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Bridging The Theory To Practice Gap

Dissertation/Project Overall Aims and Objectives

The globalisation of markets have led to increased opportunities for Domestic Companies (DCs) to flourish into Multi-National Companies (MNCs) and to penetrate new economies thus expanding their operations into foreign markets. Albeit, there are significant benefits associated with this, there are also a number of inherent risks which are associated with such business enterprises. The author seeks to demonstrate that political risk is often misunderstood and therefore ineffectively managed and incorporated into a company’s Business Strategy. Consequently, companies are at risk as a result of this when they venture into Foreign Direct Investment (FDI.)

Within the international business arena much reference is made to country risk to signify the risk of operating in foreign economies. Country risk and political risk are frequently used interchangeably however Clark and Marois (1996) assert that the former term is unrepresentative of the true extent of political risks (Clark and Marois, 1996.) The author will make reference to these cross-border risks as political risks and examine the background literature on how the management of political risk potentially has a place within a Corporate Risk Management framework, and how DCs classify, manage and analyse these political risks, in the context of a survey of the actual political risk management issues and practices which they currently face.

Within the author’s short proposal it was noted that the main theme of the dissertation sought to explore the political risks which are inherent in all foreign markets and which pose major risks for Foreign Direct Investors (FDI’s.) This dissertation proposal expands upon the former with the author seeking to examine whether businesses that enter foreign countries incorporate these risks in their Business Strategy to enable them to mitigate the risk(s) and therefore, making FDI a more feasible and profitable strategy.

Within the literature review, the author will examine current literature on the perception of risk, with particular emphasis on political risk, and the universal approaches that DCs adopt in their business strategy towards the management of political risk. This will enable the author to provide a focus on the research proposal and develop the research question.

In the methodology section, the author will demonstrate the various techniques that will be applied to this proposal, in addition to the data collection and analysis; the data analysis will provide the author with the answers to the research question.

The author has a firm interest in this field of research and the decision to focus upon risk, for this dissertation proposal, arises from a number of reasons. Firstly, the author has prior working experience in risk assessment whilst employed in the public sector and has undertaken formal training in risk assessment and analysis as well as Root Cause Analysis (RCA.) There is evidence which suggests that a number of Domestic Companies have a great deal of potential to expand and make their presence felt within the global arena however, what does appear apparent is that the recognition and understanding of political risk per se, within DCs, is not evident thus, this limits the company’s potential, and can lead to its demise. Moreover, the author seeks a future career in management consulting/business solutions, with a main focus on risk analysis and management.

Theoretical Framework

Political risk, when managed effectively, provides a firm strategy for companies to safeguard their investments, whether domestic or foreign, and to take advantage of new opportunities; consequently this will improve business performance, globally. However, this requires companies to fully integrate political risk management into a systematic process which is entrenched in their business strategy.

When it comes to improving global business performance, Price, Waterhouse Cooper (2010) describes, in their recent study, that managing political risk helps in two fundamental ways. First, it protects new and existing global investments and operations by helping management anticipate the business risk implications of political change or instability. Prepared and aware, management is more likely to be able to exit markets that are in danger of growing too unstable. Where short-term instability does not dampen the appetite to pursue long-term opportunity, companies can implement risk mitigation and operational oversight to control against shocks. Second, for a company constantly on the lookout for new opportunities and wishing to expand in the global market, monitoring political risk within target regions or foreign economies is beneficial for companies as this will enable them to potentially gain a competitive advantage (Price, Waterhouse Cooper, 2010.)

In defining political risk, a number of studies, particularly that of Jarvis, (2009) demonstrate that this is an indefinable task when approached as a deductive typological exercise, because its genealogy is discursive, its epistemology situated between disciplines rather than within a singular discipline, and because the generative agents of political risk are heterogeneous (Jarvis, 2009).

