Emerging markets have been and will continue to be an important source of growth for transnational firms and foreign investors. However, these emerging markets remain vulnerable to political risk such as unstable, volatile governments, civil unrest, and foreign exchange restrictions that are beyond the control of investors. In other words, companies and investors can face an unpredictable and changeable business environment. For these reasons, it is important to identify, assess and manage political risk for companies that operate in emerging markets.
According to the textbook, there are two approaches to measure political risk: qualitative and quantitative. Qualitative analysis is based on expert analysis whereas quantitative analysis which begins with the identification of quantifiable factors that affect political risk (Alon, Jaffe, & Vianelli, 2013). Then an average of the factors’ numerical scores given by the formula would be score for the country. However, measuring the factors of political risk is methodically difficult. Because no direct metrics of political risk exist (Eurasia Group, 2015). It all depends on the reliability and validity of the models and the databases used to measure. Recently, Eurasia Group has developed a systematic methodology for measuring political risk. The important parts of this model includes: country scores that capture current levels of political stability (the Global Political Risk Index); formal assessments of the future outlook of political stability and its impact on the business environment (political trajectories); asset pricing models that estimate the interaction between political risk and market prices (Eurasia Group, 2015). Once risks have been identified and measured, it can be reduced or managed. For example, insurance against some political risks is offered by both governmental and private agencies; sharing ownership with host country nationals; participation of local nationals (Alon, Jaffe, & Vianelli, 2013)