Recognising the lack of research and guidance on assessing micro political risks

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

1. Introduction

Recognising the lack of research and guidance on assessing micro political risks, Alon & Herbert (2009) attempted to introduce a new methodology to evaluate economic, societal and governmental forces which might have impacts on a multinational firm's plan to begin or continue its business in a foreign country.

This research aimed to provide a three-dimension consideration of the nature of political risks in a host country and to offer a framework for micro political risk assessment. The suggested model of assessment takes into account the internal and external economic historic events, the social and governmental activities, and firm specific factors such as contribution to the local economy, governance structure and the bargaining power of the firm relative to the government. Although each country and each business might face different risks nature, the suggested model is argued to be applicable generally to all cases. Targeting at multinational companies, the paper strongly argued that it is important for the firm to assess the micro political risk profiles either for entry or exit strategy or to monitor the risks to its current business investments in a foreign country.

The research suggested, however, that risk monitoring should be a continuous process, and gave warnings on vested interest by the firm's local business when conducting risk analysis and on the complication when using the model to assess and compare risks ratings of different countries. Though it did not mention future research opportunities, this research is an innovative addition to the international business literature, because it introduced a combination of firm-specific variables which can affect the firm's micro political risk profile.

As the globalization process is taking place more and more aggressively in all parts of the world, more and more companies are becoming international and looking at various opportunities to expand their footprint to different continents. This research provides a valuable starting point for these firms to make informed decision to ensure that they are compensated for the risks that they will take in their global expansion endeavour.

2. Summary

In their research, Alon et al (2009) clearly defined the research topic to focus on the nature of micro political risk within a host country, stemming from economic, societal and governmental forces, which multinational firms need to consider before or during their operation in that country.

The research is based on the hypothesis that one of the major types of risks facing multinational companies is political risk which consists of macro and micro level risks. Macro political risks are defined as those that may affect all firms in the country. At the micro perspective, there are micro political risks affecting a particular firm or project or industry. In their research, Alon et al (2009) differentiate the two types of risks and chose to look at the micro risks in details by conducting a comprehensive literature review of micro political risk and discussing the change of its nature over the years taking into account the three dimensions (macro vs. micro, internal vs. external sources, and positive vs. negative outcomes). The author then produced the following definition of micro political risks as the basis to identify research variables.

"Micro political risk is defined as the uncertainty associated with outcomes or events from political processes, which have potential and specific consequences for the firm that is either contemplating entry into, or has already entered, another country. These political processes can result in outcomes or events which can (1) emanate from environmental factors both within and outside the foreign host country, and (2) either positively or negatively affect the firm's operations, assets, or financial condition." (p. 130)

The issue here, as Alon et al (2009) argued, is what are the determinants of micro political risks and what are the variables, or a scoring model, that managers can use to evaluate their risk exposures which, together with macro political risks rating, will inform their decision on entry/exit or investment strategy.

Using Coplin and O'Leary's (1983) Prince Model methodology, the research incorporated various factors into micro political risk assessments for multinational firms. There are factors relating to economic, social and government environments which are divided into internal and external dimensions. The factors range from labour conditions, to nationalism and corruption, to country's participation in regional economic agreements, and cultural distance, to name a few. At the firm- related dimension, the research identified factors in three groups, namely contribution to local economy, bargaining power over the local government, and governance structure.

By explaining the different internal and external factors in details, Alon et al (2009) attempted to offer "a good, broad first approximation and useful guide for identifying any other factors appropriate for the actual conditions encountered." In addition, the firm's specific aspects analysis is supposed to ascertain how "the firm's situation, behaviour and structure moderate the impact of the general environment on its particular political risk exposure." (p 130)

To deliver on the above targets, the suggested model uses different set of variables such as factor's importance rating, impact on firm, and occurrence likelihood. The model then produces indexes for factor's risk assessment and provides the culmination of overall potential effect. Using an example of a firm's foreign unit, the research took one step further to show how a firm can use the indexes produced to build proactive and defensive strategies to protect themselves and to enhance its political positioning in the host country.