The major theories that relate to political risk sit within political science, development studies, international relations, international business, economics, and economic geography. Jarvis further asserts that political risk might be more austerely applied as a social science method for understanding political events and their effects upon commercial and strategic activities (Jarvis, 2009).

Literature Review

Research into the field of political risk is not new; the author seeks to explore the current themes on the management of political risk and examines previous research which, over the past thirty years, has identified a number of factors relating to foreign investment; this also includes the politico-economic factors, and Brink (2004) asserts these as having an influence the level of FDI; political risk is one of them, especially in emerging economies and developing countries (Brink, 2004.) Political risk has engaged many attempts at a conservative definition. Dickson (1989) provides a more generalised definition as being ‘the identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise' (Dickson, 1989.) However, there are a number of attempts to provide a more all-encompassing agreement. Hood and Nawaz (2004) assert that a further complication in the definition of political risk is that most approaches are predicated on the notion that such risk is invariably negative and that such approaches fail to recognise that political developments can have a positive effect (Hood and Nawaz, 2004.) This is echoed by Butler and Joaquin (1998) who conclude that companies should take into account the positive features of political risk especially in the context of FDI.

An exploratory study undertaken by Hood and Nawaz (2004) examined the context of political risk and its management within MNCs by designated Corporate Risk Managers or by specialists external to the company. Hood and Nawaz demonstrated generalisations could not be made about the approach and management of political risk by MNCs. However, the study did reveal some interesting insights into an under-researched area, and which would benefit from further research. Albeit this research study was undertaken six years ago, at that time, the researchers left an open gap in the research field, which the author, from his own preliminary research, has been unable to attest whether this ‘theory to practice gap’ has been filled. The author believes that imperative to a globalised economy and consequently, the level of FDI which is taking place from DC’s, the responsibility for the management of political risk, in the DC, is an area which remains overlooked. Hood and Nawaz concluded that, whilst larger-scale research is needed, their findings echoed those of Burmester (2000) and Levinsohn (2000) and their criticisms of the political risk management strategies and systems of MNCs, and that those companies which have embraced corporate, business, and enterprise risk management have found it difficult to incorporate political risk into their operation (Hood and Nawaz 2004: Burmester, 2000: Levinsohn, 2000.)

The author has found that most of the existing research into political risk focuses on the paradigm of political risk, in the context of globalisation in international business. Through the literature review, the author has investigated many however, five distinct research studies, each of which falls under the ‘political risk’ umbrella have been particularly relevant to the author’s research subject.

The first study review was an empirical research into political risk as a parallel to economic risk and that both factors should be considered prior to any FDI. The assumptions drawn from this empirical research demonstrated that the measurement of political risk, per se, produced quantitative data only and that this data, was unreliable as pure causative factors measuring political risk. The study failed to include qualitative data based on the economic factors but concluded that “further research needs to be undertaken.?

Other research studies have focused on trend analyses of FDI; here the researchers examined the factors which influenced the flows in FDI, and concluded that both aspects of macro-economic and firm strategy factors should be combined in order to explain the changing trends of FDI flows. This empirical research produced a significant amount of statistical information (quantitative data.) (Sethi, Guisinger; Phelan and Berg, 2003.)

Thirdly, a study on country corruption, as a sub-system of political risk was undertaken; this study examined the impact country corruption has upon the fluctuating levels of FDI, for example, the higher the level of FDI, the higher the incidence of corruption in that country. Country-risk analysis was undertaken and measured this using the Corruption Perceptions Index (CPI.) The information was extrapolated from data sets and hence, produced quantitative data (Robertson and Watson, 2004.)

Another research study, undertaken by Khattab, Anchor and Davies (2007) examined political risk and the effect this has on international projects. Here, the researchers conclude that future research might use a multi-method of data collection since validity is raised as a quality data issue with regard to the use of quantitative methods (Khattab et al, 2007.) Whilst the researchers, here, did not explicitly examine the role responsibility for managing political risk in MNCs, they concluded that it was important to; “not only describe, but also to understand, the managerial perceptions of political risk within the firm-specific business strategy.? (Khattab, Anchor and Davies, 2007.)

