Low Political Risk Research Articles

Impact of political risk on emerging market risk premiums and risk adjusted returns

Researchers have observed the political risk, sign paradox whereby a decrease in political risk is associated with an increase in stock market returns. This apparent contradiction may be driven by a few political risk factors or perhaps certain emerging market (EM) countries. This paper examines this issue by assessing how key political risk components impact equity risk premiums and risk adjusted returns among EM countries. Using monthly stock market return data for 28 EM countries from 2000 to 2019, we segment countries into high and low political risk groups to explore heterogeneous effects. We find that improvements in political risk increase risk adjusted returns by lowering the volatility of returns. Differences were also found between EM countries with improvements in government stability leading to higher risk adjusted returns among high political risk EM countries. In contrast for low political risk countries, democracy was found to have a negative effect on equity premiums, while law and order and investment profile have a positive impact. Finally, our results suggest key political risk subcomponents, such as investment profile and corruption, impact risk adjusted returns during times of financial crisis.

The Valuation Channel of Corporate Social Responsibility in Emerging Markets: Evidence from the Cost of Equity

I examine the effects of ESG policies on the cost of equity for emerging markets controlling for Political Risk and data reliability. I find that firms in emerging market countries with relatively high political risk do not benefit from social and governance ESG activities as they lead to a higher cost of equity. This is presumably due to potential or actual political conflicts with the host government. On the other hand, environmental activities do lower the cost of equity as the measured environmental activities are internal to the firms. For emerging market firms in countries with low political risk, all ESG activities are associated with a lower cost of equity.

Influence of political risk environment in neighboring countries on FDI in host countries: the moderating role of green governance in neighboring countries.

This study examines whether political risks in neighboring countries affect foreign direct investment (FDI) by Chinese firms in host countries. Grounded in the perspective of new economic geography, it employs panel data comprising China's FDI across 37 countries along the Belt and Road, spanning from 2003 to 2021. It expands conventional research, which typically focuses on the two-country model, to include a broader examination involving third countries. Utilizing the spatial Durbin model, this study reveals that China's FDI in countries along the Belt and Road is affected by the host country's political risk environment and the spatial spillover effect of political risks from neighboring countries. Green governance practices in neighboring countries regulate this relationship. The results demonstrate that China's FDI in countries along the Belt and Road reveals a risk-averse tendency, with a preference for investing in countries characterized by relatively low overall political risk. After taking spatial factors into consideration, the spatial spillover effect of political risks is significant, as political risk levels in neighboring countries stimulate FDI from Chinese enterprises in the host country. As an effective way to mitigate ecological and environmental risks, green governance also shows significant spillover effects. By strengthening green governance, that can weaken the stimulating effect of political risks from neighboring countries on FDI inflow to host countries. Consequently, investors perceive fewer political risks in neighboring countries and are inclined to invest in those with higher levels of green governance. These research findings provide insights into Chinese investors to assess and mitigate political risks in countries along the "Belt and Road."

The impact of political competition on green innovation: A new insight into sustainable development

AbstractThis research examines a panel of 121 economies worldwide over the period 1980–2020 for the impact of political competition on green innovation. We find that an increase in the intensity of political competition has a significantly negative impact on green innovation and that this impact remains significant in the long term, especially for non‐OECD countries and middle (low) income countries, whereas the sub‐indicators of political competition indicate that the level of institutionalization of political participation and the degree of government restrictions on political participation have different impacts on green innovation. The findings also reveal that lower political risk and higher levels of globalization positively moderate the negative impact of political competition on green innovation. The adverse effects of party competition are exacerbated when left‐wing parties are in power. This study offers new insight into sustainable development based on examining the relationship between political competition and green innovation.

