Wednesday, April 27, 2016

Micro-Political Risk

After completing this week's readings, I wanted to better understand risks associated with "institutional voids" noted by author's Khanna, Palepu, and Sinha in Strategies that Fit Emerging Markets. I ultimately stumbled upon an interesting article on micro-political risk that provides some basic advice on risk identification and adaptation. Specifically, political risk analysis entails the deconstruction of sociopolitical and politico-economic environments as to determine potential positive and negative influences to business operations in a foreign country. Alon and Herbert (2009) illustrate three distinct dimensions of political risk: (i) micro versus macro, (ii) internal versus external, and (iii) positive outcomes versus negative outcomes (p. 129-130). The authors then further define micro-political risk as a type of “uncertainty” associated with “political processes” of another country that might affect “the firm’s operations, assets, or financial condition” (Alon & Herbert, 2009, p. 130). In this sense, micro-political risk analysis represents a vital precondition to foreign operations, and each firm operating internationally should adopt a risk analysis structure based on (i) issue recognition and (ii) strategic readjustment.

Issue recognition involves the process of issue deconstruction and classification. On a general level, risk can originate at the macro level, the micro level, or somewhere between the two. Analysis in each area therefore supplements analysis in the other (Alon & Herbert, 2009, p. 128). More specifically, internally- and externally-oriented economic, political, social, and firm-related factors combine to determine the micro-political risk environment for a specific firm operating in a specific country (Alon & Herbert, 2009, p. 131). This makes for an extremely complex operating environment, as many firms have multiple business units in multiple countries. Alon and Herbert (2009) recommend a “rank-ordering of micro-political risk factors by their potential impact on the firm” as a means of mitigating some complexity by systematizing the process of risk measurement and risk management (p. 135). Indeed, such a process helps to differentiate between numerous intermingled risk factors. However, this can only occur after a firm has recognized the potential magnitude of the issue on a case-by-case basis (thus, issue recognition).

Strategic readjustment involves the process of assessment and action across time. Invariably, micro-political concerns will differ between firms depending on specific socio-politico-economic environments and the type of industry. These concerns will also change internally over time. Accordingly, determinations of micro-political risk are not static requirements, but, rather, should involve continuous assessment and action.  This allows firms to better “accommodate” negative factors while simultaneously “monitoring and reinforcing” positive factors (Alon & Herbert, 2009, p. 136). For example, should a local producer acquire the necessary skills and expertise to challenge the foreign firm, that firm must compare its relative economic contributions and readjust policies as to increase its value and decrease micro-political risk.  Such a fluid approach will ensure “unremitting awareness of the constant evolution of host country pressures” (Alon & Herbert, 2009, p. 136).  

While somewhat basic, this risk analysis structure implies a level of regularity or persistance in analyzing the sociopolitical and politico-economic environment in a foreign country. In this way, micro-political risk represents an important metric in the analysis of the long-term viability of a firm’s foreign-based business units. Ultimately, while Khanna, Palepu, and Sinha (2005) write about entry decisions related to (1) adapting strategies, (2) changing contexts, and (3) staying away, Alon and Herbert note the level of persistence required in maintaining foreign operations (p.13).

References:

Alon, I. & Herbert, T.T. (2009). A Stranger in a Strange Land: Micro Political Risk and the Multinational Firm. Business Horizons, 52.

Khanna, T., Palepu, K.G., & Sinha, J. (2005). Strategies that Fit Emerging Markets. Harvard Business School Publishing: Boston, MA.


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