Further research has been undertaken into political risk assessment and management and its connection with globalisation. Howell (1998) supports this and asserts that political risk needs to be measured as early in the investment and development process as is possible (Howell, 1998.) For DCs, this would appear relatively straightforward however, what is evident is that there is a gap in this research field and the questions which need to be addressed relates to whom manages political risk in the DC and is there a clear understanding of what are the main factors of political risks facing DCs which ultimately affects FDI? Shapiro (1996) identifies them as: expropriation; currency and trade controls; changes in tax and labour laws; regulatory restrictions; and the requirements for additional local production (Shapiro, 1996.) However, it remains unclear whether Shapiro’s inclusions are definitive. There are a number of scholarly arguments which infer that political risk analysis is not undertaken effectively and this is supported by Burmester (2000) who asserts that no academic discussion of political risk is complete without a complaint about the generally low standard of political risk analysis undertaken by domestic and international business firms (Burmester, 2000.) The author believes that there is sufficient existing evidence and primary data, to support a larger-scale research to be undertaken, in this under-researched area.

Research Methodology, Data Collection and Analysis

It is not the author’s intention to replicate research already undertaken; for the methodology approach to the research area, the research will be a descriptive study since the author seeks answers to the questions: ‘who, what, where, when and how.’ The author will access secondary data to form a bridge between where the previous researchers left off i.e. bridge the gap. Indeed, the author will explore the concepts relating to political risk but merely as a demonstration of breadth and depth of knowledge in the research subject. The author will use primary data through the design of the survey questionnaire; and proposes a mix of questions from which qualitative and quantitative data can be extrapolated and ultimately analysed. The author will primarily use secondary data from the various studies and literature available. Secondary data is an important component of research and relates to the collection and processing of data by other research studies rather than the primary sources from the researcher. Secondary data has many benefits but also limitations. Secondary data is time saving for the researcher and does not involve new data collection; secondary data provides a larger database as opposed to primary data and if existing data is available then researchers should take advantage of this thus preventing ‘reinventing the wheel.’ Secondary data allows the researcher to explore research questions and formulate hypotheses to test. However, the limitations associated with secondary data are that reliability is not guaranteed; data may be outdated and may not have been collected long enough to enable the researcher to detect trends. Furthermore, neither does it permit progression of formulating research questions to designing methods for answering the research question. Moreover, the secondary researcher is disengaged from observational studies and developing concepts.

The author will draw conclusions which infer that much of the research into the measurement of political risk lends itself to being more quantitative than qualitative in nature, as previous research into this area, establishes that purely quantitative data raises a degree of uncertainty and the impact this subsequently has upon political risk management in the DCs. Furthermore, the author will explore alternative ways in which political risk can be measured – those differing to the traditional models of risk measurement for example, country-risk i.e., purely quantitative.

The backbone of the research will be an empirical study whereby the author will undertake a survey of a number of DCs, chosen randomly, and which are representative of the wide-ranging, larger domestic companies, in the UK.

The author recognises that potentially there could be barriers to entry into individual companies however, the author proposes to make explicit that all responses will be held in confidence and that companies will not be identified by name, only by the industry sector in which it operates.