The great wall of debt: Real estate, political risk, and Chinese local government financing cost

Chengtou bond is the only asset with market prices that can capture the funding cost of Chinese local government debt. In contrast to the U.S. municipal bonds, Chengtou bonds are issued by private corporations but implicitly guaranteed by local and the central governments, which are reflected by novel risk characteristics—real estate GDP and political risk. One standard deviation increase in local real estate GDP (political risk) corresponds to 10 (9) basis points decrease (increase) in bond yields, respectively. However, conditional on political risk, real estate GDP actually increases bond yields, suggesting that only local governments with low political risk can enjoy the low funding costs driven by high real estate growth.

Frenemies: When Ideological Enemies Ally by Mark L. Haas

When do states ally against a common threat despite ideological differences? This question presents a puzzle for two prominent theories of international relations. Realists expect that ideology animosity is no barrier to alliance formation, while ideological arguments expect that it is an insuperable obstacle. Mark L. Haas’s answer to this important and relevant puzzle provides new insights for scholars and policymakers to consider. First, Haas argues that external threat is necessary but insufficient for ideological opponents to ally (20). In addition to an external threat pushing together two countries that ideological disagreements would otherwise pull apart, leaders must perceive low domestic political risks and a favorable ideological configuration in the international system (50). If leaders expect that security cooperation will embolden domestic revolutionaries and endanger their hold on power, they will not risk a “frenemy” alliance (24). Leaders must also believe that one country is their greatest ideological and material threat or that they can wedge apart states with similar ideologies as an “ideological outsider” (39).

International Remittances and International Tourism Development in South Asia: The Moderating Role of Political Stability

The increasing dependence of South Asian countries on international remittances (IRM) and international tourism development (ITR) in the presence of political uncertainties has attracted scholars' attention. Although the largest receiver of IRM, South Asia fails to channel these funds to the tourism industry, which continues to operate below its potential. This study estimates the impact of IRM, political stability (PS), and their interaction with foreign direct investment (FDI) and relative price (RP) on ITR in South Asia. We used a balanced panel dataset of six South Asian countries from 1996 to 2020. We applied the pooled ordinary least squares (POLS), fixed effects (FE), feasible generalized least squares (FGLS), and Prais-Winsten regression with panel-corrected standard errors (PCSE), to estimate the results. The study discovered quite interesting and surprising results between IRM and ITR. The results suggest a statistically significant negative impact of IRM on ITR in South Asia, implying that the recipients of IRM tend to spend most of it on their basic level consumption needs and do not have incentives to save and invest. Further, the results suggest that PS positively moderates the relationship between IRM and ITR, suggesting that IRM will be channelized to the tourism sector if domestic investors expect low political risks in the region. In addition, the results indicate that PS and FDI have a statistically significant positive effect on ITR in South Asia. Moreover, RP has a negative and significant impact on ITR, implying that international tourists prefer cheaper destinations. This study provides crucial implications for South Asian economies. First, effective public policies are specifically designed for channelling IRM and FDI, focusing on enhancing the tourism industry's infrastructure. Second, PS is necessary for ITR and domestic investors to invest IRM in the tourism sector. Thus, policymakers must consider political factors while designing tourism policies and strategies. Third, the findings highlight the significance of price competitiveness for developing the tourism industry. Hence, we argue that policymakers should implement effective economic policies to stabilize regional prices to attract international tourists.

The impact of financial risk on green innovation: Global evidence

This research examines the effects of financial risk on green innovations by adopting the panel Poisson model for 99 countries. We employ environmental management innovations as a proxy for green innovations and financial risk index as the main explanatory variable, documenting strong evidence that financial risk presents significantly negative impacts on green innovations by decreasing patent applications related to environmental management technologies. Moreover, we conclude that increased financial risk hinders a country's performance of green innovation by restricting foreign direct investment (FDI) inflows and foreign trade. Lastly, financial risk considerably affects the development of green innovation in democracy nations and countries with low political risk, but not in non-democracy countries and countries with high political risk. In light of this, our research should help policymakers in many nations develop workable currency and valuable policies from the perspective of financial risk for enhancing their green innovation level and sustainable development.

