Many businesses have branched out in recent years in search of more rewarding marketplaces around the world. Businesses branch out for various other reasons as well, particularly when they are in search of new resources, a lower cost of production, and other opportunities which can bring about growth. But branching out or expanding brings some risks along with it, one of which is the political risk of the new environment where a business is planning to expand. It is therefore imperative that such risks are analysed and identified so a company can decide if they can be dealt with (if necessary) or if the risks are too high for them to venture into the new environment. Here are the basics of political risk management for investors: what you need to know.
What is political risk?
There are many variations of the term ‘political risk’, but it all boils down to this: political risk is a kind of risk to the objectives of a business which comes from political decisions and political changes. This includes social and macroeconomic policies, which include changes in monetary, fiscal, trade, industry, and labour regulations. Additionally, political risk includes specific events, such as coup d’états, terrorist threats or attacks, and other events which can threaten a country or region’s overall stability.
How can it affect you?
Political risk can have an effect on a business’ objectives for growth and development, as well as its finances and – perhaps more importantly – the safety and security of its staff and assets. This is why it is important to determine the political risk in a particular environment when a business is planning to make a significant investment in that environment.
If your company is geared towards globalisation or internationalisation, you need to understand the level of political risk in specific regions or areas, as any change in the politics of an area can result in definite political risk. Risk comes in many forms as well: changes to a government, pending regulations and legislation, social turmoil and unrest, or an unpredictable or volatile trade and climate condition.
The analysis of political risk is particularly important if you are in the telecommunications, mining, defence, or utility sector, as these industries often have stringent rules and legislation as well as a high level of intervention from the government.
The benefits of political risk management
Managing political risk is important for two main reasons: protection and opportunity. If you are able to manage political risks with the help of key political risk consulting experts, you can protect your business and investments from the effects of instability or change in the political climate. An awareness of political risk will help you make an informed decision regarding minimising, transferring, or essentially avoiding such risks. When it comes to opportunity, political risk management has benefits as well – if you can anticipate changes in the political environment, such as new markets being launched or new legislation or regulations, you can benefit greatly as you can become one of the first players to take advantage of these opportunities.
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