A stranger in a strange land: Micro political risk and the multinational ﬁrm Ilan Alon, Theodore T. Herbert *
Crummer Graduate School of Business, Rollins College, 1000 Holt Avenue - 2722, Winter Park, FL 32789, U.S.A.
Micro political risk; Risk assessment; Environmental analysis; Multinational corporation
Abstract When a ﬁrm chooses to enter or continue business in a foreign market, it becomes exposed to associated political risks which should be assessed and managed. Help is available for becoming aware of the level of macro political risk; that is, the political risk across industries or all businesses in entire countries or geographic regions. Yet, surprisingly little guidance exists by which to identify and assess ﬁrmspeciﬁc political risks, termed micro political risk. Herein, we offer some new perspectives on the nature of micro political risk within a host country, illustrating how it stems from economic, societal, and governmental forces. We have compiled a number of ﬁrm-speciﬁc variables which can affect the ﬁrm’s micro political risk proﬁle, and advance an innovative methodology by which executives can address these variables and develop an assessment of their ﬁrm’s micro political risk. Examples of micro political risk situations are provided, along with discussion of implementing the proposed methodology. # 2008 Kelley School of Business, Indiana University. All rights reserved.
1. Micro political risk: An overview
International commerce has grown incredibly, yet much of it is susceptible to diverse types of risks. One major risk is political risk, which encompasses political events and processes that can negatively affect doing business. This risk has both a macro perspective, affecting all ﬁrms in a country, and a micro perspective, affecting only select industries, ﬁrms, or projects. Simply put, micro political risk is * Corresponding author. E-mail addresses: firstname.lastname@example.org (I. Alon), email@example.com (T.T. Herbert).
the political risk affecting a particular ﬁrm, project, or industry. At this level of speciﬁcity, the unit of analysis is not only the target country (as in macro political risk) but also the ﬁrm’s nationality, industry, and particular project characteristics and their relationship to the country. Macro and micro political risks overlap, sharing some of the same determinants; depending on the ﬁrm’s nationality, industry, and particular situation, micro and macro risks can intersect to varying degrees (see Figure 1). Micro political risk is similar to macro political risk in that it, too, emanates from internal and external as well as economic, societal, and governmental forces. The two types of risks are different in that
0007-6813/$ — see front matter # 2008 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2008.09.004
Figure 1. Micro vs. macro political risk
I. Alon, T.T. Herbert
speciﬁc aspects of the ﬁrm either increase or decrease its political risk exposure. Micro political risk is thus important to the international ﬁrm because of its higher level of relevance and speciﬁcity. Academic research on micro political risk is still in its infancy. Most of the research to date has focused on macro political risk, yielding broadly-based insights about speciﬁc countries or regions. The paucity of research on micro political risk is probably due to the difﬁculty in generalizing about risk that is particular. Previous attempts to develop micro political risk assessment models have ended in conceptualization of the concept (e.g., Alon, Gurumoorthy, Mitchell, & Steen, 2006) or delineation of some of its components (e.g., de la Torre & Neckar, 1988). Herein, we build on the scant literature of micro political risk to provide a more comprehensive and systematic analysis of factors affecting a particular ﬁrm. As knowledge matures by which to...