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The management of political risk

Publication ,  Journal Article
Giambona, E; Graham, JR; Harvey, CR
Published in: Journal of International Business Studies
May 1, 2017

We explore a long-standing prediction in the international business literature that managers' subjective perceptions of political risk - not just the level of risk - are important for how firms manage political risk. The importance attributed to political risk by corporate executives has increased over the last 15 years and our results show that political risk is now considered more important than commodity (input) risk. Our analysis suggests that nearly 50% of firms avoid (not simply reduce) foreign direct investment because of political risk. Using a unique survey-based psychometric evaluation of manager risk aversion, we show that firms with risk averse executives are more likely to avoid investment in politically risky countries - a key implication of behavioral models. This relation is economically stronger when agency problems are more likely to be severe: for example, when executives are less aligned with shareholder value maximization, and when executives are younger (and therefore might put their personal career concerns in front of shareholders' interests). While numerous studies have shown that political risk affects foreign direct investment using objective measures of such risk (electoral uncertainty, conflicts, etc.), our study documents that executives' subjective perceptions of political risk are also important for political risk management.

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Published In

Journal of International Business Studies

DOI

EISSN

1478-6990

ISSN

0047-2506

Publication Date

May 1, 2017

Volume

48

Issue

4

Start / End Page

523 / 533

Related Subject Headings

  • Business & Management
  • 1505 Marketing
  • 1503 Business and Management
  • 1402 Applied Economics
 

Citation

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Giambona, E., Graham, J. R., & Harvey, C. R. (2017). The management of political risk. Journal of International Business Studies, 48(4), 523–533. https://doi.org/10.1057/s41267-016-0058-4
Giambona, E., J. R. Graham, and C. R. Harvey. “The management of political risk.” Journal of International Business Studies 48, no. 4 (May 1, 2017): 523–33. https://doi.org/10.1057/s41267-016-0058-4.
Giambona E, Graham JR, Harvey CR. The management of political risk. Journal of International Business Studies. 2017 May 1;48(4):523–33.
Giambona, E., et al. “The management of political risk.” Journal of International Business Studies, vol. 48, no. 4, May 2017, pp. 523–33. Scopus, doi:10.1057/s41267-016-0058-4.
Giambona E, Graham JR, Harvey CR. The management of political risk. Journal of International Business Studies. 2017 May 1;48(4):523–533.
Journal cover image

Published In

Journal of International Business Studies

DOI

EISSN

1478-6990

ISSN

0047-2506

Publication Date

May 1, 2017

Volume

48

Issue

4

Start / End Page

523 / 533

Related Subject Headings

  • Business & Management
  • 1505 Marketing
  • 1503 Business and Management
  • 1402 Applied Economics