Recent systemic transformations due to globalization, trade and investment growth, and nations’ growing interest in economic internationalization to remain or become more competitive led scholars to evaluate the potential political risks of the internationalization process. There are three main sources of political risk in the internalization of the national economy. First, political – the structure of the host state and its institutions. Second, economic, related to the country’s stability in their agencies and capital market monitoring organizations. Third, socio-cultural, related to xenophobia and the ethnic, religious, and behavioral standards of the host society concerning the enterprises, the product, or the incoming service. Overall, the political risk exposures grow in importance with the increasing internationalization of national economies.
To begin political risks evaluation, one must first define the concept. In general, according to Costa and Figueira (2017), there is no universally accepted definition of what constitutes political risk. Political risk is influenced by socio-cultural, political, and economic phenomena (Costa & Figueira, 2017). According to Costa and Figueira (2017), political risk is an important aspect of the international environment because multinational companies (MNCs) mostly face a new political system and rules in a new location. Therefore, the analysis of the political risks highlights the inherently unstable and novel nature of conducting business internationally.
In this context, the regulatory and political environment of the host state can be a risk factor for international businesses. The coercive power of the host state necessitates businesses to behave according to the new regulatory environment requirements that may not always be clear (Costa & Figueira, 2017). For instance, a recent driver of global economic growth has been the emerging markets (EMs), which present the entering economies with both ample opportunities and risks (Ali et al., 2021). Ali et al. (2021) note that the risks associated with the political environment of host countries are a major concern for MNCs choosing how to enter a market. In particular, MNC operations in EMs might be disrupted by corruption, diplomatic tensions, economic crises, logistics issues, or bureaucracy (Ali et al., 2021). The unpredictability and complexity vary across EMs; moreover, there are numerous functional voids in EM countries, implying little institutional help with identifying these risks and facilitating MNC operations (Ali et al., 2021). Overall, national economies that expand into the international arena face uncertainty and find little help combating it, increasing their risk exposure.
Moreover, political risk’s economic and political variables are especially apparent in the world ridden by crises. Costa and Figueira (2017) describe a case study of the Brazilian MNC that attempted to internationalize through a large store in Buenos Aires. Unfortunately, the economic crises in Argentina, together with errors of re-evaluation of the local market, led to the store’s closure after three years, resulting in a loss of $300,000 (Costa and Figueira, 2017). Another investment took place in 2001 when the company intended to open a new business in Miami, USA, but the September 11 terrorist attacks postponed these plans (Costa & Figueira, 2017). Thus, revolutions, civil wars, expropriations, and other unpredictable events tend to increase political risk in internationalizing local enterprises and national economies.
Furthermore, political and economic instability may directly affect risk-taking and selection strategies in expanding MNCs, thus further rendering businesses and the national economy susceptible to adverse effects of internationalization. Santangelo and Meyer (2017) discuss how higher resource commitments expose companies to greater risk, increasing the likelihood that an unexpected risk event will cause changes in performance. While low performance increases the likelihood that an MNC will not pass market selection, increased profits increase MNC’s chances of ‘surviving’ (Santangelo & Meyer, 2017). Thus, selection processes at the business unit level lead to jumps in the scale of a country’s international operations, rendering the path of economic internationalization as influenced by chance rather than deterministic. Ultimately, the economy’s increased susceptibility to chance outcomes of political factors would imply that political risk exposure increases once the ‘playfield’ turns international.
Lastly, expanding national economies may face cultural variables of political risk that can hinder the success of the internationalization process, which concerns the challenges of applying national operational standards in the international field. Costa and Figueira (2017) present a case study of a Brazilian fast-food MNC that carried out market and economic feasibility studies in Mexico during its planning. At the time of the company’s internalization, a socio-cultural variable of political risk was not identified: Mexico’s economy seemed to hold great potential for the company’s business in the country (Costa & Figueira, 2017). However, milder Mexican sanitary laws resulted in difficulties training Mexican employees, causing challenges to the processes and food handling standards originally established by the company (Costa & Figueira, 2017). This difficulty impacted a high turnover of employees at the beginning of the project and, consequently, the internationalization process (Costa & Figueira, 2017). Therefore, international operations render MNCs and the economy susceptible to approaches and processes differing substantially from the initial expectations.
To conclude, internationalizing the national economy will ultimately expose nations to numerous political risks. Moreover, these political risks will play a much more significant role in international economic outcomes. The political and economic aspects of such risks were discussed concurrently. These aspects entailed operating in host countries with different and often unpredictable environments, including the local governing structure and unforeseen catastrophic events. Further, the unstable environment may directly affect operational business decisions that a nation undertakes, making it more prone to chance outcomes globally than local operations. Lastly, internationalizing national economies may face socio-cultural challenges such as different standards of operation or racial prejudice. Overall, political risks must be thoroughly considered as an important factor in national economies’ expansion in the increasingly globalized world.
References
Ali, T., Butt, A., Arslan, A., Tarba, S. Y., Sniazhko, S. A., & Kontkanen, M. (2021). International projects and political risk management by multinational enterprises: Insights from multiple emerging markets. International Marketing Review, 38(6), 1113–1142.
Costa, L. P. da S., & Figueira, A. C. R. (2017). Political risk and internationalization of enterprises: A literature review. Cadernos EBAPE.BR, 15(1), 63–87.
Santangelo, G. D., & Meyer, K. E. (2017). Internationalization as an evolutionary process. Journal of International Business Studies, 48(9), 1114–1130.