Abstract
We explore a long-standing prediction in the international business literature that managers’ subjective perceptions of political risk – not just the level of risk – are important for how firms manage political risk. The importance attributed to political risk by corporate executives has increased over the last 15 years and our results show that political risk is now considered more important than commodity (input) risk. Our analysis suggests that nearly 50% of firms avoid (not simply reduce) foreign direct investment because of political risk. Using a unique survey-based psychometric evaluation of manager risk aversion, we show that firms with risk averse executives are more likely to avoid investment in politically risky countries – a key implication of behavioral models. This relation is economically stronger when agency problems are more likely to be severe: for example, when executives are less aligned with shareholder value maximization, and when executives are younger (and therefore might put their personal career concerns in front of shareholders’ interests). While numerous studies have shown that political risk affects foreign direct investment using objective measures of such risk (electoral uncertainty, conflicts, etc.), our study documents that executives’ subjective perceptions of political risk are also important for political risk management.
Résumé
Nous étudions une prédiction ancienne de la littérature en international business qui avance que les perceptions subjectives des dirigeants sur le risque politique – pas seulement sur le niveau de risque – sont importantes pour comprendre la façon dont les entreprises gèrent le risque politique. L’importance attribuée au risque politique par les dirigeants d’entreprise a augmenté au cours des 15 dernières années et nos résultats montrent que le risque politique est maintenant considéré comme plus important que le risque lié aux matières premières (intrants). Notre analyse suggère que presque 50% des entreprises évitent (pas simplement réduisent) les investissements directs à l’étranger en raison du risque politique. À l’aide d’une évaluation psychométrique fondée sur une enquête unique concernant l’aversion au risque des dirigeants, nous montrons que les entreprises qui ont des dirigeants ayant une aversion au risque sont plus susceptibles d’éviter des investissements dans des pays politiquement risqués – une implication clé des modèles de comportements. Cette relation est économiquement plus forte lorsque les problèmes d’agence sont plus susceptibles d’être sérieux : par exemple, lorsque les dirigeants sont moins soucieux de la maximisation de la valeur pour les actionnaires et lorsque les dirigeants sont plus jeunes (et pourraient donc mettre leurs préoccupations de carrière personnelle devant les intérêts des actionnaires). Alors que de nombreuses études ont montré que le risque politique influence les investissements directs à l’étranger en utilisant des mesures objectives d’un tel risque (incertitude électorale, conflits, etc.), notre étude alimente l’idée que les perceptions subjectives du risque politique par les dirigeants sont également importantes pour la gestion du risque politique.
Resumen
Exploramos una predicción de larga tradición en la literatura de negocios internacionales que las percepciones subjetivas de los gerentes sobre los riesgos políticos –no sólo el nivel de riesgo- son importante para como las empresas gestionan el riesgo político. La importancia atribuida al riesgo político de los ejecutivos corporativos ha aumentado en los últimos 15 años y nuestros resultados muestran que el riesgo político es ahora considerado más importante que el riesgo de materia prima (insumos). Nuestro análisis sugiere que cerca del 50% de las empresas evitan (no simplemente reducen) la inversión extranjera directa a causa del riesgo político. Usando una evaluación psicométrica basada en encuestas para evaluar la aversión al riesgo de los gerentes, mostramos que las empresas con ejecutivos con aversión al riesgo son más propensas a evitar inversiones en países políticamente riesgosos – una implicación clave de modelos comportamentales. Esta relación es económicamente más fuerte cuando es más factible que problemas de agencia sean severos: por ejemplo, cuando los ejecutivos están menos alineados con la maximización del valor para el accionista, y cuando los ejecutivos son más jóvenes (y por esto pueden poner sus preocupaciones sobre sus carreras personales primero que los intereses de los accionistas). Mientras que muchos estudios han mostrado que los riesgos políticos afectan la inversión extranjera, usando medidas objetivas de estos riesgos (incertidumbre electoral, conflictos, etc.), nuestro estudio documenta que las percepciones subjetivas los ejecutivos del riesgo político son también importantes para la gestión del riesgo político.