Effects of institutional quality and political risk on the renewable energy consumption in the OECD countries

Higher institutional quality and lower political risk are the essential drivers of rescuing the resource curse and achieving sustainable development since these variables can also affect energy demand via energy transitions. Given this background, this paper examines the effects of novel measures of institutional quality and political risk on renewable energy consumption in the panel dataset of 32 Organisation for Economic Co-operation and Development (OECD) member countries from 1997 to 2019. It is observed that a higher level of institutional quality and per capita income increase renewable energy consumption. In addition, economic globalisation and political risk are negatively associated with renewable energy consumption in the long run. Therefore, the policymakers in the OECD countries should consider the role of institutional effectiveness and political risks in renewable energy demand function to ensure a cleaner natural environment in the long run.

Firm-level political risk and corporate leverage decisions

This study examines the effects of firm-level political risk on firm leverage decisions and speed of adjustment. We uncover that firm-level political risk has a negative impact on a firm's total and long-term leverage. We also find that firms facing high political risk tend to prefer debts with short-term maturity. However, firm-level political risk is positively related to debt specialisation, suggesting that firms are more inclined to adopt fewer debt types when they face high political risk. Further analysis reveals that firms with high political risk are associated with a faster speed of adjustment to target than those with low political risk. Our results are robust to endogeneity concerns and the effects of financial crisis.

The role of private investment in ICT on carbon dioxide emissions (CO2) mitigation: do renewable energy and political risk matter in Morocco?

The present study proposed the relationship among private investment in information and communication technology (ICT), carbon emissions (CO2), renewable energy, political risk, and economic growth over the period of 1985-2020 in Morocco. The dynamic ARDL simulations (ARDL) model suggests that private partnership in ICT plays a significant role in abating CO2 emissions, the adaptation of renewable energy is a key contributor in CO2 degradation, while economic growth shows a positive and significant association with CO2 emissions, indicating that economic growth increases CO2 emissions. The study also analyzed political risk in the study region, which indicates that low political risk mitigates CO2 emissions in Morocco. The findings provide significant enlightenment to acknowledge the importance of private partnership in ICT for the purpose to decarbonize CO2 emissions, and adopting the use of renewable energy. The findings also suggest that a stable political system is inventible towards low-carbon development.

What facilitates policy audacity in tobacco control? An analysis of approaches and supportive factors for innovation in seven countries

BackgroundTobacco control policy audacity can make radical ideas seem possible, and set in motion a ‘domino’ effect, where precedents in one jurisdiction are followed by others. This review examines tobacco...

Political Risk, Volume of FDI, and Ownership Strategy: Contextual Analysis of African Markets

This research examines the relationship between political risk and the volume of FDI activity and ownership strategy of foreign firms in Africa. Our study employs panel regression models to examine 2,360 FDIs into four low political risk and five high political risk African countries during the period 2010-2017. This data represents FDIs from the top 10 countries with the most investments in Africa (UNCTAD, 2018). We find that there is a progressive increase in the volume of FDI activity by multinationals in high political risk countries, even though low political risk countries remain the preferred FDI destinations. We also find that joint venture (JV) is the preferred ownership strategy by foreign multinationals in high political risk African countries. The preferred ownership strategy in this research helps firms mitigate potential hostile government policies such as expropriations. This research contributes both theoretically and empirically to enrich the political economy and international business literature.

Financial structures, political risk and economic growth

Using a panel of 113 countries over the period from 1990 to 2013, this paper provides new empirical evidence to the intensive debate of whether financial structure is relevant for economic growth. Specifically, we evaluate the role of political risk, development stage and their interactions with the structure of the financial system. We find that on average a more market-based financial system is associated with a higher level of economic growth. This impact varies with different levels of political risk and different stages of economic development. Specifically, the comparative development of equity markets compared with banks appear to promote more economic growth in countries with lower political risk and at a better stage of economic development. Moreover, banks are more important to economic growth in over-market-based financial systems, whilst equity markets are more sensitive to economic growth in over-bank-based financial systems. Our paper provides new insights into the real effects of the mixture of banks and markets on the economy.

