and highlights the challenges associated with managing external factors. The report explores the importance of political risk management, particularly in foreign markets, and its benefits in protecting against policy changes and identifying market opportunities. It details the risk assessment process, including quantitative and qualitative methods, the use of third-party organizations, and the assessment of internal and external inputs. Furthermore, it outlines various risk mitigation strategies, such as risk retention and risk transfer through insurance, including export credit agencies. The conclusion underscores the significance of evaluating and managing political risks to safeguard and optimize business operations.

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POLITICAL RISK AND RISK MANAGEMENT

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Table of contents
1.0 Introduction..........................................................................................................................3
2.0 Political risk and risk management......................................................................................3
3.0 Conclusion............................................................................................................................5
Reference....................................................................................................................................6

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1.0 Introduction
The economy of a country and the politics of the country are intertwined with each other. The
changes in the stability level of the country in terms of politics impacts the operation of the
businesses. Political risk can also come from different kinds of turbulence as well such as
terrorism, mass protest and many more. Both the action of the government and the
turbulences affect the operation of the organizations and limits their potentiality to achieve
business objectives.
2.0 Political risk and risk management
The term political risk has more than one definition, however, as per the most widely used
definition, it is the risk that comes from the decisions of the government and the turbulence.
There are many of the factors that can come as the political risk to the companies. These
involve the social factors, macroeconomic factors, fiscal and monitory decisions of the
government and many more. The political risk for an organization can exist at two levels such
as macro and micro. While the impact of macro-level risk affects all the industries of the
economy, the micro level risks are only related to few of the specific industries. Zonis et al.
(2011) stated that micro level risks are the internal risks of the organizations.
One of the most important problems related to political risk and risk management is the
unambiguity associated with the external factors that directly get impacted due to the changes
in politics. The political changes impacts on the economy, society, stability and many other
factors which in turn impacts the business that is operating in the economy. These factors are
all external to the organization and hence very much difficult for the management to manage.
The political risks in general troubles all the economic entities some way or the other.
However, domestic and the international firms are the main victims of political risks. The
changes in the legislation or the requirement by the government compel the organization to
change their standard which in turn increases the cost of operation and hence the revenue is
impacted. Shai (2017) highlighted that, even the firms that have some amount of control from
the side of the government also comes under the risk of political changes.
There are many of the benefits of managing the political risks especially if the organization is
operating in a foreign market. The first benefit of the political risk management is the
protection from the changes in the policies of the government. The analysis and
understanding of the political changes allow the upper management to articulate and
implement contingent strategies in order to nullify the negative impacts due to the risk of the
political changes. Apart from that, the management of the risk also provides the management
of the organization to make the most of the market opportunities. Toksöz (2014) stated that

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the changes in the policies and decisions of the government while on one hand harm the
operation of the organization, on the other hand, it also creates indirect opportunities for the
organization. Continuous study and monitoring of the macroeconomic factors allow the upper
management of the organization to anticipate changes before the changes are implemented.
Therefore, management can formulate prior strategy in order to make the most of the changes
and convert the political risks into gains for the organization.
Thus, it is always possible for the management of the organization to manage the risks so that
it does not harm the operations of the organization. One of the most important challenges
faced by the political risk analysts is that the changes in the political factors also bring other
related risks to the company as well. Therefore, the management of the risk becomes complex
and difficult. The objectives of the analyst are to reduce the complexities and covert the risks
into opportunities for the organization as discussed above.
The first stage for the management of the risk is the risk evolution. In this process, the
management of the organizations examines how the external factors influence the business of
the organization. In other words, this process determines the exposure of the organization to
the political risks. There are a number of processes which helps the organization to evaluate
the risks. The most important process is the quantitative and the qualitative methods to assess
risks. Although there exists a lot of debate regarding the abilities of the mathematical models
to quantify the political risks, it is widely used by the management of different organization
for the purpose of risk assessment (Toksöz, 2014). There are also different third-party
organizations as well which enables the management to quantify the political risks so that the
results are robust.
Apart from that, another method to assess the political risk and its impacts on the businesses
is the external and internal input assessment. The organizations use inputs for the operation
from a number of external and internal sources. The third-party analysts and the service
providers develop risk indices based on the external and internal inputs to the organization.
These help the management to articulate strategies in order to deal with the political risks.
Furthermore, the use of the reporting framework is also an important process to assess the
potential political risks which can hamper the operations of the organization. In this process,
the upper management of the organization sets the risk tolerance levels as per the strength
and the weaknesses of the organization. This benchmark and the macro and micro-reporting
information will then guide the management regarding the decisions in a politically risky
environment. In this context, Toksöz (2014) stated that in order to asses and manage the
political risk the management of the organizations needs to incorporate the political risk in

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the overall business risk. Therefore, the regular monitoring of the business risk will allow the
organization to check whether the political factors have the real potential to harm the
business. Under this process, it is also important to monitor and update the performance of
the risk assessment model of the organization as well.
Once the evolution is done, there are many of the ways the management of the organization
mitigates the risks. One of the most used risk response strategies is the retention of the risk.
Bremmer and Keat (2010) highlighted that risk elimination is costly for many of the
organization and hence often negative impacts due to the political risks remain less costly.
Therefore, risk retention is popular among the small businesses of the economy. However, in
this process, the management of the organization needs to accurately find out how much risk
that the organization can retain without completely getting disrupted due to the changes in the
political factors. Another popular strategy is the risk transfer using the proper insurance so
that the loss due to the changes can be recovered reducing its impacts on the operation of the
organization. However, Howell (1998) highlights that unlike the insurance of other mishaps
such as the car insurance this political risk insurance cannot be quantified easily and hence
the insurance is very costly. The use of export credit agencies is the most popular ways to
insure the negative impacts of the risks.
3.0 Conclusion
Therefore, political risk is a major concern for the management of both domestic and
international organizations. As per the study, the risk first needs to be evaluated in order to
understand how the external factors can harm the operation of the organisation. Based on the
finding, the management can undertake either risk retention or risk transfer strategies so that
the risks do not harm the operation of the organisations.

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Reference
Bremmer, I. and Keat, P., 2010. The fat tail: the power of political knowledge for strategic
investing. Oxford University Press.
Howell, L.D., 1998. The handbook of country and political risk analysis. PRS Group, the.
Shai, A., 2017. The End of the Asian Century: War, Stagnation, and the Risk to the World's
Most Dynamic Region.
Toksöz, M., 2014. Guide to Country Risk: How to identify, manage and mitigate the risks of
doing business across borders. The Economist.
Zonis, M., Lefkovitz, D., Wilkin, S. and Yackley, J., 2011. Risk rules: How local politics
threaten the global economy. Agate Publishing.