By Henry Kyambalesa
Abstract
Investors and business operators encounter a multitude of risks in countries where their operations are undertaken. Existing pieces of literature on business risks are devoted to analyses of risks associated with business operations undertaken in foreign countries. In this article, however, such risks are conceived of as any and all unfavorable factors to which existing and potential investors and business operators are exposed in domestic markets and/or foreign countries or regions.
This article is designed to provide a brief survey of the following themes relating to business risks obtaining in both domestic and foreign markets which investors and business operators would need to be aware of: (a) potential business risks worldwide; (b) the assessment of business risks sifted or drawn from the potential business risks, and why such risks ought not to be ignored; (c) the process by which country ratings may be determined; and (d) an example of a rating for one country—that is, the Republic of Zambia. Concluding notes are presented at the end of the article.
1. Potential Business Risks
In this section, let us consider the following broad categories of business risks which are likely to be encountered by investors and business operators in domestic and foreign markets, and which have the potential to adversely affect the success, survival and profitability of business entities: (a) political risk; (b) economic risk; (c) cultural risk; (d) the incidence of religion-based conflicts in a country; (e) the incidence of endemic corruption in a country; and (f) a country’s image as perceived by foreigners.
1.1 Political Risk. The term “political risk” refers to governmental and/or societal actions and policies in local or foreign markets which are likely to thwart successful or profitable investments and business operations in such markets. The following are some of the important indicators of political risk which investors, business prospectors and operators of business entities need to look for in a country:
(a) The country appears on the list of principal sources of refugees in the world—refugees who flee from political turmoil in their home countries;
(b) The country has segments of its people who are designated as internally displaced persons (IDPs)—that is, people who are compelled to flee from their residential areas due to an armed conflict and/or human rights violations but who have not crossed into other countries;
(c) Authoritarian rule, which may include a single-party system of government and/or self-imposed leaders, or leaders with dictatorial tendencies;
(d) Presence of terrorist groups in the country—groups whose tendency is to orchestrate indiscriminate attacks on individuals, communities and/or business entities;
(e) Appearance of a country on the list of countries published by Newsweek and reported periodically by the U.S. Department of State as being one of several countries in the world which have been seriously impacted by terrorist attacks;
(f) Speeches or outbursts by political leaders, trade unionists or other local leaders against business entities, business executives, foreigners, or diplomats;
(g) Government breaches, or unilateral revision, of contracts with local or foreign business entities;
(h) Nationalization and/or expropriation of assets owned by local and/or foreign investors or business operators;
(i) Unreasonably strict restrictions on profit repatriation; and/or
(j) Default or repudiation of external debts by the government.
1.2 Economic Risk. This type of risk pertains to unfavorable market conditions obtaining in a country which are likely to be inimical to the success and survival of business entities. Such conditions include the following:
(a) Prevalence of inflationary trends, deflationary conditions, depressions, and/or recessions in a country;
(b) Unstable national currency;
(c) Unstable industrial relations and labor strife characterized by regular strikes;
(d) High tariffs and restrictive quotas;
(e) A country appears on the list of countries cited periodically by Global Finance and Focus Economics, and annually by The World Almanac and Book of Facts, as one of the twenty (20) countries in the world with the lowest gross domestic product (GDP) per capita, and/or it is listed by the Economic and Social Council (ECOSOC) of the United Nations in its triennial listing as one of the world’s ten (10) least-developed countries;
(f) The country is or has been facing economic sanctions instituted by the United Nations;
(g) Absence of an ideology expressly or otherwise prescribed in the country’s constitution or in subsidiary pieces of legislation; and/or
(h) Existence of political parties that exhibit elements of an assortment of ideologies, including socialism, communism and the free enterprise ideology.
