International Political Risk Management: Perspectives, Approaches and Emerging Agendas

• Author: Thomas C. Lawton,Anna John
• DOI: http://doi.org/10.1111/ijmr.12166
• Date: 01 October 2018
• Published date: 01 October 2018

International Journal of Management Reviews, Vol. 20, 847–879 (2018)

DOI: 10.1111/ijmr.12166

International Political Risk Management:

Perspectives, Approaches and Emerging

Agendas

Anna John and Thomas C. Lawton

Open University Business School, Michael Young Building (D1), Walton Hall, Milton Keynes MK6 7AA,

Buckinghamshire, UK

Corresponding author email: anna.john@open.ac.uk

This paper reviews the extant and emerging perspectives on, and approaches to, po-

litical risk management, particularly in the context of foreign direct investment. The

authors identify and classify the various theoretical lenses in the domain of political

risk management, and suggest a future research agenda. The paper contributes by

conceptually categorizing and mapping the extant research onto three approaches to

the management of political risk. Through conducting a narrative literature review,

the authors suggest three theoretical perspectives on political risk management: in-

stitutions; resources and capabilities; and resource dependence. They argue that the

institutions approach to political risk management is reactive, responding to external

stimuli, whereas the resources-and capabilities-based approach is proactive, preparing

and acting in anticipation. The resource dependence domain offers an intermediate

approach – the active management of political risk. The authors also suggest that the

effectiveness of the domains’ approaches mayvary across different national contexts.

Introduction

The often unpredictable and hard to measure nature

of political risk makes it difficult to anticipate and

manage ((Lawton et al. 2014; McKellar 2010). For

managers, financial, operational and other forms of

risk can also arise unexpectedly and havea significant

impact on business structure and strategy.But how do

you manage the risk to your organization and assets

associated with sudden regime change, an unexpected

policy shift by government or the political instability

caused by a terrorist attack or civil unrest? Despite the

range and scale of impacts that political risk can have

on companies, many top management teams continue

to ignore, avoid or underestimate its strategic impor-

tance (Bremmer and Keat 2010; Czinkota et al. 2010;

Lawton et al. 2014). Setting aside extractive indus-

tries and other sectors prone to frequent political in-

tervention, firms typically deal with political risk in

a tactical and defensive mode (Lawton et al. 2014).

The extant literature on political risk management

reflects this reactive and avoidance-orientedtendency

(Butler and Joaquin 1998; Ellstrand et al. 2002;

Henisz and Zelner 2003; Henisz et al. 2010; Jim´

enez

2010; Jim´

enez et al. 2014; Kobrin 1979; Moran and

West 2005; Mortanges and Allers 1996; Slangen and

van Tulder 2009).

In this paper, we challenge this predisposition and

show there are other approaches that are proactive

and more strategic in managing political risk. We

draw on diverse research threads and theoretical

perspectives to advance a comprehensive assessment

and classification of political risk management schol-

arship, particularly in the context of foreign direct

investment (FDI). We subsequently map these per-

spectives onto three approaches to the management

of political risk: reactive, proactive and active.

As a mode of foreign market entry, FDI – particu-

larly through greenfield investmentsand inter national

acquisitions – entails greater voting shares (a 10%

threshold) and control over the operations and organi-

zation in a host country (Financial Times 2016). Yet it

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848 A. John and T.C. Lawton

also implies greater resource commitment, higher po-

tential losses and fewer possibilities to remove assets

from the host country (Feinberg and Gupta 2009; Fi-

nancial Times 2016). This conundrum stimulated our

interest in research on the determinants of FDI deci-

sions. Much of the extant research focuses on mar-

ket and corporate determinants such as resource fac-

tors, including financial, managerial and knowledge

(Erramilli 1991; Herrmann and Datta 2002; Lecraw

1993), organizational capabilities such as network-

ing and timing (Chen and Chen 1998; Chen et al.

