Strategies for managing the political risk of investing in infrastructure projects, in developing countries

Abstract

PurposePolitical risk has been identified as a major impediment to the success of foreign invested projects, in developing countries. Infrastructure projects are especially sensitive to host-country political climates. Governance in emerging economies can be unstable, which adversely impacts infrastructure projects, given their high capital-intensity, long operational periods and high asset specificity. While the detrimental impact of political risk is well documented, the mitigation of such impacts on infrastructure projects remains largely unexamined. This study, therefore, addresses this by exploring the available identified political risk management (PRM) strategies based on resilience theory and evaluating their effectiveness.Design/methodology/approachA mixed-method approach was employed to identify PRM strategies. Firstly, a comprehensive literature review identified 40 potential PRM strategies. However, the applicability of those 40 strategies was uncertain due to the scarcity of PRM studies. Thus, expert interviews, drawing on the insights of Chinese infrastructure industry professionals with experience in FII, were applied to review the identified strategies. This process reduced the pool of applicable strategies to 34. Subsequently, 356 questionnaires were sent out to investors from China, Australia and Singapore, with 218 valid responses returned. Based on the data collected from the surveys, statistical analysis was used to evaluate and classify applicable PRM strategies.FindingsResults reveal the most effective top five strategies for offsetting the detrimental effects of political risk on foreign infrastructure investment to be: (1) selection of suitable markets and projects; (2) maintaining good relationship with government; (3) purchasing political insurance; (4) utilizing capable contractors from both host country and home country; and (5) adopting an appropriate entry mode. The 34 strategies were further consolidated into four meta-strategies through factor analysis, resulting in the formulation of a strategy selection matrix.Originality/valueThe findings of this study offer a rational means by which infrastructure investment practitioners considering projects in developing countries, may arrive at an optimal political risk mitigation strategy. The findings also offer government of host countries directives to improving the political environment in order to attract foreign investment flows into local infrastructure projects.