A Theoretical Perspective on Political Risk

Author(s): Jeffrey D. Simon

Source: Journal of International Business Studies , Winter, 1984, Vol. 15, No. 3 (Winter,
1984), pp. 123-143
Published by: Published by: Palgrave Macmillan Journals on behalf of Academy of
International Business.

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A THEORETICAL PERSPECTIVE ON POLITICAL RISK

JEFFREY D. SIMON
The Rand Corporation

Abstract. One of the fastest growing areas of research in international business has been
political risk assessment. Concerned primarily with the identification, analysis, and manage-
ment of sociopolitical and governmental restraints on foreign investment, the discipline has
flourished in the wake of the international turmoil of recent years. An integral stage in the
development of any new field is the establishment of a theoretical base upon which further
research can build. This paper thus addresses itself to theoretical and conceptual issues in
political risk assessment, focusing on the interrelationship of strategies, goals, and capabili-
ties of key actors, as well as the impact of different environments on the formation of political
risk. In order to demonstrate the feasibility of the approach set forth in this paper, political risk
in the Republic of South Africa is examined.

INTRODUCTION
* Instability in foreign political and social systems, changing power structures in
international relations, and growing demands by host countries for a greater
control over the operations of multinational enterprises (MNEs) have all brought
into question the traditional ways of assessing foreign investment opportunities.
Market surveys, cash flow and foreign exchange analyses, econometrics, and
theories of comparative advantage are not designed to forecast major political
and social upheavals such as occurred in Nicaragua and Iran at the end of the
1970s. Nor are they conducive to tracking the less catastrophic, but equally
threatening situations that MNEs face in host countries, including labor strife,
changes in local content rules, discriminatory taxes, and restrictions on the
repatriation of profits, capital, dividends, and interest.
Political risk assessment has thus become one of the fastest growing sectors in
international business studies. Concerned with the identification, analysis, man-
agement, and reduction of sociopolitical risks to foreign investment, the new
discipline has flourished as articles appear in journals and magazines, as confer-
ences and professional associations are formed, and as risk assessment posi-
tions are created in corporations. With each additional international crisis, the
demand for risk analyses proliferates, even though no one as of yet has
established a proven track record for forecasting such developments.
Within this atmosphere of increased pressure for applied results, it is not
surprising that theoretical concerns have laid dormant. Without theory, each new
risk situation tends to be viewed as unique to the particular country involved, and
no attempt is made to identify recurring patterns and trends across nations.
Because host countries are part of an interdependent international and global
system, in-depth country analyses often miss some of the key determinants of
political risk.
The purpose of this article is thus to lay the foundation for understanding the
complexities of the political and social environments within which the MNE must
operate. After discussing the major obstacles to the development of theory in
political risk, the article will focus on the impact that different environments can
have upon the formation of risk, as well as the interrelationship of key actors in the
process. Finally, in order to demonstrate how the perspective set forth in this
article can be used to analyze an individual country situation, political risk in the
Republic of South Africa will be explored.

*Jeffrey D. Simon is a consultant with The Rand Corporation in Santa Monica, California. He has written
extensively in the field of political risk analysis and is currently writing a book on political risk.
This article is based on a paper presented at the 63rd Annual Meeting (Pacific Division), American
Association for the Advancement of Science, Santa Barbara, 21 June 1982.
The author would like to thank the anonymous referees for their valuable comments.

Journal of International Business Studies, Winter 1984 123

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 OBSTACLES Although the millions of dollars that foreign investors lost as a result of the Iranian
TO THE and Nicaraguan revolutions helped to promote an interest in political risk assess-
DEVELOPMENT ment, the size of these losses worked against the earlier efforts of scholars to
OF THEORY IN develop a scientific discipline.1 Studies of national interest, national identity, level
POLITICAL RISK of national frustration, and type of political system were not seen as very relevant
to the more immediate needs of corporate planners. Theory was put aside while
"yes-no" and "invest-disinvest" answers were sought concerning foreign mar-
kets. Not wanting to be caught off guard again, MNEs were interested only in the
applied side of political risk.
The pressure for immediate results, however, has only been part of the reason for
the lack of systematic analysis in political risk. Additional factors include a general
skepticism among corporations concerning the operationalization and quantifica-
tion of non-economic variables, a preference for in-depth single country analyses,
and the lack of clearly defined boundaries for the discipline.
The skepticism is based on a belief that political risk is too amorphous and
subjective a concept to be exposed to systematic quantitative analysis. Being
used to working with "hard" economic and financial indicators, those in the
corporate world would understandably tend to avoid "soft" political and social
data. However, more than 2 decades of behavioral research in political science
and international relations have shown that indicators of instability, public atti-
tudes, elite behavior, foreign policy decision making, and international conflict can
be treated in a systematic and quantitative manner. International yearbooks,
government publications, international newspapers, and public opinion polls
provide accessible data bases for this task.2
A second factor impeding the growth of theory in political risk analysis is the
problem of time pressure in companies that tend to favor sporadic individual
country studies over systematic cross-national analyses. Whenever an invest-
ment decision for a particular country is needed, the usual corporate approach to
political risk is to tap all available sources of information on the country's
economic, political, social, cultural, and legal environment. These include con-
tacts with home and host government officials, host subsidiaries, business
sources, independent consultants, and headquarters personnel. The information
is then integrated with the economic and financial indicators, and a decision on in-
vestment is ultimately made.
While this process yields voluminous information on a given country, no concep-
tual framework is developed to aid in the analysis of the data. Adding to the
problem is the fact that many political risk analysts within MNEs are either former
Foreign Service officers or corporate country analysts, whose main orientation
toward international relations is the traditional country/area studies approach.
Rarely is an attempt made to link the various country analyses together in order to
identify patterns that may apply across nations.
Finally, an important obstacle to the systematic study of political risk is the cross-
disciplinary nature of the subject. It is often difficult for economists, political
scientists, business management scholars, legal experts, and sociologists to
communicate with each other because their respective training and current
interests produce different ways of looking at a problem. This in turn precludes a
cumulative growth in the discipline. As one political scientist notes, part of the
problem lies in the failure of political science and international relations scholars to
apply their theories to corporate country concerns: "If we have pet theories about
who gets what, when, and how in politics, we should be prepared to suggest how
these theories are likely to play out in a given country at a given point in time."3 In-
deed, the power of any good theory lies in its ability to explain various situations in
different contexts. A crucial preliminary step in this process is to identify who the
key actors are and to determine how their interactions can affect the formation of
political risk. This issue is discussed next.