1.3 Cultural Risk. The term “cultural risk” refers to the potential business risk which may emanate from serious inconsistencies or clashes between a local or foreign business entity’s product offerings, or any other element of its operations, and the deep‑rooted customs, values, beliefs, and/or attitudes of indigenous people in a given country or region. The following constitute the elements included in this category of business risks:
(a) Presence of a multiplicity of official languages, which can, for example, pose problems in designing a cogent marketing strategy that is not likely to evoke or cause any misunderstanding in any of the languages;
(b) Presence of a multiplicity of hostile and/or violent religious denominations in the country, and the country often reported in the news media as experiencing incidents of religion-based conflicts;
(c) Half or more of a country’s citizens are illiterate—that is, they cannot read or write due to inadequate education or the lack thereof; and/or
(d) The country is listed by the World Population Review under the “Most Racist Countries” rubric as being one of the ten (10) most racist and xenophobic countries in the world.
1.4 Religion-Based Conflicts. The country has a multiplicity of hostile and/or violent religious denominations, and is often reported in the news media as experiencing recurring incidents of religion-based conflicts.
1.5 Incidence of Endemic Corruption. The Corruption Perceptions Index (CPI) score of the country, which is reported annually by Transparency International, renders the country as being one of the twenty (20) most corrupt countries in the world.
1.6 A Country’s Image. The question of whether “made-in” labels are of any significant consequence in export marketing has increasingly been receiving wide attention. For instance, Papadopoulos and others have argued that “country-of-origin” images are of the most immediate interest in the case of goods which are marketed in a foreign country. As such, exporters need to have an idea regarding importing-country images—regardless of whether or not they actively take part in creating the goods involved—by conducting an independent and informal survey.
Essentially, Papadopoulos and others have found that perceptions of the sourcing country entail the following: (a) “cognitions” pertaining to the country’s degree of industrial development and technological advancement, among a host of other things; (b) “affect” or feelings regarding the country’s people; and (c) a “conative” component relating to the consumer’s desired level of interaction with the source country.
2. Assessment of Business Risks
In this section, the following specific types of business risk are used in the determination or assessment of the potential business risks which investors, business prospectors and business operators are likely to encounter in any given country mainly because credible and chronicled sources of information are readily available for such types of business risk:
2.1 Principal Source of Refugees. The country appears on the list of principal sources of refugees in the world; that is, citizens who flee from political turmoil, economic malaise, a high incidence of crime, and other factors and conditions obtaining in their home countries—factors and conditions which can also have devastating effects on economic activities and business operations. The list of such countries is published online annually by the United Nations High Commission for Refugees (UNHCR Global Trends) and in hard copy format by The World Almanac and Book of Facts.
2.2 Significant Numbers of IDPs. The country has segments of its citizens who are designated as internally displaced persons (IDPs)—that is, people who are compelled to flee from their residential areas due to an armed conflict and/or human rights violations but who have not crossed into other countries as refugees.
As such, the country appears on the list of countries published annually in hard copy format by The World Almanac and Book of Facts and reported periodically by the Internal Displacement Monitoring Center of the Norwegian Refugee Council as having a large number of IDPs due to violence and conflicts—violence and conflicts which can thwart the success, survival and profitability of business undertakings.
2.3 Presence of Terrorist Groups. The country has terrorist groups based within its national borders—groups which are likely to orchestrate occasional and indiscriminate attacks on individuals, communities and/or both small-scale and large business entities.
2.4 A Target of Terrorist Groups. The country appears on the list of countries published by Newsweek and reported periodically by the United States Department of State as being one of several countries in the world which have often been impacted or targeted by terrorist groups. This would partly make the country unsuitable for investment and business operations due to the potential for disruptions of economic activities.
2.5 Lowest GDP Per Capita. The country appears on the list of countries cited periodically by Global Finance and Focus Economics, and annually by The World Almanac and Book of Facts, as one of the twenty (20) countries in the world with the lowest gross domestic product (GDP) per capita, and/or it is listed by the Economic and Social Council (ECOSOC) of the United Nations in its triennial listing as one of the world’s ten (10) least-developed countries.
Potential consumers in less-developed countries (LDCs) do not generally have sufficient purchasing power needed to bolster the operations of either small-scale or large business entities. Besides, LDCs do not have adequate and appropriate infrastructure and public facilities and services that are important to marketers of goods and services.
