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How to Calculate Political Risk
To express visually the relationship between stability and openness, and to suggest what it means for people looking to do business abroad, I came up with what I call the J curve. It's shown here.
Where Should I Go?
Risk, as entrepreneurs know better than anyone, incorporates upside as well as downside. Small and medium-size companies can manage both, starting with the decision of which markets to enter. The most important question is how long you intend to be there. Scores of small companies from around the world are reaping impressive profits by betting on China's continued growth. But China, though quite stable today, could face substantial instability as it opens to the outside world and domestic demand grows for political change. That's not to say long-term-minded companies should ignore a 1.3 billion-person market. But if you venture to China, or to any state where long-term stability is a question mark, you need a smart hedging strategy.
Hedging, of course, implies diversification. East Asia's democracies--India, Japan, South Korea, Taiwan, and others--remain sound investment bets that can help mitigate risks associated with overexposure in China. Businesses that can't diversify across countries should try diversifying their operations within a single country. For example, China is especially vulnerable to locally isolated social unrest, environmental disasters, and public health crises. For that reason, don't concentrate research and development facilities, production, and supply chains in any one province or region.
Prospects may also vary tremendously according to industry. Many businesses view Russia as a hostile market because of its much-publicized moves to restrict foreign investment in economic sectors considered strategic to the state. True, Russia is quite risky if you're in energy, metals, minerals, even telecommunications--sectors the Kremlin intends to dominate. But the investment climate is by no means monolithic. There's money to be made in construction, retail, white goods, high-end services, and other industries that attract companies of all sizes. Small companies already profit in sectors as diverse as high-tech R&D and food and beverage manufacturing and distribution. And small companies may be able to fly beneath the radar in some restricted sectors, something their large competitors cannot do.
Finally, small businesses can be reluctant to tackle preemerging (some call them frontier) markets. But growth industries exist in places such as Vietnam, Mauritania, Cambodia, and Senegal. In Africa, for example, some smaller pharmaceutical companies have profitably sold generic drugs and commercially developed local products. Another advantage: Competition in such markets is less intense (for the moment) because so many companies focus exclusively on downsides, which keeps them at bay.
Company leaders pursuing frontier markets require a thorough grasp of their politics and business environments. If a small business can't afford a well-connected consulting service, its decision makers should spend substantial time on the ground making contacts and building a reliable in-country team (see "Building a Global Network,").
Small companies with their fleet feet and low profiles have advantages large competitors can't replicate. Still, small-business leaders should incorporate risk-management practices into every aspect of their international adventures. To ignore political risk is dangerous. To avoid it is shortsighted. To use it can be very profitable.
Ian Bremmer is president of Eurasia Group, the world's largest political risk consultancy. He is the author of The J Curve: A New Way to Understand Why Nations Rise and Fall (Simon and Schuster).
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