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Prior efforts at theory-building in political risk have focused essentially on dyadic TOWARD A

relationships, with the host government as the major actor and the MNE as the pri- PRE-THEORY OF
POLITICAL RISK
mary target. One theory is based on the notion that issues such as national
interest, national sovereignty, and national identity are the motivating factors
behind host government restrictions on foreign business activity.4 Another, based
indirectly on Gurr's theory of relative deprivation,5 points to a high level of national
frustration as the key determinant of expropriations, with the host government
using the MNE as a scapegoat for the country's problems.6 A third links type of
government with propensity for radical political change, with newly independent
states viewed as the ones most likely to experience such change, while demo-
cratic systems are perceived to be the least likely.7
This emphasis on the influence and actions of host governments is the mirror
image of the once popular notion of the omnipotent multinational enterprise
penetrating a host country to the advantage of the corporation and to the
detriment of the society. Just as the latter view was an exaggeration of the power
of the MNE in relation to the host government, so too the theories that focus
exclusively on the host government as the initiator of political risk are a mispercep-
tion of the role of the state in the political risk process. While the host government
may be the most important actor in terms of capabilities to inflict risk upon a
foreign company, it is not the only one, and to concentrate on the host govern-
ment-to-MNE flow of risk ignores a whole range of other relationships. As one
observer has noted, other factors, such as the vested interests of local business
groups, the activities of opposition forces, and so on, can all be important sources
of political risk.8 Furthermore, when a MNE enters a foreign market, it enters more
than just the host country's political, social, and economic environment. The MNE
becomes part of the international and global environments within which both the
host and home countries must operate.
A foreign company, therefore, must not only assess the power structures within
the host country to determine where the political and social pressure points are
and how they are likely to evolve, but must also take into account the role of the
host and home countries in the international arena, in order to determine the
potential for external actors to affect the operations of the company. It is this web
of direct and indirect relationships that needs to be explicitly acknowledged
before even a pre-theory of political risk can be established. Attention needs to
shift from the host government-to-MNE flow of risk to a more encompassing
framework that places the MNE in the context of the different environments that
exist.

One recent work that attempts to move beyond the government-to-MNE model is
Gladwin and Walter's research on conflict management.9 Working under the
assumption that it "is not conflict itself that is dangerous, but rather its misman-
agement," Gladwin and Walter adapt a conflict behavior framework developed
earlier by Thomas,10 and use it to identify the strategies that a MNE should utilize
under different situations. Based on the case studies of 5 large multinationals,
Gladwin and Walter identify the appropriate corporate responses to various
contingencies, including terrorism, human rights issues, labor disputes, and
environmental problems. The recommended strategies are not based on whether
the situation is of a terrorist or environmental nature, but rather on what the
outcome stakes, relative power, interest interdependence, and relationship qual-
ity are for the MNE in relation to its adversary. Thus, for example, when the relative
power and stakes are high and interest interdependence and relationship quality
are negative, Gladwin and Walter advise a "competitive" (uncooperative and
assertive) strategy. When the stakes and power are relatively low, and when
interest interdependence and relations are negative, the situation calls for an
"avoidance" (unassertive and uncooperative) strategy. The 3 other basic types of
strategies identified are accommodative (cooperative and unassertive), collabora-

Journal of International Business Studies, Winter 1984 125

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 tive (cooperative and assertive), and compromise (moderately assertive and
cooperative).
Although a conflict management approach is an interesting departure from the
typical government-to-MNE flow of risk models, the Gladwin and Walter frame-
work has some limitations as a vehicle for political risk assessment. First, it
assumes rationality in a world that sometimes consists of nonrational actions. Just
as foreign policy decisions can at times be the result of bureaucratic politics or
personality traits of key decision makers,11 so too are political risk management
decisions sometimes the result of politics within the corporation or personalities of
key corporate and social actors. Secondly, one would be hard pressed to imagine
many situations where a MNE has the freedom to make clear-cut decisions on
whether to pursue a "cooperative," "assertive," or "accommodative" strategy.
Events often happen very quickly, precluding the type of "rational" reactions the
Gladwin and Walter framework presupposes. Related to the above point is the
fact that there are certain types of conflicts that are beyond the ability of a MNE to
control, such as revolutions, riots, and international wars. Whatever strategy a
MNE adopts with respect to these events may have little effect on the ultimate
outcome.

Despite these limitations, Gladwin and Walter make an important contributio

the development of theory in political risk by moving beyond the unidimensiona
government-to-MNE model, and identifying different strategies for different s
tions. Another recent work that adds a new perspective to political risk analysis
Chatterjee's study of foreign direct investment in developing countries.12 Utilizi
a conceptual framework that depicts the host society as an "organization" wh
responds to perceived deficiencies by making strategic adjustments, Chatter
improves upon earlier frustration-aggression and relative deprivation mod
which tended to focus exclusively on violent societal behavior.13 Accordin
Chatterjee, when the divergence between human resource development and
capita income widens, a society "does not automatically become violence-pr
or disorder-prone. It only tends to become change-prone." 14 This change wi
manifest in either expropriations, political instability, or changing policies
stable government.
Although he did not empirically test the various measures of change, Chatte
did test the relationship between the societal performance gap (as measured
ratio of an index of secondary and higher levels of school enrollment, and annua
per capita income) and corporate perceptions of political risk (as measured by
annual stock and flow of foreign direct investment in 76 less developed co
tries-LDCs). His major finding was a negative relationship between the socie
performance gap and foreign direct investment, leading him to conclude tha
Rapidly increasing [the] level of education [in LDCs] is of questionable value, if the level of
material achievement persistently falls behind the rising aspirations generated. Such a
development is essentially unbalanced and likely to be destabilizing.15
The concept of societal performance gap thus adds to our understanding of s
of the origins of political risk. What is also needed is a general framework
takes into account the different types of environments in which a MNE mu
operate when investing abroad, since risk can originate in several differen
arenas. The framework can then aid in the identification of key actors an
developments affecting the political risk process.
Figure 1 depicts such a framework, with 4 basic environments: host coun
home country, international arena, and global arena. Host environment refer
the actors and developments within the country in which a MNE has an inv
ment, while home environment refers to the country from which a MNE is based.
both these environments, governmental, societal, legal, business, and med
actors can affect developments. International environment is concerned with
policies and actions of other nation-states, as well as nongovernmental act
such as regional organizations and international activist groups. The globa

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 FIGURE 1

The Multinational Enterprise and Its Environments

Host Country Environment Home Country Environment

Government actions/policies Government actions/policies
Societal actions/attitudes Societal actions/attitudes
Local business community actions Local business community actions
Legal community rulings Legal community rulings
Media reports Media reports

MNE

International Environment Global Environment

Foreign policies [economic, military, Global organizations' actions/poli

diplomatic] of nation states IMF]
Regional organizations' actions/policies Global developments [worldwide inflation
International activist groups' actions/policies recession, oil crisis, commodity price
Internal developments in nation states fluctuations, external debt crises]

environment incorporates those developments that transcend a particular coun-

try or group of countries, and has the capacity to affect most nations simulta-
neously, such as worldwide recession, oil price fluctuations, and international
financial system instability. The activities of organizations that incorporate most of
the nations of the world (UN, IMF, World Bank) are also included in this realm.
As pointed out above, when a MNE invests in a given country, it enters the world
of that country.16 The risks it will face will depend upon the interactions of key ac-
tors and the course of developments in the different environments, which can
have either direct or indirect effects on the MNE (Figure 2). Among the direct
internal risks would be host government nationalizations, expropriations, and
remittance restrictions, host societal terrorist attacks and demonstrations di-
rected against MNE operations, anti-MNE legal rulings, and negative media
reports. Often a MNE will face risks in a host country through indirect processes.
Among the risks in this category are the effects of societal-governmental friction,
leadership struggles, and local business groups' lobbying efforts.
MNEs also face direct external risks, such as home societal protests against
investments in certain countries, home government restrictions on overseas
operations, and regional and global organizations' attempts to monitor the
operations of MNEs, as well as impose codes of conduct. The indirect external
risks include the effect on MNEs of deteriorating relations between the host and
home countries, spillover of turmoil from a neighboring country, and the effect of
global economic trends such as oil price fluctuations on the host country's
economy.