Discussing the limitations when using the model, the authors asserted that the assessment of micro political risks should be carried out in close relation with the work on macro political risks so the firm and monitor and mitigate risks, on a periodical and continual basis so the firm can develop contingency plans for its operations. A possible conflict of interest was also mentioned in the research when micro political risk assessment is carried out by the firm's foreign affiliate. Cautions should also be taken, as suggested by the research, when comparing risk assessment from different country units because countries are different from each other.

In short, Alon et al (2009) "have shown [in their research] the importance of, and how to develop, a foreign firm's ability to assess its micro political risk profiles either for entry to candidate host countries or for monitoring the risks to current business investments in a country." (p. 136).

3. Critiques

3.1. Making the case for micro political risk rating model

Alon et al (2009) was motivated by the pressing question facing any multinational firms on how to identify and manage the firm-specific political risks that it is exposed to. The research have applied the theories to the solution of this practical problem because it has studied and synthesized from various academic works on political risks in general, identified the missing information on micro political risks, and explained its significance in ensuring informed decision making by the firms.

The research expands current understanding about micro political risks by introducing a new model of rating taking into account identifiable variables encompassing the three dimensional view of risks. In this context, the research has usefully defined the terminologies within the political risk arena such as macro vs. micro risks. As mentioned in the summary above, it also created a definition of micro political risks to reinforce the audience's understanding and knowledge on this special field. With the comprehensive rating model, what the research adds to the body of knowledge on risks is innovative and practical process for managers to assess and manage micro political risks. This is an important contribution to other works in the field because, as the research points out, a lot has been studied and written about macro political risks but little has been done on micro political risks.

The research contribute to the flow of knowledge by reinforcing and synthesizing existing theories, ideas and facts to establish a framework to assess micro political risks which can be used to inform decision-making and action by managers of multinational firms in their international business strategies. Alon et al (2009) has made the case for multinational companies to have their own capacity to conduct regular assessments of micro political risks when considering either to start or to continue business in foreign markets.

3.2. Extensive literature review offering multi-dimensional understanding of micro political risks

Alon et al (2009) has conducted extensive review of relevant literatures on the concept of political risks, how it has changed over the years from merely a look into the "inherent adversarial" government-business relationship, to the modern view that considers the broader environmental context of governmental and societal actions, events and policies. The research synthesizes previous findings to offer a three dimensional view on the nature of risks: the separation of macro and micro level of risks, the external and internal factors (referring to whether they originate from inside or outside the country) and the positive vs. negative impact of risks which can either help or damage business interests. Moreover, empirical evidence was also used to clearly illustrate the facets of political risks, such as the comparison of the cases of McDonald's restaurants and Kodak's retail operation in China.

Based on review of relevant literature, the research presents theoretical and empirical context to political risks understanding and points out the missing information and studies on micro political risks. From this, the research builds an analytical framework for the assessment of micro political risks. With the cited resources, the research seems to show credibility to the readers, and persuades the readers on their point of view.

In addition to examining different view points on micro political risks and putting them all in a comprehensive multi-dimensional context, the research also identifies various elements of the identified dimensions of micro political risks stemming from economic, social and government related factors. By extensively analysing relevant literatures, the research shows how these factors are weaved into the fabric of uncertainties associated with political events and outcomes which might have specific impact on the multinational firms in their foreign markets.

3.3. Functionalist paradigm and cross sectional design

Taking the functionalist paradigm which is based on problem solving orientation and leading to rational explanation, Alon et al (2009) used the realist qualitative paradigm in their research. In terms of epistemology, the research discusses the nature of political risk assessment across the three dimensions: macro versus micro, internal versus external sources, and positive versus negative outcomes. It also sheds lights on the way the assessment has changed over the years and how micro political risks evaluation has emerged as an essential tool for decision making by multinational companies. Ontologically, Alon et al (2009) clearly defines micro political risk as the uncertainty associated with outcomes or events from political processes, and explained the significance of this type of risks facing the business.

