Pruebas de Hipótesis

The third and last major challenge facing political risk in the analysis phase is that of data interpretation. The interpretation of data refers primarily to the ability of practitioners to consistently, validly and reliably interpret and quantify the effects of political risk. Although political risk analysis is a process which consists of various stages, it is during this phase that the result, vis-à-vis the analyses, is produced, with the intention of being integrated into FDI decisions. A review of the works by various scholars related to the challenges of data interpretation is presented below.

As noted above, due to a lack of transparency in the field, an inconsistency in analytical frameworks and the subjectivity of the data collected, political risk analysis is often referred to as a soft science. It thus follows that analyses would be comprised of ‘soft data’. “‘Soft data’ is anecdotal, usually gathered in informal communications, and lacks the rigor that is implied in statistic data” (Kiritz, 1997: 2). This is problematic as there is emotion attached to it that cannot be statistically verified. Befeki & Epstein (2008: 35) also expand on this in later years when they state that political risks are broadly considered immeasurable and typically explained in narrative form. One of the earliest observations of the challenge of this for political risk and its integration into FDI decision-making was by Brewer (1981). Given that political risk analyses are a mixture of quantitative and verbal estimates, Brewer (1981: 5) notes that financial analysts would be likely to treat these quantitative estimates based on “soft data” with scepticism. He draws attention to a major implication of this for the integration of these analyses into decision-making when he states

7 _{GeoQuant pulls all kinds of data from traditional country data from institutions like banks, non-}

governmental organizations, social networks and high frequency opinion polls. The data from

approximately 250 risk variables is then processed through the company’s software that formulates a real- time score for political risk in a country (Shieber, 2017).

the following: “Third, the integration of political risk assessments into the capital budgeting analyses tends to be simplistic” (Brewer 1981: 5). Another important observation that Brewer (1981: 9) made, still pertinent today, is the following:

However, even if political analysts can develop methodologically respectable estimates, and even if financial analysts are receptive to the possibility of incorporating them directly into the financial decision-making process, a difficult problem still remains. That is the problem of how to integrate the results of political risk assessments into standard financial analyses, particularly in the capital budgeting process.

International business strategies, especially with regards to long-term capital investments, are undertaken to generate optimal profits. FDI decision-makers are therefore accustomed to working with hard economic data and financial indicators. It follows, thus, that there would be a reluctance to use soft data such as political risk analyses (Simon, 1984:124).

Baas (2010: 137) in his analysis written almost two and a half decades later indicates that this challenge still largely persists. Baas (2010: 137) states the following: “The extent of the challenge is made all too apparent when PRA is compared to other activities associated with investment decisions. In general, the tools, data and benchmarks used to evaluate the economic and market risk factors related to FDI are relatively well-developed, have been tested over time and are deemed credible by corporate decision-makers.”. With regards to political risk analyses, however, he noted that there is neither a generally accepted definition of political risk nor any widely accepted methodologies to evaluate it Baas (2010: 137).

Much of the literature regarding the challenges that political risk faces, dates back to the 1980s. Given the significant growth of the industry, one would expect sufficient progress to have been made for many of these challenges to now be obsolete. However, a review of the works by contemporary political risk authors such as Bremmer and Keat (2009), Jakobsen (2012) and Sottilotta (2013), indicate many of these challenges still persist. As recently as 2012 Jakobsen (2012: 25) notes the following:

…the political risk assessment industry, whose advice are paramount in MNCs’ location decisions, are regularly criticised for offering forecasts that are inherently subjective with respect to methodology, variable selection and country-specific evaluations; for not providing theoretically or empirically informed analyses; and consequently, for giving foreign investors advice of questionable validity and accuracy.

If noteworthy scholars in the discipline made these claims less than five years ago, where does that leave the discipline and the industry today? Considering the above challenges, why do political risk analyses remain a vital consideration in FDI location decisions? Many attribute the growing importance of political risk to globalisation and the fact that companies are increasingly exposing themselves to political risk as competition in the global economy intensifies (Baas, 2010: 136). Sottilotta (2017) in her new book Rethinking political Risk: Concepts, Theories, Challenges, argues that institutions, both public and private, have increasingly developed complex methodologies to evaluate risk just to keep up with the rapid globalisation of trade and investments. This increased interconnectedness is accompanied by increased political risk. The following statement by Hall (2014) illustrates the significance of this:

Back in 2005 political risks were ebbing, making the world a safer place. Three years later, upgrades to risk assessments outpaced downgrades almost threefold. Then in 2009, an about-face: not only did downgrades outpace upgrades, but a new ‘very high’ risk category was created. By 2012, there were seven times more downgrades than upgrades.

Thus, despite the many challenges explored above, political risk not only remains a pertinent issue, but there are signs that it is increasingly considered a constraint to foreign investment, ranking second only to macroeconomic stability (Hall, 2014). Despite all the challenges facing political risk that are explored above, its necessity cannot be refuted, as is illustrated by the recent growth in the industry. One need only look at the increase in the number of consultancies to get an indication of this. In 2014 The Financial Times published an article with the heading “Political risks now a growth industry”, noting its increasing prominence (Thompson, 2014). Political Risk consultancies now charge large sums for their expertise and analyses by way of heat maps,

complex scoring systems and government networks. These high fees charged are indicative of the value MNCs attach to this information (Thompson, 2014).

The following looks at a handful of the emerging trends in the global political economy and considers how they may have changed the nature of political risk from the 1960s and 1970s to today.