Although certain types of political risk will occur no matter where the MNE has its
investment (for example, home and host country taxation policies), in several
cases the exact nature of the risk will depend upon the intent and capabilities of
key actors to shape events. This, in turn, will depend upon certain characteristics
of the host country. Two of the more important ones are the stage of economic
development, and the degree of openness in its sociopolitical system.
Industrialized and developing countries will differ in their overall orientation
towards foreign business. A suspicion of MNEs as potentially exploitative entities
is not as prevalent in the industrialized societies as in the developing countries. In

Journal of International Business Studies, Winter 1984 127

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 the LDCs, the need to promote indigenous business elements as part of the
development process will be reflected in risks such as technology transfer
requirements, joint venture pressure, local content rules, and in extreme cases,
nationalization and expropriations; in the industrialized countries these risks are
less likely. As some observers have noted, LDCs have sought "to protect all their
industries even though some are unlikely ever to develop a comparative advan-
tage."17 More moderate risks, such as environmental standards, licensing re-
quirements, and price controls can be expected in the industrialized countries.
Similarly, pressure from home societal and international community groups to

FIGURE 2

Flow and Type of Risk

Flow of Risk Type of Risk

I. DIRECT-INTERNAL
Host government-to-MNE Nationalization, expropriation, indigenization, import/
export regulations, restrictions on remittances,
environmental standards, local content rules, price and
wage controls, licensing regulations, requirements for
technology transfer, breach of contract, devaluations,
inflation, recession

Host society-to-MNE Protests, strikes, riots, demonstrations, terrorist attacks,

boycotts, negative public opinion

It. DIRECT-EXTERNAL
Home government-to-MNE Taxation policy, restrictions on MNE overseas
operations, restrictions on technology transfer, fines for
illegal payments to host government officials

Home society-to-MNE Negative public opinion, pressure for disinvestment,

protests, demonstrations

Regional organizations-to- Codes on MNE conduct, labor demands in member

MNE nations, boycotts

International activist Protests, demonstrations, boycotts, terrorist attacks,

groups-to-MNE pressure for disinvestment

Global organizations-to- Codes on MNE conduct, labor demands in member

MNE nations, boycotts

III. INDIRECT-INTERNAL
Host society-to-host Civil war, revolution, guerrilla war, protests, riots,
government-to-MNE demonstrations, election of anti-business politicians,
pressure on government to restrict foreign business

Host society-to-host Ethnic/religious conflicts, factional conflicts

society-to-MNE

Host business community- Discriminatory taxes, subsidization of competition, local

to-host government-to-MNE content requirements, pressure for joint ventures

Host business community- Anti-foreign business rulings by the courts

to-host legal community-to-
MNE

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 Flow of Risk Type of Risk

Host media-to-host society- Promotion of anti-foreign business sentiments, protests,

to-MNE strikes, boycotts

Host media-to-host Promotion of tighter government restrictions on foreign

government-to-MNE business

Host government-to-host Leadership struggle, coups, radical regime change,

government-to-MNE bureaucratic delays, more restrictive policies toward
foreign business

IV. INDIRECT-EXTERNAL
Home government-to-host Deterioration in relations, economic sanctions,
government-to-MNE reciprocity/retaliation

Nation-state-to-host War, border conflicts, economic sanctions, trade

government-to-MNE agreements detrimental to MNE

Regional organization-to- International economic sanctions, negative international

host government-to-MNE public opinion

Global organization-to-host International economic sanctions, negative international

government-to-MNE public opinion

Nation-state-to-nation- Spillover of international war to host country, multilateral

state-to-host government- trade agreements detrimental to MNE
to-MNE

Nation-state [internal Spillover of internal turmoil, spread of anti-foreign

developments]-to-host business sentiment
society-to-MNE

Home government-to- Anti-foreign business sentiment caused by home country

nation-state-to-host foreign policy in other regions or countries
government/society-to-
MNE

Home media-to-home Promotion of negative public opinion concerning MNE

society-to-MNE investment in the host country

Home media-to-home Promotion of home government restrictions on MNE

government-to-MNE investment in the host country.

Home business Home government protection/legal rulings against host

community-to-home government affecting MNE products
government/legal
community-to-host
government-to-MNE

Regional organization-to- Pressure for disinvestment from host country

home government-to-MNE

Global organization-to- Pressure for disinvestment from host country

home government-to-MNE

Global developments-to- Reduced profits, curtailment of expansion, disinvestment

MNE due to global inflation, recession, energy crises,
commodity price fluctuations, external debt crises

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 adhere to certain rules of conduct, and in certain cases to disinvest, can be
expected to be more intense for MNEs operating in developing countries than in
industrialized ones. Risks stemming from both internal and external conflict will
also tend to be higher in the LDCs, as vulnerability to conflict is often a by-product
of the development process.
The industrialized-developing dimension alone, however, is not sufficient to
explain variations in macro risk for MNEs. Another set of characteristics describ-
ing the political climate in the host country needs to be added. By distinguishing
between open and closed political systems, a further understanding of the origins
of risk can be attained.18 The degree of openness in the society is an important di-
mension of political risk, since it explains the propensity and capability of
nongovernmental actors to shape events. In an open society, expressions of
discontent can be channeled into elections, protests, boycotts, and other forms of
nonviolent activity. In closed societies, these avenues of expression are not
available, and the repression of the populace can often erupt into violent
activities. According to Huntington, revolutions are most likely in societies which
have experienced economic development, but have lagged behind in the creation
of institutions for political expression.19 In addition to the higher probability of risks
stemming from violent social activity, MNEs operating in a closed host country will
also face a greater degree of external pressure to disinvest than would be the
case if they were operating in a host country with an open political system. Home
societal groups, as well as international organizations, are likely to view an MNE's
investment in a country with a closed political system as either tacit approval of, or
inadvertent support for, the repressive regime. Therefore, disinvestment pressure
will tend to be high.
Combining the industrialized-developing and open-closed dimensions produces a
better insight into the types of risk MNEs are likely to face in different types of host
countries. As can be seen in Figure 3, the advanced stage of both the economic
and political sectors in open-industrialized societies diminishes the risks that can
stem from instability, such as revolution, factional conflict, and nationalization.20
Without a need to promote economic development rapidly, host government
actions directed at MNEs are likely to be relatively moderate in nature-for
example, licensing requirements and taxation policies, as well as price controls. If
it is assumed that the society as a whole will be sharing in the economic benefits
of the environment, then direct societal risks such as boycotts, strikes, and
protests are reduced. The MNE will, however, face direct risks in open-industri-
alized countries from adverse legal rulings and negative media reports.
The indirect internal risks will also be of a nonviolent nature. Public pressure for
environmental controls, adverse election results, and local business groups'
lobbying efforts for protective measures are among the risks facing MNEs in open-
industrialized countries, as are bureaucratic delays and procedures. Without the
controversy that surrounds investments in closed societies, MNEs will not face
direct external risks such as disinvestment pressure from home societal and.
international activist groups. Rather, the more likely types of direct external risks
will be home government taxation and licensing policies. Although it is not likely
that there will be disinvestment pressure, MNEs operating in industrialized
countries do have to cope with regional and international organizations' attempts
to regulate corporate behavior. A recent example of this is a proposal by the
European Trade Union Confederation to have the European Community require
parent MNEs to report to their EC subsidiaries on any company matter affecting
employee interests. The subsidiary, in turn, would inform worker representatives
of any potential changes in investment and expansion plans, payroll matters,
mergers, and takeovers.21
Since open-industrialized countries are, for the most part, pro-Western in their
foreign policy orientation, the risk of a serious rift in home-host relations is low.22 In-

