Political Risk - Explained
What is Political Risk?
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Table of ContentsWhat is Political Risk?Why is Political Risk Important?Types of Political RisksInsuring Against Political RisksAn Example of Political RiskAcademic Research on Political Risk
What is Political Risk?
The risks that the return on investments could face due to political changes or lack of stability in an economy are known as political risks. Such inconsistencies can include a change in government structure, foreign policy officers, army officers, or legislative organizations. Also referred to as geopolitical risk, it appears to be more like a factor with time period of an investment becoming more.
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Why is Political Risk Important?
It is difficult to estimate political risk as there are not much sample sizes or case studies related to a specific country. There are many foreign agencies or government institutions that help in mitigating the extent of political risks. If political risk occurred, it would result in decreasing the investment returns, or could force the investors for taking capital off from an investment.
Types of Political Risks
Besides businesses getting affected by market-based factors, political decisions also affect businesses and their operations. There are many decisions such as expenditure, foreign exchange, minimum wage rate, environment policies, tax policies, etc. made by the government that affect organizations, sectors, and sometimes, the whole nation. The enforcement of different laws affects the economy too. There can be regulations made in local, state, and federal level of different nations. Many companies enlist political risks with the Securities and Exchange Commission, or a prospectus, or a prospectus in case it is a mutual fund.
Insuring Against Political Risks
Multinational companies that have branches in different parts of the world can buy political risk insurance for eliminating or nullifying political risks. This enables the company as well as investors to focus on the primary business operations with an assurance that political risks wont hinder their investments or activities. Different activities that are covered under such insurance include terrorism and war.
An Example of Political Risk
Wal-Mart Stores Inc. mentioned specific political risks, that it experiences, in its 10-K filing in the fiscal year 2015 with the Securities Exchange Commission in its category of operating risk. Regarding its risks related with suppliers, the company informed prospective instability in the political and economic operations of countries that are operated by international suppliers. The other section involving Wal-Marts regulatory, compliance, reputational and other risks involves risks concerning legislative, regulatory, jury-based, and political or economic risks. Many risk factors involve product safety, political changes, legal issues, environment policies, tax regulations, trade policies, and currency-based policies. Wal-Mart particularly emphasized on Brazil, and the complications associated with its federal, state, and domestic laws.
Academic Research on Political Risk