Political risks is the possibility of change in a country’s political environment or government policy that would adversely affect a firm’s ability to operate profitability and effectively. Political risks can prevent a firm from investing abroad. This means that uncertainty drawn from political instability will not attract foreign investment. Political instability can be in various forms as discussed below. These are reports recorded by Business Environment Risk Intelligence (BERI), The Economist Intelligence Unit (EIU) and PRS Group.
War in a nation causes tension that makes investors fearful to invest in such a country due to the risk of losing or destruction of property caused by political or ethnical reasons. This would bring loses and the main objective of a business is to make profit.
Social unrest in a country scares away investors. Societal conflicts involving demonstrations, strike and street violence. Social unrest can spring into war thus causing destruction of property and losses to businesses.
Political transfer: Where there is no orderly transfer of power due to the ruling party using coercive measures to retain power, there will be no external investments due to fear of clashes.
Political motivated violence: form of violence that is sparkled by political leaders who are egocentric and want to seize power for self-interest.
International disputes: when there are disputes in a region or neighboring countries investors will be fearful. Negative influences from regional political forces.
Change in government. New government can come up with new policies and regulations that are not favorable to foreign investors.
Institutional effectiveness: Where institutions such as law and financial institutions are not effective, investors are less likely to come to such a country.
Transparency of fairness: if there is no fairness in a country investors will less be interested.
Corruption: in a country full of corruption there is possibility of unfairness and favoritism therefore investors fear the repercussions.
Crime: a society full of crime is unsafe and security is a major factor to consider before investment.