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direct external risks will, therefore, most likely involve intermediate-level events,
such as trade disputes and bilateral and multilateral trade agreements detri-
mental to the MNE. Global economic developments are another source of risk,
with oil-importing, industrialized countries negatively affected by petroleum price
hikes, as well as by global inflation and recession.
If an industrialized host country has a closed political system, then the risks facing
MNEs through elections, boycotts, protests, legal rulings, and media reports are
eliminated. A new set of problems arises for the foreign corporation, however, due
to the closed nature of the system. It would appear that the gap between societal
aspirations and realizations will be very wide in a closed-industrialized country,
since the advantages of the industrialized society will be there for all to see, yet
not for all to participate in.23 Without any peaceful means available to press for
their demands, disaffected groups will present a number of direct threats to
MNEs, ranging from violent demonstrations to terrorist attacks. The risk of
government-imposed restrictions on remittances during periods of instability is
another problem for MNEs. The indirect internal risks will include revolution and
guerrilla war, as well as the effects of sudden changes in government leadership
due to coups and other forms of leadership succession in nondemocratic
systems. Externally, the MNE faces negative public opinion at home and interna-
tional pressure to disinvest from the repressive country, while indirect risks
include sanctions placed on the host government by both the home government
and the international community.
As can be seen in Figure 3, if the MNE's investments are in an open-developing
country, then a different combination of risks is postulated. The need to promote
economic self-sufficiency will increase the likelihood of host government local
content and technology transfer requirements, as well as import/export regula-
tions. The struggle for economic benefits in the developing country will yield
strikes, protests, and possible boycotts against MNEs. The openness of the
system, however, will allow for societal dissatisfaction to take a peaceful path.
Negative media reports and adverse legal rulings are additional direct internal
risks that can evolve in democratic LDCs.
The openness of the system will also reduce the likelihood of violent indirect
societal risks. Intra-governmental friction over the development process is likely to
cause some problems for foreign firms, however, as are nationwide strikes and
elections of public officials antagonistic towards foreign business. There is also
the risk of pressure by local business interests to attain favorable treatment from
the host government.
The direct external risks facing MNEs in open-developing countries will evolve
around the basic issues in North-South relations, such as development assis-
tance, reduction of tariff and nontariff barriers, international commodity agree-
ments, and rescheduling of LDCs' external debt.24 There will also be an overall
suspicion of MNE activities in developing countries, thereby increasing external
groups' pressure on foreign firms to pursue policies beneficial to the host country.
The pending U.N. Code of Conduct for Multinationals, which has been in the
drafting stage for the past several years, is an attempt by the international
organization to aid developing countries in their dealings with MNEs.25 The
openness of the political system will lessen the international public pressure to
disinvest, since the MNE will not be perceived to be associated with a repressive
regime. Direct risks stemming from the home government will also be similar to
those that occur in open-industrialized societies (for example, taxation, licensing),
with the possibility of a more extensive oversight function by the home govern-
ment due to the delicate nature of North-South relations.

The most serious indirect external risk facing MNEs in developing countries,
whether they be open or closed systems, stems from the problem of mounting
external debt, and its effect on both the host country's economy and the stability

Journal of International Business Studies, Winter 1984 131

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N)

C-
0

- FIGURE 3
o

A Political Risk Framework

Industrialized Developi

Internal External Internal Ext

o
_.

CD
CO
Cl Home government
Host government Local cont
licensing, l
taxation
price controls, policies
venture p
taxation
0o cD transfer an
(.)
(3" .

Adverse Regional
legal and
rulings global
regulation
CD
C3 organizations' monit
MNE operations
Negative media I
Strikes, pr
reports
negative p

(D
Adverse le
CD
0
Negative m
O0 -
4o
Bureaucratic delays Intra-gover
Host-home and
country
disputes
procedures
General st
Elections, Bilateral/multilateral
public pressure for
environmental controls
agreements Local busi
detrime
a)
subsidies,
C_
Global
Local business economic
pressure for de
subsidies, favorable treatment

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 Restrictions on remittances Home government restrictions Nationalization, expropriation H
on operations o
0
ci Strikes, terrorism, violent Terrorism, riots, strikes
demonstrations/protests Negative home and N
international public opinion, p
disinvestment pressure p

Coups, radical regime change, Deteriorating host-home Coups, radical regime change, N
7C)
leadership struggles relations leadership struggles
a)
cn
A
Revolution, guerrilla war, riots International economic Revolution, guerrilla war, riots t
sanctions/boycott m
0)
0
C
International protests R

Global economic developments H

C-

o C

CD
(P)
o
5-

CO
cn

(D
U)
CD

0
CO
aO
4c-

CA)