Foreign direct investment, income inequality and country risk

AbstractGiven the continuous debate about the foreign direct investment (FDI)‐inequality nexus, there is an acknowledged need for reconsidering their relationship from a new perspective. Therefore, applying balanced panel data composed of 60 countries from 1998 to 2014, this research estimates a finite mixture model with country risk as a concomitant variable to explore the interrelationships among FDI, inequality, and country risk so as to offer fresh insight into the FDI‐inequality nexus. We present evidence that shows a significant role of compositing country risk on this. Specifically speaking, FDI deteriorates inequality under the condition of high risk, whereas it alleviates inequality in a country with low country risk. Moreover, we can also obtain the similar findings by considering the role of components of country risk (economic risk, financial risk and political risk) as a determinant for the FDI‐inequality nexus. FDI deteriorates inequality under the condition of high political, economic and financial risks, whereas it alleviates inequality in a country with low political, economic and financial risks.

Effect of the Belt and Road Initiative on Agricultural Value Chain Linkages: Evidence from Eora 26 Input-Output Data

The Belt and Road Initiative（BRI）aims to create a new paradigm of China’s opening-up. Using the input-output data from Eora 26 database from 1995 to 2015, this paper measures the agricultural value chain linkages（AVCL）by fun-tuning the cross-border times indicator, examines the policy effect of the BRI on AVCL, and analyzes the potential mechanism and heterogeneity of the policy effect. We find that the implementation of the BRI has significantly promoted the AVCL between China and economies along the Belt and Road from the perspectives of both value-added outflow and inflow, which is confirmed by a series of effectiveness checks. The heterogeneous effect analysis suggests that economies along the overland Silk Road and in areas adjacent to China get stronger AVCL promotion, and the policy effect is significant for economies with low political and investment risks, but not in those with high political and investment risks. We also explore the potential interference effect of free trade agreements（FTA）using triple difference models, which indicates that the AVCL promotion effect of the BRI is robustly significant, but FTA partner countries get stronger AVCL promotion. Also, we find that the policy effect of the BRI on AVCL is mainly achieved by reducing agricultural trade costs and extending agricultural production lengths. The above results have important policy implications: First, under the existing cooperation mechanism, it is necessary to formulate advanced agricultural cooperation agreements, and the quasi-public goods role of BRI should be fully utilized in the field of international food security and high-quality agricultural development. Second, China can take advantage of its own agricultural production capacity, identify the heterogeneity of the target market, distinguish the comparative advantages of different markets in the cooperation of primary agricultural products, agricultural semi-finished products, and agricultural capital products, take into account the political environment and business operations of different markets, and formulate differentiated agricultural cooperation policies. Third, countries along the Belt and Road should promote cooperation in the fields of cross-border e-commerce, agricultural product inspection, and construction of agricultural industrial parks, so as to reduce the cost of cross-border agricultural trade and extend the cross-border agricultural value chains.

The (Un)sticky role of exchange and inflation rate in tourism development: insight from the low and high political risk destinations

ABSTRACT Although the tourism industry has continued to exert a significant impact on economies of most destinations, the impacts of political (in) security, socioeconomic and financial dynamics in the destination countries are equally playing decisive roles. Mirroring from this perspective, this study examined the role of political risk, exchange rate and inflation rate on the inbound international tourists in the panel of 76 destinations over the period 1995–2017. By employing the Pooled OLS (Ordinary Least Square) and the Generalized Moment of Methods (GMM), the estimation results suggest that the political risk is a significant impediment to the growth of total tourism arrivals in the panel countries. In addition, high exchange and inflation rates, respectively, impact international tourism arrivals (ITAs) in a positive and negative pattern. Moreover, the findings show that the impact of political risk on ITAs is significant, and has a positive and negative effect in the low- and high-risk destinations, respectively. While the study urges for a formidable drive towards sustainable conflict resolution in destination countries, it further presents recommendations for preventing potential spillover effects in the event of the political, economic or financial crisis.

