Risky but not Attractive?Mapping Political Risk in the BSR.

Dr. Johannes Leitner

Internationalisation &Risks for Business

Source (Hoskisson et al. 2000; Meschi 2005; Brouthers et al. 1998; Alcantara 2013; Diamonte et al. 1996)

Risks in International Business

Risks in a Business Location

GeneralEnvironment The Industry Firm specific

Variables

Source: Miller (1992,1993); van Wyk (2010); Werner et al. (1996)

Nonmarket Environment

GeneralEnvironment

Source: Boddewyn (2003); Kobrin (2015); Rajwani and Liedong (2015); Baron (1995); Boddewyn (2015)

Distribution of Political Risks…

Source: Bremmer (2009); Taleb (2007)

Low probability - high impact events

Metro in Eastern Ukraine

Distribution of Political Risks…

Source: Bremmer (2009); Taleb (2007)

Market Entry Armenia

Expansion Moldova

Which problems arose?

Competitors?

Demand?

PoliticalInstability?

Judiciary?Socio-economic?

Low GDP?

PoliticalSystem?

Formal Informal

International Context…

Political Risk

Political RiskFuzzy Concept

(e.g. Kobrin 1979, Fitzpatrick 1983, Sottilotta 2013, 2015)

Public actions….

interference with private business…

in the host country of international activities…

with (mostly) adverse effects for the business.

Cor

e de

term

inan

ts o

ver v

ario

us a

utho

rs…

(Lei

tner

, fo

rthco

mni

g sp

ring

2016

)

Political Risk Factors

Political stability (Miller 1992)

.

Geopolitical Risk Factors (MIGA 2015)

Internal (de la Torre et al 1988)

Systemic Corruption (Meissner 2016)

Regional, BilateralConflicts and DiplomaticTies (Alon & Martin 1998)

Host country‘s attitudetowards internationalcompanies (Kobrin 1980)

Macropolitical Risk Factors (Robock, 1971; Alon & Martin, 1998)

.

Micropolitical Risk Factors(Robock 1971, Alon & Martin 1998)

.

Leve

l of A

naly

sis

.

External (de la Torre et al 1988)

Systemic Favouritism (Meissner 2016)

Institutional Ambiguity (Meissner 2016)

The Risk Map

Source: AON Political Risk Maps at: https://www.riskmaps.aon.co.uk/site/map.aspx

Business Environmentin ENP Markets

Source: (EBRD BEEPS Report 2016 at: http://ebrd-beeps.com/reports/beeps_v_report/)

GDP Growth (annual %)

Source: World Bank at: http://data.worldbank.org

State Capture

Political stability (Miller 1992)

.

Geopolitical Risk Factors (MIGA 2015)

Internal (de la Torre et al 1988)

Systemic Corruption (Meissner 2016)

Regional, BilateralConflicts and DiplomaticTies (Alon & Martin 1998)

Host country‘s attitudetowards internationalcompanies (Kobrin 1980)

Macropolitical Risk Factors (Robock, 1971; Alon & Martin, 1998)

.

Micropolitical Risk Factors(Robock 1971, Alon & Martin 1998)

.

Leve

l of A

naly

sis

.

External (de la Torre et al 1988)

Systemic Favouritism (Meissner 2016)

Institutional Ambiguity (Meissner 2016)

State Capture

Systemic Corruption

Systemic Favouritism

Institutional Ambiguity

State Capture:“private actors seize public institutionsand legal-political processes to realise

their particularistic interests of accumulating power and private

wealth. For that reason, they more or less systematically abuse, side-step, ignore, or even

tailor formal institutions to fit their interests” (Larulle 2012)

State Capture works through systemic corruption, systemicfavouritism and institutional ambiguity and poses severe politicalrisks to enterprises

Example: Azerbaijan

Risk Assessment

Stakeholderanalysis

Politicalterrain

analysis

Risk factors

Probability

Impact

Be prepared

Be aware

Focus

Monitor

Severity

Source: McKellar 2010

Risk Management

Generic Strategies Refined Examples

Accept You simply accept the risk and do not take any action

Start the business and hope for the best

Mitigate You try to reduce either the probablity or the impact of the risk

• Political strategies• Stakeholder Mgmt• Portfolio Mgmt• Intelligence

Transfer You transfer the risks to other partners who are willing to bear them

• Insurance• Outsourcing risky

actions• Brokers• Decoupling

Avoid You do not take actions that inherently are associated with certain risks

• You do not pursue a business opportunity

Risky but not attractive?

…political risks root in the parallel existence of formal and informal institutions…

No surprises in economic development,trough being experienced in 2015…

…paired with state capture in most of thepost-Soviet markets.

But these issues can be managed if decisionmakers in the firm are aware of these risks.