Resumo
Exploramos uma previsão de longa data na literatura de negócios internacionais que afirma que as percepções subjetivas dos gestores sobre risco político – não apenas o nível de risco – são importantes para a forma pela qual empresas gerenciam o risco político. A importância atribuída ao risco político por executivos de empresas aumentou nos últimos 15 anos e nossos resultados mostram que o risco político é agora considerado mais importante do que o risco de commodities (insumos). Nossa análise sugere que quase 50% das empresas evitam (e não simplesmente reduzem) o investimento direto estrangeiro por causa do risco político. Usando uma avaliação psicométrica única baseada em pesquisa de aversão ao risco do gestor, mostramos que empresas com executivos avessos ao risco têm maior probabilidade de evitar investimentos em países politicamente arriscados – uma implicação-chave dos modelos comportamentais. Esta relação é economicamente mais forte quando é mais provável que problemas da agência sejam severos: por exemplo, quando os executivos são menos alinhados com a maximização do valor do acionista e quando os executivos são mais jovens (e, portanto, podem colocar seus interesses pessoais a frente dos interesses dos acionistas). Embora numerosos estudos tenham mostrado que o risco político afeta o investimento direto estrangeiro usando medidas objetivas desse risco (incerteza eleitoral, conflitos, etc.), nosso estudo documenta que as percepções subjetivas dos executivos sobre o risco político também são importantes para a gestão do risco político.
概要
我们研究国际商务文献里的一个长期以来的预测,即经理人对政治风险的主观认知 – 不仅仅是风险层次 – 对于公司如何管理政治风险是重要的。企业高管归因于政治风险的重要性在过去15年增加了,且我们的研究结果表明,政治风险现在被认为比商品(输入)风险更为重要。我们的分析表明,近50%的公司因政治风险避免(不是简单地减少)外国直接投资。使用一个独特的经理规避风险的心理测试评估调查,我们发现高管规避风险的企业更有可能避免在有政治风险的国家投资 – 行为模型的一个关键启示。这种关系当代理问题更有可能变严重时在经济上较强:例如,当高管们较少与股东价值最大化对齐时,当高管们更年轻时(所以可能将他们自己的个人职业生涯考虑放在股东利益之前)。虽然有大量的研究客观测量此类风险(选举不确定性,冲突,等),我们的研究证明,高管们对政治风险的主观认知对政治风险的管理也是重要的。
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Acknowledgements
We are grateful for the helpful comments from the editor, Mona Makhija, and the referees. We would like to thank Ye Wang for excellent research assistance. We appreciate the comments of Arie Lewin and Ben McCartney.
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Accepted by Mona Makhija, Area Editor, on 21 August 2016. This Research Note has been with the authors for four revisions.
Appendix: Survey Questions on Political Risk
Appendix: Survey Questions on Political Risk
This appendix contains the survey questions on political risk.
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1.
Political (PR): Change in level of risk faced relative to 2006
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+1 = Up
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0 = No Change
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−1 = Down
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2.
Political (PR): Change in degree of risk management relative to 2006
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+1 = Up
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0 = No Change
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−1 = Down
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3.
After September 11, 2001, how has the role of geo-political risk management changed at your firm?
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2 = Much more emphasis
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1 = More emphasis
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0 = About the same
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−1 = Less emphasis
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−2 = Much less emphasis
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4.
What methods does your firm use to deal with political risk? (check all that apply)
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Political risk insurance
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Avoid investments in certain countries
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Decrease size of investments in risky countries
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Increase use of partners or consortia
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Increase research before new investment
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Increase use of political risk analysts
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Increase use of security personnel
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Alter supply chain management
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Diversify investments over more industries
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Diversify investments across more countries
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Lower company profile in risky regions
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Enhance public relations in risky regions
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Increased use of currency/commodity hedging
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Increase hurdle rate on projects in risky regions
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Other
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5.
When valuing investment projects with significant political risk, how does your firm incorporate the political risk into the decision?
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1 = Add a risk premium to the required rate of return
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2 = Use risk-adjusted expected cash flows
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3 = Scenario/Simulation analysis considers extreme risk events
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4 = Price in political risk insurance costs
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5 = Other
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Giambona, E., Graham, J.R. & Harvey, C.R. The management of political risk. J Int Bus Stud 48, 523–533 (2017). https://doi.org/10.1057/s41267-016-0058-4
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DOI: https://doi.org/10.1057/s41267-016-0058-4