Abstract

International trade has become common in the current society. Investors and governments
have established business in different countries to markets products developed at home.
Political risks have become common in the market. They affect international business
established by investors, governments, and big firms. Political risks affect the productivity and
growth of a firm. The risks lead to loose of market, customers and products. To overcome the
effects of political risks, one has to establish measures to manage them like diversification.
Other measures include integrating political risks in risk management system and analyzing
risks before investment.

Managers have established ways to manage political risks so as to increase

productivity in the business. According to a study carried out by Eurasia and
PricewaterhouseCoopers, most businesses do not know how to manage
political risks. Few business monitor political risks before investing and
continue to monitor them after investment. There are various reasons why
businesses do not manage political risks. Businesses have limited finances to
manage political risks. Other businesses have in adequate knowledge about
political risks and management. Some of the managers in the business make
inaccurate decisions about political risks.

Introduction
Political risks are risks incurred by investors, big firms and governments. Political risks are
faced by governments and firms that have invested in the global market. Also, investors who
have invested in foreign countries face political risks. Political risks result from various issues
like changes in political decisions. They also result from changes in politics or governance of a
country. Most countries in the world do not have stable forms of governance. Countries have
governance issues like political strikes, corruptions and other issues associated with
governance like regulations. The issues affect economic status of the country and cause risks
to business invested in the country. This paper analyzes how to manage political frisks.

Managing political risks in the international business

Political risks have become common in many countries as the countries do not have good
governance (Moran, 2001). Most investors who have invested in foreign countries have
incurred a lot of loses that result from political risks. Governments and big firms have
experienced different effects caused by political risks. For example, the firms have
experienced workforce shortage, low productivity and closure of business. This is because
managers in various firms have not established good measures to manage political risks.
Political risks result from various issues related to politics (Moran, 2001). They can result from
political decisions made by governments and regulations. Also, political issues can result from
poor governance and political instability.

Most countries in the market do not have stable governments. This affects
business in the country and international market. The political changes affect
business objectives established by different business. Political risks result
from certain events in the country that affect the stability of the country.
Events like terrorism, coup and civil war cause political instability in the
country. Other events that cause political instability in the country include riots
(Moran, 2001).

Managers should establish measures to manage political risks from affecting businesses.
There are various measures that can be used to manage political risks in the market (Moran,
2001).

First, investors, governments and firms should analyze the environment before investing, and
understand the political conditions in the country. They should analyze the risks faced by
other business in the country before establishing an investment. Investors can get
information about the political environment in the country from the website and any other
source. Analyzing the business and political environment is important for any investor. It
helps the investor make wise decisions (Ian, 2009). For example, the investor will decide to
invest in the country or not depending on the political environment of the country. He should
also analyze the policies and other regulations used by the government. Government
regulations affect many businesses established by investors.

To overcome risks, one should carry out market research so as to get clear
information (Ian, 2009). Market research helps control looses resulting from
political risks as investors and other managers are able to make clear
decisions. Most companies face looses caused by political risks because they
do not assess political risks before establishing any business in a foreign
market. Assessing the environment helps the company know the political risks
in the country. The company gets clear information on the effects the risks
have on the business. Assessing political risks is a major step in managing
political risks and companies should utilize it (Ian, 2009).

Another method that can be used to manage political risks is diversification. Diversification
involves establishing multiple firms in different locations (Ian, 2009). Diversification is
important in any business as it helps overcome risks associated with the businesses.
Investors, governments and big firms should use diversification strategy to manage political
risks. Investors should establish investments in different countries (Ian, 2009). They should
avoid investing in a single country. This is because the political environment of the country
can affect the business in the country negatively. Diversification helps investors reduce
political risks, and its effect. Having multiple businesses in different countries makes it safe
for investors to manage political risks. Thus, investors should encourage diversification when
investing (Ian, 2009).

Moreover, investors and governments can use systematic monitoring tools to manage political
risks. The systematic monitoring tools helps investors identify risks in the country and the
effects the risks have on the business (Ian, 2009). This makes it easy for the business to
manage political risks. Investors should continue to monitor political risks and the effect they
have even after joining the market. This will help the business establish measures to control
further effects.

For example, the investors can decide to move the business to other locations
or increase measures to manage political risks (Ian, 2009). According to a
report released by PricewaterhouseCoopers and Eurasia, most companies
having international business do not have systematic monitoring tools. This
has made it difficulty for investors to manage political risks in different
countries. According to the study, most countries have various types of
political risks that affect investments in the countries.

The political risks have made it difficulty for investors to make high profits. To
overcome political risks, PricewaterhouseCoopers and Eurasia advice
companies to use systematic monitoring tools to manage political risks (Ian &
Zakaria, 2006).

Another strategy that can be used to manage political risks is improving decision making in
the organization. Managers are required to communicate political risks with other members in
the organization so as to improve decision making. Most organizations have risk managers
who identify risk in the organization and how to manage them. The risk managers are
required to help manage political risks in the organization (Ian & Zakaria, 2006).
Communicating political risks, and their effect will help develop the right measures to manage
the risks. Big firms have employed professionals to act as chief risk officers unlike small firms
(Ian & Zakaria, 2006). The main duty of the chief risk officer is to identify political risks like
unfavorable political climate, changes in regulations in a country. Also, the chief risk officer is
responsible for analyzing changes in currency, and any other political aspects. Small
companies do not have professionals who act like chief risk officers, the companies employ
chief finical officer. This makes it difficulty for the company to analyze, and monitor the
political environment.