2004; Isobe et al. 2000; Li et al. 2008; Luo 2001),

company size (Moran 2012; Terpstra and Yu 1988),

degree of diversification (Doukas and Lang 2003;

Mudambi and Mudambi 2002), prior acquisitions

(Harris and Ravenscraft 1991), age of the enter-

prise (Moran 2012; Mudambi and Mudambi 2002),

level and extent of FDI experience (Benito and Grip-

srud 1992; Chan et al. 2006), and governance and

ownership structures (Cui and Jiang 2012; Lien and

Filatotchev 2015; Meznar and Nigh 1995; Woodcock

et al. 1994). Some studies havealso explored how FDI

decisions depend on factors determined by the indus-

trial and national systems of host and home coun-

tries (Jensen 2008). Examples include: industry re-

sources, size and structure (Denekamp 1995; Moran

2012; Yu and Ito 1988); national economic, legisla-

tive, administrative and political systems (Buckley

et al. 2007; Chan et al. 2008; Globerman and Shapiro

1999; Habib and Zurawicki, 2002; Li and Resnick

2003); and market dynamics such as size, demand

and competition (Anand and Kogut 1997; Galan and

Gonzalez-Benito 2001; Kim and Lyn 1987; Sethi

et al. 2003; Tsang 2005). Moreover, some authors

refer to FDI decisions as being influenced by the ac-

tivities of international institutions such as the World

Bank or the World Trade Organization (Lawton and

McGuire 2005; Lawton et al. 2009) or being deter-

mined by international relations, particularly home–

host country agreements and relations (Bieler et al.

2004; Lundan 2004; Schuler and Brown 1999).

We argue that these FDI determinants cannot be

fully understood without considering the moderating

effect of the political environment (De Villa et al.

2015), and without factoring in the risk arising from

actions or inactions in this political context (Bremmer

2005). Hence our interest in the political risk factor in

FDI decision-making. Spar (2001) stresses that FDI is

inherently political, and political risks remain the key

determinant of FDI decisions. This perspective is sup-

ported by studies such as Brewer(1981, 1985), Kobrin

(1979), Oetzel (2005), and Zhuang et al. (1998) that

support the idea of political risk as a significant de-

terminant of FDI decisions. Moreover, political risk

has implications not only at the pre-investment stage,

but also when the FDI is in place (Feinbergand Gupta

2009; Oetzel 2005). In this paper, we revisit the link

between political risk and firms’ overseasinvestments

by reviewing and classifying the relevant literature.

We place an emphasis on the role of political risk

management in this interconnection.

For our purposes, political risk refers to the pos-

sibility that a specific action or inaction in the po-

litical environment will directly or indirectly, on a

regular basis or episodically, induce negative or pos-

itive changes in the economic outcomes of firms at

macro and micro levels. This study considers polit-

ical risk particularly in an international context, and

examines it as one of the most important determi-

nants of FDI choices. Wedefine the political environ-

ment as a complex multi-levelconstr uct composed of:

firm–government relations (firm-level); trade associ-

ations, unions and interest groups (industry-level);

policies, norms and regulations, and political history

in host and home countries (national-level); supra-

national entities, international agreements of, or be-

tween, a multinational enterprise’s (MNE’s) host and

home countries, and political relations between an

MNE’s host and home countries (international-level)

(De Villa et al. 2015; Doh et al. 2012).

Since earlier studies (Baglini 1976; Carlson 1969;

Eiteman and Stonehill 1973; Green 1972; Green

and Korth 1974; Weston and Sorge 1972) and two

subsequent reviews (Fitzpatrick 1983; Kobrin 1979),

research into political risk and its management has

moved forward in different strands. As more coun-

tries around the world opened to FDI as the result

of shifting from import-substitution industrialization

to market-friendly strategies (Ramamurti 2001), new

literature streams emerged in the mid-1980s that

challenged the traditional perspective on political

risk management, which assumed the authority of

government (Poynter 1982; Root 1968; Truitt 1970)

and the passivity of firms in the political environment

(Faber and Brown 1980). This work also challenged

the view that political risk has exclusively negative

implications, should be avoided, and cannot be

managed by firms (Green and Smith 1972; Root

1968; Root and Ahmed 1978). Welear ned from these

studies that political risk does not always have purely

negative implications (Jim´

enez et al. 2014) and that,

if able to adopt a more active stance in the political

environment (Dieleman and Boddewyn 2012; Getz

and Oetzel 2009) and thereby influence government

C2017 British Academy of Management and John Wiley & Sons Ltd.

