Abstract
M.A.
The discipline of political risk analysis has often been criticised as a ‘soft
science’. As the title of this study suggest, the major challenge of this study is set
out to provide an empirical analysis of political risk and to prove that political risk
can indeed be measured. The aim of this study is to provide an empirical
analysis of political risk by testing the reliability of current risk assessment
approaches to accurately forecast political risk. There have not been many
attempts to test the reliability of political risk assessment models. However,
Howell & Chaddick (1994) tested the reliability of three (EIU, PRS and BERI)
political risk assessment models to accurately forecast risk projections in the
period 1982-1994. This study will revisit the test done by Howell & Chaddick
(1994) in order to determine the reliability of three forecast models.
In order for forecasts to be reliable, forecasts must be justified and defended by
applying practical logic. Practical logic implies that theory be tested against real
world experience. Hence, a reliable analysis will require that actual losses be
tested against theory. Therefore, in addressing the connection between theory
and actual losses, this study will correlate losses incurred in the period 1994-
2004 with theory.
Due to the nominal nature of the concept political risk, there has been a lack of
consensus in the field on what constitute political risk. This study will provide a
conceptual clarification of political risk. A brief discussion of the underlying
theoretical background in political risk is required in order to understand the
concept of political risk and terms thereof. Hence, this study will establish a
theoretical base of political risk analysis.
This study argue that low political risk encourage foreign direct investment. The
relationship between political risk and foreign direct investment will be analysed
in this study. It is hoped that in light of this study’s findings, a case can be putt
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forth that multi-national corporations can use political risk analysis to minimise
exposure to losses and as an extension of political risk analysis, multi-national
corporations can use political risk insurance to hedge against political risks.
The outcomes of this study aim to prove that political risk can be empirically
tested and measured and that the analysis of political risk is essential to
successfully manage political risks.