Examination of the political environment and analysis of the impact of the

risks to the business is the best method to avoid political risks (Ian & Zakaria,
2006). This is because the company is always aware of any political change
and takes necessary steps to prevent political risks. The business is able to
pull out of a market that is risk, and move to an environment that is good for
investment. Evaluating political risks is important as it improves decision
making in the organization. Managers should views political risks important
like other risks that affect the business. This will help them see how political
issues affect business. Managers should be able to monitor political risks
globally (Ian & Zakaria, 2006).

In addition to using communication political risks and using systematic monitoring tool,
investors should use insurance to manage political risks. Investors can get political insurance
from an insurance agency. Political risks insurance is used to manage political risks at the
micro level and macro level. Most countries have political risks insurance that provides
insurance covers for investments in the country (Ian, 2007). The political insurance policies
are important to the investor as they manage the effects of political risks on the investment.
For example, an investor can get insurance for any damage caused to investment after
political instability like terrorism.

The investor gets his or her property back after insurance (Ian, 2007). The
investor should know the difference between micro political risks and macro
political risks so as to get the right insurance. Political risk insurances are
mostly used to manage political risks at the micro level. Thus, the investor and
business managers should know the different between micro level and macro
level. It is difficulty to get political risk insurance to manage risks at the macro
level (Ian, 2007).

Managers should integrate political risks into a risk management system. This will help
manage political risks an organization (Ian, 2007). The risk management system helps
organizations manage political risks by evaluating the risks in the country like evaluation of
currencies and political instability. Managers analyze the effects of the risks and develop
strategies to manage the risks. According to the report released by PricewaterhouseCoopers
and Eurasia, most companies did not have risk management systems to manage political risks
after investment (Ian, 2007). This made it difficulty for companies to monitor the political
environment in the country.
Also, the countries did not know the effects of political risks on the future of
the company. A risk management system helps companies collect information
about the political environment, analyzed it and establish strategies to control
the risks (Ilan, Mitchell, Gurumoorthy etal, 2006).

Investors should know the difference between micro level risks and macro level risks and the
effects they have on the company and the economy. There are two types of political risks.
That is macro level political risks and micro level political risks. Macro level political risks are
connected with non project risks (Ilan, Mitchell, Gurumoorthy etal, 2006). Macro level political
risks affect all the people in the country. Micro political risks can have effect on international
trade. So managers should take time to evaluate macro level risks. Managers in the
organization can quantify macro level risks and develop them like other risks. This will help
find measures to prevent micro level political risks.

Micro level political risks have negative effects on projects in a country. Micro level political
risks include changes in climate of the country. The investor should identify micro level
political risks by analyzing the political environment. This will help make a wise decision (Ilan,
Mitchell, Gurumoorthy etal, 2006).

Lastly, managers should design an emergency response system to monitor markets in

different countries. Developing countries are more vulnerable to political risks than developed
countries. The countries face political issues like civil riots. The political issues prevent
workers from coming to worker and this affects productivity in the firm. The business should
use design emergency system to overcome disruption like workforce shortage. Workers
should be able to work from various places (Ilan, Mitchell, Gurumoorthy etal, 2006).

Conclusion
Political risks are common in many countries. The political risks have adverse effects on the
productivity and growth of a company. Political risks affect the future expansion of a
company. There are various types of political risks in the country. Examples of the political
risks are political instability that results from terrorism, civil and labor riots. Other political
risks include change in the governance of a country, political climate and change in
regulation, and currencies in a country. The risks affect many businesses. Most business do
not how to manage political risks.

There are various strategies that business can use to manage political risks.
For example, business can use diversification strategy to manage political
risks. Diversification strategy allows investors to have different investments in
different countries. This lowers the effect of political risks on the investment.
Another strategy is analyzing the political environment of the country before
investing. Investors should analyze the political environment like changes in
regulations, currencies, governance of a country. This will make it easy for the
investor to make wise decisions. Also, managers should integrate political
risks into the risk management system in the organization. This will help the
company to evaluate the political risks and analyze them.

Investors should get political insurance policies to cater for any risks resulting
from the political environment. The political insurance will make it easy for the
investor to reclaim his investment incase of looses. Lastly, business should
evaluate political risks and share information with other members in the
organization. The chief risk officer should identify political risks and find
strategies to overcome them. The strategies above will help the company
manage political risks and prevents looses.

Reference
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Ian B. (2007).How to Calculate Political Risk,” Inc. Magazine, page 101
Ian, B., & Zakaria, F. (2006). Hedging Political Risk in China, Harvard Business Review 84, no.
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Ilan, A., Mitchell, M., Gurumoorthy, R., &Steen, R (2006), Managing Micro-Political Risk: A
Cross Sectional Study, Thunderbird International Business Review 48 (5), page 623-642.
Moran, T.H. (2001). International Political Risk Management: Exploring New Frontiers (IBRD:
Washington, page 213-214