International Political Risk Management 849

(Blumentritt and Rehbein 2008; Holtbr¨

ugge et al.

2007), firms can actively manage and reduce political

risk (Holburn 2001; Oliver and Holzinger 2008;

Puck et al. 2013; Shaffer 1995). However, we have

a limited understanding of the overall political risk

research terrain, where these new perspectives could

be documented relative to existing approaches to po-

litical risk management. Our contribution addresses

this knowledge deficiency by categorizing extant

literatures into discrete domains, each advancing

a distinct approach to the management of political

risk, particularly in the context of FDI. Through

exploring these domains, we intend to develop a

more robust understanding of managerial approaches

to political risk strategies for FDI, shed light on their

possible complementarities, and suggest a future

research agenda. We pursue these objectives through

conducting a narrative literature review.

Compared with systematic reviews (e.g. meta-

analysis), narrative reviews are particularly valuable

where, as in our case, there is the need to integrate

advances in a certain research field by reinterpreting

and interconnecting many publications on different

topics and with diverse methodological approaches

(Baumeister and Leary 1997). Moreover, narrative

reviews are preferred where, as in our sample, an-

alytical aggregation is impossible owing to a diver-

sity of methodologies in the studies (Baumeister and

Leary 1997). Narrative reviews do not always suf-

fer from subjectivity (Hammersley 2002; Jones and

Gatrell 2014). Instead, a scholar may enhance the ob-

jectivity of a narrative review by borrowing the more

rigorous approach of systematic reviews, as well as

by attaining a high level of transparency in sample

development (Hammersley 2001; Jones and Gatrell

2014).

The remainder of the paper is structured as follows.

First, we outline a methodological approach to the re-

view,and propose research domains. Then, we present

the research domains and their approaches to political

risk management outcomes. Wesubsequently discuss

the results of our review and the implications for fu-

ture research agendas.

Methodology

Toincrease the objectivity of this review and the cred-

ibility of the analysis, we adopt a methodological ap-

proach based on the transparency of procedures in

relation to the selection of studies to be included in

the review. To increase the research transparency, we

discuss conceptual boundaries, establish thematic and

disciplinary parameters, outline the review process,

and present survey results by detailing the sample

quality and proposing a review framework.

Establishing conceptual boundaries

The boundaries as to what constitutes political risk are

based on a synthesis of existing definitions. As shown

in the introduction, we propose a broad definition of

political risk as the possibility that a specific action,

or inaction, in the political environment will directly

or indirectly, on a regular basis or episodically, in-

duce negative or positive changes in the economic

outcomes of firms at macro and micro levels. We

envisage several conceptual implications of this def-

inition. These are summarized in Table 1. It is worth

noting in our definition of political risk how wereflect

the evolution of the concept by capturing new chal-

lenges for firms in modern political environments. For

example, in contrast to earlier definitions of political

risk (Kobrin 1979; Robock 1971), we emphasize that

the economic consequences of political risk are not

always negative. In line with Robock’s (1971) early

classification, we emphasize that political risk may

be regular/continuous or episodic/discontinuous. In-

deed, as the frequency, magnitude and geopolitical

implications of terrorist attacks, violent conflicts and

civil unrest increases, there is a need to develop an

enhanced understanding of not only potentially man-

ageable systematic political risks, but also exposure to

less controllable discontinuous political risks (Oetzel

and Oh 2015).

In this review, we consider political risk in the con-

text of FDI into a host country.Our focus is on studies

that discuss the link between political risk in host and

home countries, and the FDI of firms in host countries.

Earlier studies assumed that political risk originates

in a host country context. However, subsequent dis-

cussions questioned this assumption by suggesting

that, being an open system, an international firm is

also exposed to political dynamics in its home coun-

try (Duanmu 2014; Kobrin 1979; Li and Vashchilko

2010; Murtha and Lenway 1994; Simon 1984; Soule

et al. 2014).

It is worth noting at this point what this paper

considers to be beyond the concept of political risk.

Table 1 details what political risks are not.

Establishing thematic parameters

Political risk management and corporate political

activity. We distinguish between the literature on

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