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 of the international financial system. Complicating the issue is the fact that a
majority of the debt is owed to a small number of private banks who tend to
impose harsher terms (for example, higher interest rates, shorter maturities) than
public lenders, and also tend to oppose rescheduling efforts.26 According to one
observer, LDC debt is not due to internal problems, but rather "is the result of ex-
ternal factors beyond the capacity of these nations to control or influence," such
as inflated prices for energy products, and the failure of OPEC to provide
assistance to the non-oil developing countries.27
Non-oil commodity price fluctuations are an additional factor that is beyond the
control of LDCs. Although both industrialized and developing countries are
actively engaged in the export of primary commodities, the proportion of export
earnings that is tied to commodities is substantially higher in the LDCs. Primary
commodities account for approximately 55 percent of LDC non-petroleum ex-
ports.28 Because the foreign exchange available to the developing countries is
dependent upon commodity prices, a sharp decline in prices often results in a
balance-of-payments deficit. This in turn causes the LDC to cut back on imports,
thereby disrupting development programs that depend upon foreign goods.29 The
MNE, along with the rest of the country, feels the effects as operations need to be
scaled back. The prospects for societal unrest also increases, as rising expecta-
tions are suddenly dashed.
Both open- and closed-developing countries will also contain the seeds for
potential anti-MNE sentiment among the population and government due to the
home country's foreign policy in other regions (for example, U.S. involvement in
Central America conflicts). LDCs will also be susceptible to border and regional
wars, as part of the instability associated with the development process.
Whereas host government actions directed against foreign firms in open-develop-
ing countries are likely to be moderate in nature (for example, local content
requirements, joint-venture pressure), the risks tend to escalate if the developing
country has a closed political system. These are the types of nations most likely to
undergo radical transformations, thereby increasing the likelihood of nationaliza-
tions and expropriations. As Kobrin points out, "a major shift in political-economic
ideology was both an intervening variable and the direct cause of the mass
expropriations" in several LDCs during the 1960s and 1970s.30 In addition to being
a target for the host government, foreign firms also face direct internal threats
from societal groups, including terrorism, riots, and illegal strikes.
The indirect internal risks will be similar to those that occur in closed-industrialized
countries (for example, coups, revolution, guerrilla war), while the closed nature of
the system will lead to direct external risks such as negative international public
opinion, disinvestment pressure, and home government restrictions on opera-
tions.

It can thus be seen that MNEs are exposed to a number of political risks
originating from a variety of sources. Identifying who the key actors are and how
their interactions can result in various types of risk in different types of countries
can help to isolate the early warning signs of stress. Discussion will now turn to
how the perspective set forth above can be applied to an individual country
situation.

POLITICAL RISK One of the main functions of political risk assessment is to determine when and
IN SOUTH how non-economic factors can affect the foreign investment climate in a particular
AFRICA: A country. The attractiveness of a foreign market can often be negated by the
QUALITATIVE realities of the political and social situation. This is the dilemma currently facing
APPL IONF MNEs with respect to investments in the Republic of South Africa. As a resource-
FRAMEWORK abundant and industrialized nation, South Africa offers foreign companies im-
mense opportunities in terms of growth, profits, market potential, and trade.
However, internal and international tension caused by Pretoria's policy of apart-

134 Journal of International Business Studies, Winter 1984

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heid (separate development of the races) tends to increase the level of risk MNEs
face in the nation. A key question thus becomes to what extent the economic
opportunities are offset by the political realities of the closed-industrialized
society. A look at who the key actors are and how their interactions may affect the
political risk process can help shed light on this question.
When applying the risk framework to a specific country situation, an assessment
of the capabilities and intentions of the key actors becomes necessary. If an actor
has the capabilities to cause problems for another party, but has no intentions of
doing so, then the risks from that relationship remain low as long as the intentions
do not change. Similarly, an actor with low capabilities but high intent poses a risk
only if the capabilities improve. The most dangerous situation occurs when high
capabilities are combined with high intent.31
As can be seen in Figure 4, the major direct internal risks facing a MNE in South Af-
rica stem from 3 basic actors: the host government, the black trade unions, and
the black insurgent forces. Although the government of Prime Minister P. W.
Botha has the capabilities to cause serious problems for MNEs, the likelihood of
risks materializing from this sector is low. Isolated both politically and economi-
cally in the international community, and in need of foreign investment to stimulate
the economy, the ruling Nationalist Party has shown no intentions of alienating the
foreign business community through restrictive rules or expropriations. As is
typical in an industrialized country, there is a lack of suspicion on the part of the
host government of MNE activity. In fact, a number of reforms aimed at attracting
foreign investment have been introduced in recent years. The most significant of
these has been the elimination of most of the country's foreign exchange controls
for nonresidents. In addition, favorable treatment has been given to investments
related to the expansion of manufacturing capacity, promotion of exports,
projects in labor surplus areas, development of strategic industries, introduction
of foreign technology, expansion of labor intensive industries, and import replace-
ment.32
Other reforms have included progressively increasing the "free" list of imports
while steadily reducing the "restricted" list.33 Nevertheless, despite Pretoria's
intentions to keep the foreign business community satisfied, MNEs do face the
potential risk of government-imposed restrictions on the repatriation of profits,
dividends, interest, and capital. This is due to the underlying sociopolitical
tensions in a closed society, as well as to South Africa's track record in reacting to
a sudden outflow of foreign capital. Political violence in the early 1960s, and South
Africa's subsequent withdrawal from the Commonwealth, resulted in a rush by
foreign investors to repatriate their funds from the troubled country. The govern-
ment responded by blocking the transfer of funds abroad. Since most investors
are extremely sensitive to sudden short-term political and social stress, sporadic
violence that does not really threaten the regime could nevertheless result in a
resurgence in the outflow of foreign capital, thus causing the government to
impose new remittance restrictions.
Black insurgent forces and black trade unions are additional actors that have the
potential to affect foreign firms in South Africa directly. The most powerful guerrilla
group is the African National Congress (ANC). The 2,000-strong outfit has
followed a strategy of disrupting both local and foreign businesses via terrorist
attacks such as the 1981 bombing of 2 transformers at an electrical substation
near Durban, cutting power supplies and forcing the closing of hundreds of
factories. These attacks are sporadic, however, and while the intent of ANC and
other terrorist groups is to inflict as much damage as possible on both the
government and the business community,34 their capabilities are low given the
government's overwhelming superiority in troops and weapons. Furthermore, the
recent nonaggression pact between South Africa and Mozambique, in which both
sides agreed not to allow their territories to be used for guerrilla and terrorist
attacks against each other, has eliminated an important base of operations for the

Journal of International Business Studies, Winter 1984 135

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0.

0
o
C
3
-(I

r-

FIGURE 4
0)
Political Risk in South Africa

() cn

02 Internal Externa
CO

CD Flow of Risk Type of Risk Flow of Risk Typ

U)
Restrictions on
South Africa government- U.S. Government-to-MNE R
c to-MNE repatriations of profits,
dividends, interest and
capital

Black trade unions-to- Strikes, violent U.S. society-to-MNE S

.)

42,
0) MNE demonstrations, protests f
Co
0
p
00
p
S

Black insurgent forces-to- Terrorist attacks Regional/global D

MNE (bombings, kidnappings) organizations-to-MNE m
p
S

International activist P
groups-to-MNE

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 South African Leadership struggles U.S. government-to-South D
government-to-MNE Africa-to-MNE

Black majority population- Violent demonstrations, Black Africa-to-South B

to-South Africa protests, revolution Africa-to-MNE N
government-to-MNE

Black trade unions-to- Nationwide strikes, violent Namibia-to-South Africa S

South Africa government- demonstrations, protests Black majority-to-MNE n
to-MNE
0
aL)

Black insurgent forces-to- Guerrilla warfare, terrorist Regional/global E

._

South Africa attacks organizations-to-South

governmnent-to-MNE Africa-to-MNE

U.S. media-to-U.S. N
society-to-MNE a
0 p

Global economic D
0 development-to-South f
Africa-to-MNE g
:,

()

:3

c3 cl
r--
00
co

_.

