Political risk assessment by multinational corporations in African markets: A Nigerian perspective

• Author: James B. Mshelia,John R. Anchor
• Date: 01 March 2019
• DOI: http://doi.org/10.1002/tie.21964
• Published date: 01 March 2019

AREA PERSPECTIVES: AFRICA

Political risk assessment by multinational corporations in

African markets: A Nigerian perspective

James B. Mshelia

1

| John R. Anchor

2

1

Faculty of Business and Law, University of

Northampton, Northampton, UK

2

Huddersfield Business School, University of

Huddersfield, Huddersfield, UK

Correspondence

John R. Anchor, Huddersfield Business School,

University of Huddersfield, Queensgate,

Huddersfield HD1 3DH, UK.

Email: j.r.anchor@hud.ac.uk

Political risk assessment (PRA) is one of the determinants of foreign direct investment (FDI)

and the competitiveness of multinational corporations (MNCs), yet little is known about its use

in African markets. This study critically investigates the PRA techniques used by MNCs in Nige-

ria and their applicability. It uses a multimethod approach to analyze data collected from MNCs

and the data set of the International Country Risk Guide (ICRG) PRA annual rating for Nigeria

from 2011 to 2015. The findings reveal that most firms use qualitative, rather than quantita-

tive, PRA techniques. Regional variations in the outcome of PRA within Nigeria could also con-

tribute to the low use of quantitative techniques. This article identifies that firms are prepared

to invest in Nigeria, in spite of high political risk, due to its economic and financial attractive-

ness. This article’s findings offer some implications for practice with some suggestions on how

it could influence firms’internationalization and their conduct of PRA.

KEYWORDS

Africa, foreign direct investment, internationalization, multinational corporations, Nigeria,

political risk assessment

1|INTRODUCTION

FDI is generally increasing year on year in sub-Saharan Africa,

although a 7% decline in inflows was reported in 2015 (United

Nations Conference on Trade and Development [UNCTAD], 2016).

The quest for growth and competition among multinational corpora-

tions (MNCs) has increased the rate of foreign direct investment

(FDI) into African markets since the turn of the century (World Bank,

2014, p. 5). It is also influencing the internationalization of African

firms and changing the dynamics of international business within the

continent (UNCTAD, 2014, 2016).

Most studies of political risk assessment (PRA) have been in an

FDI context, due to its having more consequences for political risk

than other forms of international investment (Bekaert, Harvey, Lund-

blad, & Siegel, 2014; Filipe, Ferreira, Coelho, & Moura, 2012; World

Bank, 2014). The importance of PRA for MNCs operating in African

markets has increased significantly with the growing rate of FDI

(Baek & Qian, 2011; Jiménez, Luis-Rico, & Benito-Osorio, 2014). PRA

is used for managing political risks and the decision-making processes

associated with the internationalization of firms and is one of the key

influences on FDI into African markets (World Bank, 2014).

The assessment of how MNCs can operate successfully and prof-

itably in African markets in spite of the presence of political risk has

continued to gain attention (Cleeve, 2012; Kerner & Lawrence, 2014;

Khan & Akbar, 2013). Political risk is any changes in a political envi-

ronment due to government decisions or an event that decreases the

possibility of a foreign investor’s achieving its business objectives in

another political environment (Howell, 2014). However, most African

markets have more unstable political environments, with more fre-

quent changes in government policy, than developed countries

(Baek & Qian, 2011).

Previous studieshave shown that the consequences of politicalrisk

differ from one African market to another and have influenced the

types of international strategy thatfirms adopt (Baldacci, Gupta,& Mati,

2011). This means that each African market has specific political risk

that differentiates one from another, therefore creating different sce-

narios for MNCsto assess (Bekaert et al., 2014; Quer, Claver,& Rienda,

2012). Sub-SaharanAfrica is regarded as high risk, but thereare signifi-

cant intercountry variations in risk perception versus actual risk. Like-

wise, MNCs have specific characteristics that cause them to perceive

political risk differently (Baldacci et al., 2011; Bekaert et al., 2014).

[The copyright line for this article was changed on 19 February 2018 after orig-

inal online publication.]

DOI: 10.1002/tie.21964

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