Location matters: Valuing firm‐specific nonmarket risk in the global mining industry

AbstractResearch summaryUsing collective action and social movement theory, we investigate the potential incentives and ability of stakeholders to engage in collective action that can increase firm‐specific nonmarket risk of mining companies. We argue that proximity to the nearest environmentally sensitive water source increases the probability that local stakeholders will take collective actions that impose material costs on the focal mine. We hypothesize that stock markets recognize this nonmarket risk and apply a discount on announcements related to mines located near such areas, and that these risks are moderated by the type of mineral, the nature of the water source, and the strength of host country institutions. Using a unique data set and an event study method, we find support for most of our arguments.Managerial summaryWe argue that mines located near environmentally sensitive water sources are subject to nonmarket risks arising from the potential collective actions of local stakeholders and their allies. Stakeholder mobilization can impose material costs on a mine in the form of delays, regulatory hurdles, and closure. We find that stock markets recognize these nonmarket risks and apply a discount on announcements by mining companies whose mines are located near environmentally sensitive water sources, particularly rivers. However, we also find that investor reaction is stronger in countries with strong institutions that support collective action. Thus, nonmarket risk management is important even in countries that are typically characterized by low political and institutional risks. We discuss the degree to which these results can be generalized beyond mining.

The (Un)sticky Role of Exchange and Inflation Rate in Tourism Development: Insight From the Low and High Political Risk Destinations

Although the tourism industry has continued to exert a significant impact on economies of most destinations, the impacts of political (in) security, socioeconomic and financial dynamics in the destination countries are equally playing decisive roles. Mirroring from this perspective, this study examined the role of political risk, exchange rate and inflation rate on the inbound international tourists in the panel of 76 destinations over the period 1995–2017. By employing the Pooled OLS (Ordinary Least Square) and the Generalized Moment of Methods (GMM), the estimation results suggest that the political risk is a significant impediment to the growth of total tourism arrivals in the panel countries. In addition, high exchange and inflation rates, respectively, impact international tourism arrivals (ITAs) in a positive and negative pattern. Moreover, the findings show that the impact of political risk on ITAs is significant, and has a positive and negative effect in the low- and high-risk destinations, respectively. While the study urges for a formidable drive towards sustainable conflict resolution in destination countries, it further presents recommendations for preventing potential spillover effects in the event of the political, economic or financial crisis.

The role of country governance on value-added tax and inequality

Income inequality is a growing concern for regulators because it brings adverse consequences towards social stability, institutional stability and economic performance. One of the popular ways to reduce income inequality is through the implementation of Value Added Tax (VAT) despite of many criticisms on its regressive nature. Hence, using a wide data range from 1984 to 2014, we study the impact of VAT on income inequality in both developed and developing countries. Besides, this is the fi rst study that seeks to focus on the moderating role of country governance in enhancing the effect of VAT on income inequality. We use the Generalized Method of Moments (GMM) to overcome the endogeneity, autocorrelation and heteroscedasticity issues. The results suggest that the VAT reduces income inequality but the positive effect is contingent upon the existence of a set of good country governance. Countries that have higher quality of bureaucracy, greater democratic accountability, high government stability, effective law and order, low political risk and favourable socioeconomic conditions stand to benefit more from the VAT system in terms of narrowing the income inequality. Therefore, we conclude that better institutions improve the tax collection and public service delivery, which is a crucial element in achieving the economic objective of narrowing the income gap between the wealthy and the poor. This is particularly true in developing countries. Further, the governments in developing countries need to effectively manage the degree of socioeconomic pressure that could distract them from implementing social and economic policies to eradicate poverty and raise the income level of the poor segment of society. © 2018, Technical University of Liberec. All rights reserved.