Typology of Political Risk

Typology of Political Risk

Firm-specific risks - directed at a particular company are rare. Government will nullify its contract with a given firm or that a terrorist group will target the firm's physical operations are firm-specific. It is easier to reduce the likelihood and impact of firm-specific risks by incorporating strong arbitration language into a contract or by enhancing onsite security to protect against terrorist attacks.

Country-specific risks - not directed at the firm but are countrywide are more common. Examples include a government's decision to forbid currency transfers or the outbreak of civil war in the country. Firms usually have little control over the impact of country-level political risks aside from stop operating in the country of question.

Government risks - Arise from the actions of a governmental authority, where that authority is used legally or not. Examples include a legitimately enacted tax hike or an extortion ring that is allowed to operate and is led by a local police chief may both be considered government risks.

Instability risks - Arise from political power struggles. Conflicts could be between members of a government fighting over succession or mass riots in response to deteriorating social conditions.