2.6 Sanctions-Related Risk. The country is, or has been, facing economic sanctions instituted by the United Nations, sanctions which may include the following: (a) sanctions designed to cripple a targeted country’s ability to export and import goods; (b) sanctions designed to ban foreign investment (foreign direct investment and portfolio investment) in the country; (c) sanctions designed to cripple the operations of airlines based in a targeted country; (d) sanctions designed to ban a targeted country from raising money by offering treasury bills, notes and bonds outside its national borders; and (e) sanctions designed to cripple a targeted country’s financial institutions, including banks and the stock market.
Investors, business prospectors and operators of business entities can face hefty fines and/or civil and criminal penalties for venturing or operating in a UN-sanctioned country.
2.7 Xenophobic Attitudes. The country is listed by the World Population Review as being one of the ten (10) most racist and xenophobic countries in the world due to widespread racism, prejudice, bigotry, nationalism, and/or high levels of unemployment obtaining in the country. Investors, business prospectors and operators of business undertakings should expect to encounter various forms of discrimination and potential attacks in host countries where large segments of citizens exhibit racist attitudes and/or harbor anti-immigrant sentiments.
2.8 Endemic Corruption. The Corruption Perceptions Index (CPI) score of the country, which is reported annually by Transparency International, renders the country as being one of the twenty (20) most corrupt countries in the world. As Kaufmann of the World Bank Institute has noted, widespread corruption in any given country can create an environment of uncertainty, inflate the operating costs of economic units, reduce economic units’ profit margins, and take a toll on economic units in terms of the time needed in dealing with corrupt government officials.
2.9 Religion-Based Conflicts. The country has a couple or more of hostile and/or violent religious denominations, and/or is often reported in the news media as experiencing recurring incidents of religion-based conflicts—conflicts which can potentially culminate in violent clashes between and/or among religious groups in their quest to dominate the political sphere, impose their religious laws on the citizenry, and/or disrupt public order and socioeconomic activities. And
2.10 Socialist Political Parties. The country has political parties that exhibit elements of an assortment of ideologies, including socialism, communism and the free enterprise ideology. There are many socialism-related issues and risks associated with propositions and pronouncements by Karl Marx and Frederick Engels in the Manifesto for the Communist Party which investors, business prospectors and operators of business entities need to be mindful of.
They include the following: (a) eradication of what the duo referred to as bourgeois competition; (b) abolition of “free trade” and of buying and selling of commodities; (c) abolition of private property and replacing it with communal control of a country’s national economy; (d) nationalization and/or expropriation of privately owned business entities and conversion of such entities into state-owned enterprises; and (e) imposition of price controls, which require business entities to charge prices prescribed by the government for their products irrespective of the costs associated with the creation of the products.
3. Country Ratings
We can determine the level of potential risk which investors and business operators may encounter in any country by using the following specific categories of business risk cited earlier in this article:
(a) The country is a prominent source of refugees or a major origin of asylum seekers (REF);
(b) The country is chronicled as having a presence of internally displaced persons (IDP);
(c) There is a presence of terrorist groups in the country (PTG);
(d) The country is designated as being one of several countries in the world which have often been impacted or targeted by terrorist groups (TTG);
(e) The country is one of the twenty (20) countries in the world with the lowest gross domestic product (GDP) per capita, and/or it is one of the world’s ten (10) least-developed countries (GDP);
(f) The country is, or has been, facing economic sanctions instituted by the United Nations (ECO);
(g) The country is listed by the World Population Review under the “Most Racist Countries” rubric as being one of the ten (10) most racist and xenophobic countries in the world (XEN);
(h) The country is one of the twenty (20) countries in the world with a high incidence of corruption (COR);
(i) The country has a recurring incidence of religion-based conflicts (RBC); and
(j) The country has one or more socialist political parties, or it has an existing or potential socialist regime (SPP).
Thus, the potential risk associated with investing and/or conducting business operations in any country is a function of the sum of the foregoing categories of business risk. This may be presented in the form of a simple and recallable expression as follows:
RQ = f(REF + IDP + PTG + TTG + GDP + ECO + XEN + COR + RBC + SPP),
where:
RQ = The risk associated with investing or conducting business operations in country Q;
and
REF + IDP + PTG + TTG + GDP + ECO + XEN + COR + RBC + SPP represent the various categories of business risk cited in the foregoing sections and paragraphs.
