The Initiative on Political Risk and Development

Firms operating in emerging markets are exposed to tremendous risk from both economic and political sources. On the political side, governments can expropriate assets, renege on tax agreements, restrict capital flows, and fail to enforce contracts, or engage in other activities that negatively affect multinational's assets or income streams. Countries that can reduce political risks for multinationals attract higher levels of multinational investments.

Most political risks today do not change ownership dramatically from foreign firms to host governments. Instead, they comprise policy changes that affect operations of a multinational firm. These changes in the policy environment that adversely affect multinationals are commonly referred to as "creeping expropriation." Governments today seldom directly nationalize industries, but often they make attempts to wrestle control or capture income streams from the corporation. Part of this creeping expropriation includes the difficulty of specifying complete contracts. In technology joint ventures, for example, multinationals remain wary of how technological leakages or inadequate enforcement of property rights could threaten an investment. These contracts, even if they are fully enforced, prove difficult to specify given the complexity of writing a contract about assets that have yet to be created and the uncertainty of technological innovation's pace and scope. Not only do multinationals have to predict contract enforcement, but also resolution of disputes over the unspecified elements of the contract itself.

The Political Risk Initiative supports research that explores the policies and institutions that reduce political risks for multinationals. This research can inform business investment decisions, and provide guidance to emerging market countries on how to attract foreign direct investment.
Earlier studies and programs sponsored by this program thus far include.

Nation-States and the Multinational Corporation: A Political Economy of Foreign Direct Investment. This research project finds that political institutions, specifically democratic institutions and certain types of federal institutional structures, reduce risks for multinational corporations. A book authored by Professor Nathan Jensen has been published from this research (Princeton University Press, 2006). This book is available at http://press.princeton.edu/titles/8207.html.

Political Institutions and Foreign Direct Investment. A June 2005 academic workshop addressed this topic. Ten top faculty from political science, economics, and management presented research on how political institutions affect risks for multinational investors. Conference papers can be viewed at http://nathanjensen.wustl.edu/me/confer.html.