Data Collection and Analysis

The author proposes that that the dissertation will encompass the concepts of a combination of deductive and inductive theory, given that this is a combination of quantitative and qualitative data. Deductive theory is usually associated with quantitative methods whilst inductive theory is associated with qualitative methods. The author is aware that, traditionally, research is one or the other however, there is a spectrum of research which encompasses both methods and that each crosses these traditional demarcations. Burney (2008) simplifies these concepts – deductive theory has the ‘waterfall’ or ‘top down’ effect whereby the researcher follows the theory, through to hypothesis; observation and confirmation; this is more specific and conclusions are drawn from available facts. Conversely, inductive theory, as simplified by Burney, is informally called the ‘bottom up’ effect where the researcher begins with observation, through to pattern; a tentative hypothesis and theory. Burney also refers to this as ‘hill climbing’ and that inductive theory is based upon broad generalisations and involves a degree of uncertainty. The secondary data used for this dissertation proposal will be sourced from the Economist Intelligence Unit (at http://www.eiu.com/) and Transparency International (at http://www.transparency.org/). These provide a substantial amount of information and intelligence on political risk in a particular country/region. This will enable the author to correlate the major countries where risk is high. Further data will be obtained from the Organisation for Economic and Co-operative Development (OECD) (at http://www.oecd.org/home/) risk rating agencies, such as the Business Environment Risk Intelligence (BERI) (at http://www.beri.com/), the International Country Risk Guide (ICRG), the Multiagency Investment Guarantee Agency (MIGA) (at http://www.miga.org/) and the World Bank, and substantial literature reviews and studies. Primary data will be collated from a survey questionnaire which will be sent to a random sample of UK companies. This will enable the author to analyse responses given which will determine who, at what level, and how political risk is analysed; the level of understanding of political risk and whether this is integrated into the company’s business strategy. Essentially, this will determine the theory to practice gap – what many companies say they do, and whether this is this put into practice.

Many of the information sources for identifying political risk also provide information on its measurement. Fundamentally, most sources have illustrated a combination of qualitative and quantitative techniques for example, expected utility forecasting (de Mesquita et al, 1985) in order to provide a single rating value. Comprehensive reviews of such measurement techniques can be found in Erb et al (1996), Butler and Joaquin (1998) and Monti-Belkaoui and Riahi-Belkaoui (1998.) However, much of the literature does not demonstrate how companies integrate this information into their risk management strategy. Considering Burmester’s criticisms of the quality of political risk analysis by companies, it could be argued that the extremely quantitative nature of much of the risk measurement information is ambiguous. Consequently, this level of ambiguity can have a significant impact on risk management; however, there are a number of techniques which companies do employ to mitigate the impact of negative political risk (Shapiro, 1999) and the author will provide an overview of these to correlate results in total.

Data will be obtained from DCs represented by the standard industrial classification, across a broad range of businesses – these will include the following sectors: finance/banking; IT services; communications and media; retail; utilities and transport. The purpose behind this is to establish perceptions of political risk across a range of business sectors.

There are no ethical issues which will need to be considered.

Hypotheses and Research Questions

The author proposes the following hypotheses and related research questions. These are coded as follows: Hypotheses, H0 ..., Research Question, R0 ....)

H01: There is a level of ambiguity regarding the importance of political risk.

R01: How important is political risk?

R02: What are the different types of political risk?

R03: Is there sufficient knowledge, training and guidance on political risk to adequately match the extent of the environment?

H02: Companies do not integrate political risk into their business strategy.

R01: Who is responsible for managing political risk?

R02: Are political risk strategies and techniques appropriately formulated?

R03: Are political risk management strategies and techniques flexible enough to cope with a rapidly changing environment?

H03: Companies are not able to react and anticipate problems associated with political risk.

R01: What mechanisms are available for anticipating potential political risk problems?

From the research questions, the author will determine whether the hypotheses are accepted or rejected. It may be necessary for the author to perform data triangulation in order to validate the research, and potentially develop alternative interpretations of the research data, especially since this research is a combination of qualitative and quantitative methods.

Dissertation Timescale

The author will conduct his research from June 2010 to September 2010. For the purposes of this dissertation proposal, the author is not required to produce a time-line, as advised by the University’s module lecturer.

It is expected that the author will communicate and check-in with his allocated tutor on a regular basis. This will primarily be via email, since the author intends relocating to Spain in July 2010. However, arrangements can be made for the author and personal tutor to have one-to-one meetings, as required.

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