CD
(CD
c

(S

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 ANC. Pretoria should thus be able to protect MNEs from sustained guerrilla
attacks.

A more serious risk to foreign companies stems from the growing strength of the
black trade union movement. The recently legalized unions already have approxi-
mately 200,000 members and have been active in several strikes,35 including a
general one called during the Fall of 1984. The largest of these unions is the
Federation of South Africa Trade Unions (FOSATU), and their struggle for
bargaining power will continue to intensify during the 1980s. Strikes, demonstra-
tions, and protests are some of the direct threats that this movement will pose for
MNEs. Since a closed political system has little tolerance for dissension, the
potential for such activity to become violent is high. Labor disputes have already
become violent, as indicated by the 1982 riots by black gold miners over pay
scales. Resistance by the government to the black trade union movement could
very well be the catalyst for widespread turmoil. As one observer notes:
... without [black] trade unions industrial peace is not possible, without industrial peace there
will be little investment, particularly from abroad, without investment there will be no growth,
and without growth there will be massive black unemployment, disruption, and ultimately chaos
and violence.36

The perspective on political risk developed in this article would lead to a

prediction that in a closed society, the direct risks stemming from societal actors
will be mitigated by the control exercised by the host government. This is true for
South Africa, where the majority black population, black opposition parties, and
the media are restricted in their expressions of dissent. The black majority is
relatively restricted within the "homelands" (extremely poor land chosen in order
to keep the blacks separate from the white population). While there has been an
increase in black migration to urban areas, thereby creating social and political
tensions near the nation's major cities, the frustrations and anger of the blacks are
aimed essentially at the government's policy of apartheid, and the role of the MNE
in the country is not a salient issue. Recent riots in several black townships
revolved around economic and political grievances of the blacks against the
Botha administration and not against the MNEs. That foreign companies have
joined the local business community in urging Botha to implement reforms in
housing, education, and political representation has helped improve their image
among blacks.37 Black opposition parties are fragmented and have virtually no
political rights, while the risks posed by the host media are minimal due to
government controls.
As would be expected in a closed-industrialized country where the majority of the
population is deprived of the economic and political benefits of the society, the
most serious indirect internal risk facing foreign firms in South Africa is the specter
of revolution. This past year was one of the most violent in the history of South Af-
rica. Of all the countries in Africa, the contrast between wealth and poverty is
most pronounced in South Africa.38 Recent surveys have found that almost 80
percent of the blacks are angry at the way the country is being run, while another
survey found growing support for the ANC.39 According to theories of relative
deprivation, revolution would be expected to occur as the gap between achieve-
ment and expectations widens throughout the country.40 However, while the
desire for revolution may be growing, the capabilities have not been. As one
observer notes: "Organizational efforts have been relatively easy to nip in the bud
not only due to South Africa's massive and effective security machinery, but also
to the crosscurrents that run through black aspirations and goals."41 This
assessment is confirmed by a high-level State Department official who states that
while the "attitudinal ingredients of a potential revolution may be present... the
physical ones are not."42 Nevertheless, the increased use of force by the South
African police in dealing with demonstrations, such as the March 1985 killing of 19
people near Uitenhage, can only serve to heighten the level of tension between
blacks and whites in the country.

138 Journal of International Business Studies, Winter 1984

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It thus appears that in the case of South Africa, Chatterjee's concept of societal
performance gap may have more explanatory power, at least in the short-term,
than Gurr's theory of relative deprivation.43 Rather than revolution, the more likely
course of events will involve changes in host government policies. This is already
taking place as Prime Minister Botha is cautiously preparing the Afrikaner elite for
reform of the apartheid system, as indicated by his appointment of the country's
first nonwhite Cabinet members and the granting of parliamentary representation
for Asian and mixed-race peoples, but not for blacks. Opposition to such reforms
has led to the defection of the National Party's right-wing faction in Parliament.
The most serious intragovernmental development that would threaten MNEs,
ironically, would be a change in leadership that results in more restrictive policies
toward the black majority. This would have the effect of igniting the sparks of
instability. A strong showing by the ultra-right-wing Conservative Party in several
recent regional by-elections, and a victory in one of them, indicates that opposi-
tion to Botha's reform policies may be growing. It is also evident that, unless the
reforms include the black majority, Botha will face increased opposition from both
moderate and liberal elements of the society.
As discussed above, an MNE operating in a closed society would be expected to
face certain direct external risks, such as home government restrictions on
operations, and pressure to disinvest caused by negative public opinion. This is
true in the case of South Africa, where the official policy of racial discrimination
evokes strong negative international reactions. Several corporations and banks
have been confronted in recent years with shareholder resolutions to disinvest,
while others have been asked to adhere to the Sullivan Code of fair labor
practices, which promotes equal pay for equal work, desegregation of company
facilities, and the training of blacks for management positions. Although the
Reagan Administration's policy of "constructive engagement," which encour-
ages political and economic ties with Pretoria, has temporarily reduced the risks
MNEs face from the home government, there are already signs that this policy will
come under increasing attack at home during the President's second term. A
wave of anti-South Africa demonstrators across the U.S. has led the Reagan
administration to adopt a more vocal public stance against the practice of
apartheid.
The closed nature of the system will also motivate international organizations to
apply direct pressure on foreign firms to disinvest. The UN's Economic and Social
Council and the International Conference on Sanctions against South Africa have
condemned MNEs for conducting business in the racially segregated country,
and have warned of repercussions unless such ties are broken.44 However, the
need of most black African nations for foreign investment will tend to reduce the
risks originating in this environment.
In the theoretical perspective on political risk, presented earlier, it was proposed
that the propensity for MNEs to experience indirect external risks due to sharp
declines in commodity prices would be more likely in the LDCs than in industri-
alized countries. This was based on the premise that the developing countries'
heavy reliance on commodities as a principal source of export earnings would
make them more vulnerable to global price fluctuations. South Africa, however,
deviates from this pattern insofar as it is one of the few industrialized countries
that depends upon one commodity to generate a large proportion of its foreign
exchange earnings. With approximately two-thirds of the world's annual output of
gold coming from South Africa, and with the precious metal accounting for 46
percent of the nation's export earnings in 1982, a decline in its international value,
which is what has occurred during the past few years, affects foreign exchange
earnings as well as the strength of the rand.45 A mere $10 decline leads to a $220
million loss in foreign exchange earnings.46 A major slide in gold prices can
therefore result in lower profits and revisions in expansion plans for several MNEs.
A drop below $300 an ounce is generally considered to be the point at which

Journal of International Business Studies, Winter 1984 139

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 serious problems would arise for both the South African economy and for MNEs
operating in the country.47

An additional factor to be considered is the link between price fluctuations of gold

and sociopolitical and military tension. Ironically, widespread internal turmoil or
international conflicts will drive up the price of gold, since it is seen as represent-
ing stability during times of unrest. It thus appears that if a MNE can survive the ef-
fects of short-term internal conflicts, it will tend to prosper in the long run through
the strengthening of the South African economy.

