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Gambling on Conflict: Profiling Investments in Conflict Countries
Unformatted Document Text:  Andreea Mihalache Updated: March 20, 2008 increased (Fig 7). Investors’ responses also differed on issues such as the nature of the risk they face in different regions (general, i.e., likely to affect many other companies operating in the same location or industry, or specific, i.e., relating to their organization’s internal systems, processes or people); changes in the levels of risks and rewards their emerging market operations faced in the previous three years; changes in the amount of time their organization dedicates to political risk management etc. Figure 5, 6 and 7 here The most important conclusion to be drawn from this survey is that not all investors react alike when faced with the same stimulus—political risk and, specifically, political violence. Uncovering the cause of variation in investor responses is the key to providing a systematic solution to the empirical conundrum of FDI location in hosts with political violence. Before presenting my argument, I discuss why it is useful to study political violence risk independently from other types of risk and I describe in some detail the ways in which political violence affects the investment environment. 3. Political violence and political risk 3.1 How political violence risk differs qualitatively from other types of political risk As far as foreign investors are concerned, developing regions present not only economic potential, but also political risk: the likelihood that political changes in the host country affect the business climate such that investors’ profits are lower than they expected when they made the investment (Howell 2001, 2) 14 . In other words, political risk is the risk that a sovereign host government will unexpectedly change the rules of the 14 Alternative definitions of political risk are offered by Root (1972) and Kobrin (1979), and summarized by Butler and Joaquin (1998, 599): “political risk is … the risk of adverse consequences arising from political events.” 10

Authors: Mihalache, Andreea.
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Andreea Mihalache
Updated: March 20, 2008
increased (Fig 7). Investors’ responses also differed on issues such as the nature of the
risk they face in different regions (general, i.e., likely to affect many other companies
operating in the same location or industry, or specific, i.e., relating to their organization’s
internal systems, processes or people); changes in the levels of risks and rewards their
emerging market operations faced in the previous three years; changes in the amount of
time their organization dedicates to political risk management etc.
Figure 5, 6 and 7 here
The most important conclusion to be drawn from this survey is that not all
investors react alike when faced with the same stimulus—political risk and, specifically,
political violence. Uncovering the cause of variation in investor responses is the key to
providing a systematic solution to the empirical conundrum of FDI location in hosts with
political violence. Before presenting my argument, I discuss why it is useful to study
political violence risk independently from other types of risk and I describe in some detail
the ways in which political violence affects the investment environment.
3. Political violence and political risk
3.1 How political violence risk differs qualitatively from other types of political risk
As far as foreign investors are concerned, developing regions present not only
economic potential, but also political risk: the likelihood that political changes in the host
country affect the business climate such that investors’ profits are lower than they
expected when they made the investment (Howell 2001, 2)
. In other words, political
risk is the risk that a sovereign host government will unexpectedly change the rules of the
14
Alternative definitions of political risk are offered by Root (1972) and Kobrin (1979), and summarized
by Butler and Joaquin (1998, 599): “political risk is … the risk of adverse consequences arising from
political events.”
10


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