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Assessing the Political Environment for Business: A New Role for Political Scientists?

Published online by Cambridge University Press:  25 November 2022

Joseph LaPalombara
Joseph LaPalombara*
Affiliation:
Yale University
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Extract

Political scientists are only now, and dimly, beginning to recognize that something called “political risk analysis” (PRA) is very much in vogue in the corporate and banking communities of this country. Any attempt to assess this uncommon development should begin with this question: Why would any banker or corporate manager wish to spend hard cash on anything political scientists might have to say about places overseas where banks and multinational corporations lend or invest their capital? After all, the profession is not exactly distinguished by its ability to make accurate forecasts. Indeed, Sartori has argued that political scientists ought to eschew forecasting entirely in that they are best able to explain what happened as opposed to what may come to pass.

Sartori's assertion of course would make historians of us all—and burden us with the historian's smug claim that, if the history examined is too recent, the immediacy of events will distort our vision and bias our judgments. Thus, rather than try to foretell where, say, Germany will move politically next year we should expend (more!) of our resources to establish once and for all what really caused Weimar to collapse and Hitler to come to power.

This is not the stuff of political risk analysis. Growing interest in this activity is little based on broad analyses of the past or on long-term forecasts of future events. The potential consumers of political assessments are intelligent, harried bankers and corporate managers who are pressed to make relatively short-term decisions that affect the viability of enterprise and investment-and, equally important, careers-in professions where tenure is unknown.

Type
Research Article
Information
PS: Political Science & Politics , Volume 15 , Issue 2 , Spring 1982 , pp. 180 - 186
Copyright
Copyright © The American Political Science Association 1982

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References

1 The term, “political risk analysis” is somewhat unfortunate, for several reasons. In the first place, assessments of the political environment for business should pay as much attention to opportunity as to risk, or as much attention to stable as to unstable investment environments. Second, for many bankers and corporate managers, particularly the latter, political risk analysis sounds too much like political intelligence and the role of govemental agencies in gathering it. One new consulting firm has unhappily launched a world-wide marketing campaign, of dubious credibility, in which it is claimed that it will outclass the CIA in its information-gathering activities. Nervous managers who remember ITT and Chile will think twice before signing on.

2 Sartori, G., “Political Development and Political Engineering,” in Montgomery, J.D. and Hirshman, A.O. (eds.), Public Policy Vol. 17 (Cambridge, 1968), pp. 266–272 Google Scholar.

3 APRA is headquartered in New York. Its membership fee and fees for participation in annual meetings are much too high to attract many persons from the academy or government. Its April, 1982, meeting included papers on such topics as “In-House Country Risk Rating Systems” and “Integration of Political Risk Analysis into the Decision Making Process.” The Association is also scheduled to organize, in August, an IPSA panel on the topic, “Applied Political Science in International Business and Banking.”

4 AII national governments—particularly their tax authorites—are aware that such transactions facilitate transfer pricing, as well as income and capital repatriating devices, that are of obvious concern to public authorities.

5 For a discussion of the emerging patterns of host-country demands and regulations regarding the MNCs, see LaPalombara, J. and Blank, Stephen, Multinational Corporations and Developing Countires (New York: The Conference Board, 1979)Google Scholar.

6 For a statistical overview of what American firms are doing in the area of environmental analysis, see Kobrin, S.J., Basek, J., Blank, S. and LaPalombara, J., “The Assessment and Evaluation of Noneconomic Environments by American Firms: A Preliminary Report,” Journal of International Business Studies (Spring/Summer, 1980), pp. 32–48 CrossRefGoogle Scholar. A more qualitative report derived from the same data base is found in Blank, S. et al. , Assessing the Political Environment: An Emerging Function in International Companies (New York: The Conference Board, 1980)Google Scholar. Cf. Blank, S., LaPalombara, J. and Sacks, P., “Political Analysis and Forecasting in the Private Sector: An Overview of the New Firm-Centric Analytical Formats,” APSA Annual Meeting (September, 1980)Google Scholar.

7 Prevailing modes of risk evaluation utilized by large-scale banks and corporations are not entirely reassuring. See, for example, Goodman, S., “How the Big U.S. Banks Really Evaluate Sovereign Risks,” Euromoney (February, 1977), pp. 105–110 Google Scholar; Keegan, W. J., “Multinational Scanning: A Study of the Information Sources Utilized by Headquarters Executives in Multinational Companies,” Administrative Science Quarterly (September, 1974), pp. 411–421 Google Scholar.

8 A striking example of the type of quantitative analysis that would be of limited utility to corporate actors is Rummel, R. and Hennan, D., “How Multinationals Analyze Political Risk,” Harvard Business Review (January-February, 1978), pp. 67–76 Google Scholar.

9 The most lucid statement of the direction and basic structure that political assessment of investment environments should take is provided by William H. Overholt, Beyond Political Risk, forthcoming in Euromoney. Overholt's Chapter III, “The Rise and Fall of Quantitative Methods,” is in fact the last word on why that approach won't fly.