Indirect external risks also relate to the host government's relationship with other
actors in the home, international, and global environments. As pointed out above,
the Reagan Administration's policy of constructive engagement has improved
U.S.-South Africa relations, although home societal and media groups will con-
tinue to put pressure on Washington to change its policy towards South Africa.
The closed nature of the South African system has also propelled regional actors
to apply military and economic pressure on Pretoria to abolish its apartheid
policies. Recent efforts included an unsuccessful effort to block an IMF loan to
Pretoria. However, the economic independence and military superiority of South
Africa will protect MNEs from the effects of sporadic border skirmishes or threats
of economic sanctions. As Black African nations reduce their dependence on
South Africa and begin to cooperate more with each other, however, economic
sanctions may become a more realistic threat.
More serious indirect external risks will arise from the eventual independence of
Namibia. The accession to power in a neighboring country of a black-ruled
majority government will bring with it the potential for the spread of black
nationalist sentiments to South Africa, and a subsequent rise in anti-foreign
business attitudes among the black population. Furthermore, since most of the
attention today in southern Africa is on the Namibian issue, once it is settled the
major focus of black African nations will shift to the domestic policies of Pretoria.
Foreign firms will therefore come under increasing attack for participating in a
racially segregated society.
As a closed-industrialized country, then, South Africa follows part of the pattern of
political risk anticipated by the theoretical framework. Direct internal risks include
terrorist attacks and potential host government restrictions on remittances.
Violent protests aimed directly at MNEs, however, are at a minimum due to the for-
eign business community's support for political reform. Indirect internal risks
include potential leadership struggles, as well as societal instability, such as
guerrilla warfare, violent protests by the black majority, and nationwide strikes by
black trade unions. However, the prediction that revolution would be likely in a
closed-industrialized country has to be modified to take into account the capabili-
ties of the host government to contain such activity, as well as the disunity in
potential revolutionary movements.

In terms of direct external risks, it was proposed that public pressure for
disinvestment from home and international organizations would be high for MNEs
operating in closed-industrialized countries. This was the case for South Africa.
However, the expectation that the direct risk of home government restrictions on
MNE operations, as well as the indirect risk of deteriorating host-home relations,
would also be high in a closed society needs to be modified to account for
changing foreign policy orientations of the home government. Finally, the effect of
global economic developments on political risk deviated from the pattern pre-
dicted due to South Africa's unique characteristic of being an industrialized
country that depends upon one commodity for a significant percentage of its
foreign exchange earnings. In this realm, South African risks resembled those
found in developing countries where fluctuation in commodity prices can cause
serious problems for both the host government and for foreign firms.

140 Journal of International Business Studies, Winter 1984

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This article has attempted to set forth the grounawork for the development of a CONCLUSION
pre-theory of political risk. Because the discipline crosses several boundaries
ranging from politics to economics and from sociology to law, preliminary efforts
must be broad enough to account for the multitude of actors, situations, and
environments that can affect the risk process. By distinguishing between open
and closed societies, as well as between industrialized and developing countries,
and by identifying the direct and indirect risks confronting MNEs, we believe that
an important preliminary step in theory-building has been taken.
Future research efforts should be aimed at applying the framework to different
country situations in order to determine if recurring patterns can be identified.
Efforts should also be directed at improving our understanding of the dynamics of
political risk management. Important theoretical work in this realm has already
been undertaken by Kobrin, Shapiro, De la Torre, and Gladwin and Walter.48
With the study of political risk still in the early stages of its development,
conceptual frameworks and theoretical propositions are needed to help establish
the boundaries and direction of the emerging discipline. This research effort was
an attempt to aid in that process.

1. Franklin R. Root, "U.S. Business Abroad and Political Risks," MSU Business Topics, Winter 1968, FOOTNOTES
pp. 73-80; Robert B. Stobaugh, "How to Analyze Foreign Investment Climates," Harvard Business
Review, September-October 1969, pp. 100-108; Stefan H. Robock, "Political Risk: Identification and
Assessment," Columbia Journal of World Business, July-August 1971, pp. 6-20; Jean Boddewyn and
Etieme Cracco, "The Political Game in World Business," Columbia Journal of World Business,
January-February 1972, pp. 45-56; Robert T. Green, "Political Structures as a Predictor of Radical
Political Change," Columbia Journal of World Business, Spring 1974, pp. 28-36; Harold J. Knudsen,
"Explaining the National Propensity to Expropriate: An Ecological Approach," Journal of International
Business Studies, Spring 1974, pp. 51-71; Antoine W. Van Agtmael, "How Business Has Dealt With
Political Risk," Financial Executive, January 1976, pp. 26-30; Stephen J. Kobrin, "When Does Political
Instability Result in Increased Investment Risk," Columbia Journal of World Business, Fall 1978, pp.
113-122.

For a thorough review of the literature on political risk, see Jeffrey D. Simon, "Political Risk
Assessment: Past Trends and Future Prospects," Columbia Journal of World Business, Fall 1982, pp.
62-71.
2. The New York Times and The Times of London have been used to monitor intra- and international
stress situations. See Charles A. McClelland, "D-Files for Monitoring and Forecasting Threats and
Problems Abroad" (Los Angeles: University of Southern California, January 1978), 28 pp.; and Jeffrey
D. Simon, "The Advantages of the Dangers Files Over WEIS as a Crisis Warning System: Some
Preliminary Findings," CWSS Pre-Technical Report #1 (Los Angeles: University of Southern California,
July 1978), 35 pp.
3. Joseph La Palombara, "Assessing the Political Environment for Business: A New Role for Political
Scientists?" PS, Spring 1982, p. 186.
4. Boddewyn and Cracco, "The Political Game in World Business."
5. Gurr argues that as the gap between a societal group's value expectations and its value
capabilities widens, the potential for revolutionary behavior increases. See Ted Robert Gurr, "A Causal
Model of Civil Strife: A Comparative Analysis Using New Indices," American Political Science Review
62 (1968), pp. 1104-1124, and Why Men Rebel (Princeton: Princeton University Press, 1979).
6. Knudsen, "Explaining the National Propensity to Expropriate."
7. Green, "Political Structures as a Predictor of Radical Political Change."
8. Robock, "Political Risk."
9. Thomas N. Gladwin and Ingo Walter, Multinationals Under Fire: Lessons in the Management of
Conflict (New York: John Wiley & Sons, 1980).
10. Kenneth W. Thomas, "Conflict and Conflict Management," in Handbook of Industrial and
Organizational Psychology (Chicago: Rand McNally, 1976), pp. 889-935.
11. See, for example, Graham T. Allison, Essence of Decision: Explaining the Cuban Missile Crisis
(Boston: Little, Brown and Company, 1971); and Ole R. Holsti, "The Belief System and National
Images: A Case Study," Journal of Conflict Resolution 6 (1972), pp. 244-252, also in International
Politics and Foreign Policy, rev. ed., edited by James N. Rosenau (New York: The Free Press, 1969),
pp. 543-550.
12. Ashok K. Chatterjee, Foreign Direct Investment and Political Risk: A Weak Signal Perspective
(New York: New York University, Ph.D. dissertation, 1982).
13. See, for example, Ivo K. Feierabend and Rosalind L. Feierabend, "Aggressive Behaviors within