Interpretation of RQ Scores:
For any country being evaluated with respect to the business risk associated with either investing or conducting business operations in the country, each of the ten categories of business risk presented above scores 1 point if it applies to the country. The RQ score for any given country should be interpreted as follows:
<> Very Low Risk: A country with an RQ score of 1 point or 2 points should be regarded as a “very low risk” country by both local and foreign investors, business prospectors and operators of business entities;
<> Low Risk: A country with an RQ score of 3 or 4 points should be regarded as a “low risk” country by both local and foreign investors, business prospectors and operators of business undertakings;
<> High Risk: A country with an RQ score of 5 or 6 points should be regarded as a “high risk” country by both local and foreign investors, business prospectors and business operators;
<> Very High Risk: A country with an RQ score of 7 or 8 points should be regarded as a “very high risk” country by both local and foreign investors, business prospectors and operators of business entities; and
<> Highest Risk: A country with an RQ score of 9 or 10 points should be regarded as a country with the “highest risk” by both local and foreign investors, business prospectors and operators of business undertakings.
4. The Zambian Context
Let us now consider an example of the potential risk associated with either investing or conducting business operations in a specific country—that is, the Republic of Zambia.
The country: (a) is not a major source of refugees; (b) does not have internally displaced persons; (c) does not have terrorist groups; (d) is not impacted or targeted by terrorist groups; (e) is not one of the twenty (20) countries with the lowest GDP per capita, and is not one of the world’s ten (10) least-developed countries; (f) has never faced UN economic sanctions; (g) is not one of the ten (10) most racist and xenophobic countries; (h) is not one of the twenty (20) most corrupt countries; and (i) has never had recurring religion-based conflicts.
However, the country has two socialist political parties—the Rainbow Party and the Socialist Party.
The foregoing information about the Republic of Zambia regarding the potential risk which investors, prospective business operators and operators of business undertakings are likely to encounter in the country can be presented in a nutshell—including a score for each category of business risk—as follows:
Score:
<> Principal Source of Refugees (REF): 0
<> Significant Numbers of IDPs (IDP): 0
<> Presence of Terrorist Groups (PTG): 0
<> A Target of Terrorist Groups (TTG): 0
<> Lowest GDP Per Capita (GDP): 0
<> Sanctions-Related Risk (ECO): 0
<> Xenophobic Attitudes (XEN): 0
<> Endemic Corruption (COR): 0
<> Religion-Based Conflicts (RBC): 0
<> Socialist Political Parties (SPP): 1
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Total: 1
5. Conclusion
With an RQ score of 1 point, the Republic of Zambia is a “very low risk” country for both local and foreign investors, prospective business operators and operators of business entities.
And Clauses 3 and 4 of Article 10 of the country’s 2016 Constitution provides for the following: “The Government shall promote local and foreign investment and protect and guarantee such investment through agreements with investors and other countries.” And “The Government shall not compulsorily acquire an investment, except under customary international law … and [where] the investment compulsorily acquired … was made from the proceeds of a crime [and, as such,] no compensation shall be paid by the Government” for such investment.
Apparently, the country desperately needs investments in manufacturing, agriculture, agribusiness, tourism, and the assembly of motor vehicles for distribution across the newly established African Continental Free Trade Area (AfCFTA).
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Bibliography
Kaufmann, Daniel. 2001. Corruption and the Private Sector: Why Should Businesses Fight against Corruption and How? Institute of International Economics (IIE), http://www.iie.com/.
Muuka, Gerry N. 2016. Exporting their Way out of Poverty: Twenty-First Century Challenges for Sub-Saharan Africa. In Kyambalesa, Henry and Mathurin C. Houngnikpo. 2016. Economic Integration and Development in Africa. New York: Routledge, eBook.
Papadopoulos, N. et al. 1989. International Competitiveness of American and Japanese Products. In Papadopoulos, N. editor. 1989. Dimensions of International Business. Ottawa, Canada: International Study Group, Carleton University.
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USAID. 2005. Corruption and the Private Sector: Why Would Businesses Fight against Corruption and How? http://www.usaid.gov/, March 19, 2005.
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Keywords: Business risks, Political risk, Economic risk, Cultural risk