Political risk and the commercial sector – Aligning theory and practice

Abstract

The Arab Spring and the euro crisis have shown that political factors and events can make or break markets overnight, making them of increasing importance to commercial actors when investing abroad. Expropriation, sovereign default, societal unrest and terrorism are examples of political risks that have considerable implications for business conditions. They are also societal acts that political scientists have long been analyzing using a diverse toolbox of models, theories and methods. However, with a few exceptions, political risk management within commercial entities – in as far as it takes place at all – seems to rest on either anecdotal knowledge or crude quantitative macroeconomic data. This article tries to bridge the gap between risk management and the study of politics. It starts by analyzing the concepts and methods underpinning commercial risk management and continues with an investigation of contributions from relevant fields of political science. The aim is to contribute to the craft of risk management and the conceptual understanding of political risk.