Journal of International Business Studies, Winter 1984 141

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 Polities, 1948-62: A Cross-National Study," Journal of Conflict Resolution 10 (1966), pp. 249-271; and
Gurr, "A Causal Model" and Why Men Rebel.
14. Chatterjee, Foreign Direct Investment and Political Risk, p. 85.
15. Chatterjee, pp. 170-171.
16. Our focus here is on a MNE investment in a single host country, rather than the worldwide
operations of the firm. Other frameworks can be developed which depict how the different country
exposures of a MNE affect the risk process. For an application of an environmental approach to foreign
policy decision making, see Richard C. Snyder, H. W. Bruck, and Burton Sapin, "The Decision-Making
Approach to the Study of International Politics," in Rosenau, International Politics and Foreign Aid, pp.
199-208.
17. David K. Eiteman and Arthur I. Stonehill, Multinational Business Finance (Reading, MA: Addison-
Wesley Publishing Company, 1979), p. 175.
18. For the purposes of this paper an open system is defined as a 2 or more party state, with all mem-
bers of the society allowed to participate in the political process. Distinctions between open and
closed societies, and industrialized and developing countries have been utilized previously in the
establishment of a theory of foreign policy. See James N, Rosenau, "Par-theories and Theories of
Foreign Policy," in Approaches to Comparative and International Politics, edited by R. Barry Farrell
(Evanston, IL: Northwestern University Press, 1966, pp. 27-92).
19. Samuel P. Huntington, Political Order in Changing Societies (New Haven: Yale University Press,
1970), p. 266.
20. Figure 2 is not intended to be an exhaustive or mutually exclusive list of risks. Rather, it is to
illustrate the likelihood of certain types of risks occurring in certain types of societies.
21. The Economist, 24 April 1982, pp. 72-73.
22. For the purposes of this article, the home country is defined as the U.S.
23. For a discussion of the gap between expectations and capabilities, see Gurr, "A Causal Model"
and Why Men Rebel.
24. David L. McNicol, Commodity Agreements and Price Stabilization (Lexington, MA: D. C. Heath
and Company, 1978), p. 4.
25. Arnold Kransdorff, "Multinationals Code 'In Sight,' " Financial Times, 24 November 1982, p. 16.
26. Chris C. Carvounis, "The LDC Debt Problem: Trends in Country Risk Analysis and Rescheduling
Exercises," Columbia Journal of World Business, Spring 1982, p. 16.
27. Carvounis, "The LDC Debt Problem," pp. 15-17.
28. Jere R. Behrman, Development, the International Economic Order, and Commodity Agreements
(Reading, MA: Addison-Wesley Publishing Company, 1978), p. 54.
29. McNicol, Commodity Agreements and Price Stabilization pp. 20-21.
30. Kobrin, "Foreign Enterprise and Forced Divestment in LDCs," International Organization 34, no. 1
(Winter 1980), p. 75. The LDCs included Algeria, Angola, Chile, Ethiopia, Indonesia, Mozambique, Peru,
and Tanzania. Except for Chile, all the LDCs during the period of the expropriations could be classified
as one-party closed systems. See also Gladwin and Walter, Multinationals Under Fire, p. 293.
31. What follows is a qualitative application of the framework discussed above. Since our purpose is
to set forth the foundation for a pre-theory of political risk, we believe a qualitative assessment is
sufficient. Future efforts can be directed at obtaining operational indicators of the variables, as well as
utilizing statistical tests.
32. Senbank Economic Report, January 1981.
33. Quarterly Economic Review of Southern Africa, Annual Supplement, 1981, Economist Intelligence
Unit, Ltd., p. 27.
34. A recent attack on the government was the 1983 bombing of the South African Air Force
Headquarters building in Pretoria.
35. John Kane-Berman, "Black Unions Start Winning," New Statesman, 15 January 1982, pp. 10-12.
36. Roy Godson, "Black Labor as a Swing Factor in South Africa's Evolution," in South Africa into the
1980s, edited by Richard E. Bissell and Chester A. Crocker (Boulder: Westview Press, 1979), p. 63.
37. While in many host countries MNEs favor a low profile in order to avoid negative public reaction, in
South Africa the norm for foreign companies appears to be a high visibility on the side of political, so-
cial, and economic reform for the black majority. This is viewed as an important strategy to prevent
hostile attitudes and behavior on the part of the subjugated population.
38. Theodor Hank, Heribert Weiland, and Gerda Vierdag, South Africa: The Prospects of Peaceful
Change (London: Rex Collings, 1981), p. 18.
39. The Economist, 13 March 1982, p. 57; and Joseph Lelyveld, "Compromise Urged in South Africa,"
New York Times, 10 March 1982, p. 5.
40. See Gurr, "A Causal Model" and Why Men Rebel.
41. Steven F. McDonald, "The Black Community," in Bissel and Crocker, South Africa into the 1980s,
p. 24.

142 Journal of International Business Studies, Winter 1984

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42. Crocker, "South Africa Strategy for Change," Foreign Affairs 59, no. 2 (Winter 1980), p. 343.
43. Chatterjee, "Foreign Direct Investment and Political Risk," p. 85.
44. UN Monthly Chronicle, May 1981, pp. 5-8, "Paris Conference Sees Total Sanctions as Effective
Weapon Against South Africa"; and UN Monthly Chronicle, January 1982, pp. 27-29, "ECOSOC
Condemns Transnationals for Collaborating with South Africa."
45. The Economist, 9 April 1983, p. 71.
46. J. D. F. Jones, "South Africa Waits Its Turn for Recession," Financial Times, 12 November 1981,
p. 4.
47. John Parry, Consultant Editor, Guide to World Commodity Markets, 3rd ed. (London: Kogan Page,
Ltd., 1981), p. 95.
48. Kobrin, Managing Political Risk Assessment: Strategic Response to Environmental Change
(Berkeley: University of California Press, 1982); Alan C. Shapiro, "Managing Political Risk: A Policy
Approach," Columbia Journal of World Business, Fall 1981, pp. 63-69; Jose De la Torre, "Foreign
Investment and Economic Development: Conflict and Negotiation," Journal of International Business
Studies, Fall 1981, pp. 9-32; and Gladwin and Walter, Multinationals Under Fire.

Journal of International Business Studies, Winter 1984 143

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