Using the cross sectional design, the research offers a new model for the assessment of micro political risk which is consisted of both internal and external events and actions, taking due consideration of economic-related factors, society-related factors and government-related factors; and firm related factors including the contribution of the firm to the local economy, bargaining power of the firm relative to the government, and the governance structure of the firm.

3.4. Realistic evaluation method

Alon et al (2009) uses the realist method of evaluation which has its roots in sociology and the philosophy of science. This method considers that interventions are always based on hypothesis and also considers that interventions are embedded in social systems, and that identifying the different layers that make up and surround interventions carries crucial explanatory value. The realistic evaluation method intends to refine underlying theory.

The research has clearly identified the context, the mechanism and the outcome configuration of micro political risk assessment. For example, the research's suggested model of risk rating is divided into internal and external dimensions originating from the economic, social and governmental environments. Specific environment factors are then identified to create the understanding of how they affect the firm. This mechanism is explained further with a set of 28 sub factors each with 3 sets of ratings and 2 correlation ratings (using Coplin and O'Leary's (1983) Prince Model methodology).

Recognizing the fact that a project or intervention may have an "official" theory and an "expected" implementation chain, but is often put into practice by many hands in different locations, Alon et al (2009) suggested that cautions should be taken when applying the suggested model at the firm's foreign operation level. This is due to the fact that the individuals or groups who will conduct the assessment will have vested interest and different countries will have different political environment or unique conditions which some times makes it hard to compare between countries.

3.5. Results and presentation

According to Jakowitcz (1995), "people undertake research in order to find out things in a systematic way, thereby increasing their knowledge." This research achieved its purpose of reviewing the various facets of micro political risks and to introduce a comprehensive framework of assessment which multinational companies can use in their strategic considerations. The research demonstrates the importance of micro political risk assessment in the firm's plans for international business expansion or investment. With consistent arguments and reliable evidence and knowledge supporting the arguments, the research presents a compelling case for their suggested micro political rating model which takes into account a broad range of determinants and judgements with clear and simple scoring methods.

The research is presented with clear structure with effective communication. Both the abstract and overview sections provides a condensed version of the report content in simple non-technical language, containing sufficient information such as the purpose and scope of the research, methods, results, conclusion and recommendations.

Although the research does not mention implications for future research, further empirical scrutiny is necessary before the suggested model would be widely applied. Different firms of different industries and natures will need different set of parameters, so additional factors might need to be included. For example, international banks would need to look more carefully in the set of factors regarding the technology platforms while manufacturers would need more consideration on the environment or climate change issues.

4. Conclusion

The title of Alon's et al (2009) paper makes one relate it to a fiction named "Stranger in the Strange Land" by Robert Heinlein, telling the story of a young man called Mike who is born to parents who are human being coming from the earth. Mike possesses human physiology and Martian mental power such as telekinesis and mind reading, and because he is raised by Martian race, he thinks the Martian way. When he comes to earth, it takes him considerable time and efforts and even problems to learn earth customs such as jealousy, desire, and lying. Mike's situation is similar to the entry or operation of a multinational company in a foreign market which is normally in developing or emerging economies, where legal system is yet to develop, transparency is in its infancy and cultural and political practices are sometimes mysterious. Would it be possible for Mike to have an easier and shorter journey to understand human beings culture and politic if he has the help of Alon's et al (2009) risk assessment index? How are multinational companies actually dealing with the political challenges that affect the company specifically? How do they understand the weaving of economic, social and government events and actions into the fabric of political risks that can either cushion or blind their operation? How can they eliminate the possible risks that arise from this risk rating itself, such as the bias nature of the individual or group of individual who will carry out the analysis?

In the expediting globalization progress happening around the world at presence, the research is a timely and fresh contribution to the international business literature on political risks facing multinational firms. Answers to the above questions need more refinement, and the research should stimulate continued discussions in this field.