The Double-Edged Sword: Government Action, Inaction, and the Calculus of Political Risk

Political risk has become a major concern for international business managers, policymakers, and researchers, given the rapid changes and altering business landscapes. It has become increasingly difficult for firms to anticipate emerging political risks in the given geoeconomic world order. However, firms continue to face various types of risks, including commercial, cross-cultural, currency, and country risks, which international firms encounter (Al Khattab et al., 2015; Brown et al., 2015). In the literature on risk assessment in International Business (IB), political risks that firms face are regularly highlighted (Darendeli & Hill, 2016; Gamso & Nelson, 2019; and John & Lawton, 2018).

    Scholars have studied political risk from different perspectives, such as international business, international relations, strategy, etc. John and Lawton (2018) have contended that political risk can arise from both the active and passive behavior of the government. These acts, whether occurring frequently or occasionally, can have detrimental or beneficial effects on the economic performance of enterprises at both individual and societal levels. They further emphasised that this action or inaction could be triggered by the government’s intervention and the significant political actors in the landscape. The government’s actions would entail factors such as nationalization and change of regime structure (Simon, 1984; Meldrum, 2000; Röell et al., 2022; Liou et al., 2023). On the other hand, the term “inaction” refers to the external risk arising from the negative impact on Multinational Enterprises (MNEs) due to worsening relations between the host and home nations and the spread of instability from adjacent nations (John & Lawton, 2018). Contrastingly, it may be interesting to note that the opportunities stemming from the forefront of these MNEs are surrounded by complexities inherent in the political environment characterized by geopolitical and social conflicts, coups, terrorist attacks, wars, and discriminatory actions of the host government. For instance, foreign exchange restrictions, corruption, and labour unrest (Röell et al., 2022; Ali et al., 2021; Zhu & Sardana, 2020). Further, it is imperative to understand that the construct “political risk” has acquired different meanings and connotations attached to its term. The period from 1980 to 2015 can be categorised as political risk emanating from the actions of the government, and beyond 2015, if we expand our purview, it is defined as a risk comprising inactions too. 

Furthermore, most existing literature focuses on political risks and uncertainties, including corruption, bureaucracy, and expropriation in host countries (Henisz et al., 2010). Moreover, it is essential to highlight what political risks are not, as outlined by John and Lawton (2018) and Psychogyios and Koutsoukis (2018). Both of these studies differentiate political risk in the realm of politics from many sources, including economic factors. The factors that can influence the economy include debt level, inflation, and exchange rates can be affected by the volatility of foreign exchange prices. Financial factors such as interest rates also play a role. Cultural factors, such as cultural distance, can have an impact. Social factors, such as strikes and ethnic conflicts, can also affect the economy, and environmental factors, such as explosions, pollution, and natural calamities. However, according to Boddewyn (1998), there are situations where the differentiation between political hazards and other types of risks may be subtle. Understanding the motivations behind the acts and inactions in the political environment is crucial in light of this differentiation. 

Moreover, we continue to witness different forms of political risk. For instance, on 2 April 2025, Donald Trump, the President of the United States, imposed a “discounted reciprocal tariff” on several countries, taking the tariff war to the next level. It has become pertinent in the last few years that the US-China trade war under the Trump dispensation caused severe supply chain disruptions and market volatility due to sudden changes in the tariff structure. In fact, the impact of government actions, which is seen as a form of influencing political risk, is evident here. In this case of the tariff war, the US government can be considered a prime example of a political risk actor. Its decisions, actions, and uncertainties have resulted in an immediate, widespread, and unpredictable impact on its domestic market and international business. Other issues, such as the Israel-Palestine war, strained contestations over Taiwan, oil and trade route issues in the Middle East, and technological supply chain issues in East Asia, have also resulted in implications for the firms by escalating into broader conflicts. These examples offer a compelling illustration of understanding political risk.

Due to the prevailing political risks in a volatile environment, countries need to adopt a flexible approach for managing such risks. It is thus advisable for the MNEs to stay flexible in responding to changing legal and regulatory environments across different markets. Three reasons revolve around this premise. First, it enables the firms to assess and examine political events beforehand. Second, it helps managers to formulate effective strategies to respond to government policies (Otto, 2023; Schwenker & Wulf, 2014). Third, it enhances managerial preparedness to examine the drivers of political risk for determining the likelihood of a probable event (Otto, 2023). In terms of understanding the “dilemmatic dichotomy” between the actions of the government and inaction too. Rice & Zegart (2018) have emphasized that the phrase “political action’ should be better used in understanding political risk. Interestingly, we continue to see that any changes in the policy of the government, regime change, or any other changes in the economic dimensions of the country, the perception holds strong that the government is responsible for the uncertainty. However, when we broadly study political risk and understand its impact, it also becomes clear that inaction can be a significant factor in influencing political risk. Political stakeholders, including non-governmental organisations, think tanks, the public sector, the private sector, and institutional arrangements, play a significant role in the political landscape. Interestingly, political systems that exhibit low political risk and high political stability are typically characterised by their development, Western influence, adherence to liberal democratic principles, and capitalist economic structure. For instance, the US-China trade conflict has heightened political risk for foreign enterprises in China, regardless of their direct involvement in US import or export activities. The trade war has heightened uncertainty, perhaps resulting in diminished investments and slower economic growth projections (McKinsey & Company, 2023). 

    There is a need for the firms to maintain cordial relationships not only with the government but also with the other stakeholders, as this can help them understand the environment before even investing in the host country. The political competence of a firm is the most significant factor here, as it involves assessing and analysing the political environment and policy directions, and the capacity to engage and communicate with important stakeholders with political weight. Therefore, proactive actions and mechanisms are needed to build political ties with actors. Thus, political risk has gained prominence in its discourse, but further studies are needed to understand the depth of the term and its conceptualisation.  It is also imperative to understand that this pertinent risk has become a severe cause of concern for all businesses across the globe. The discourse needs to be shaped by emphasizing and revisiting core concepts and theoretical frameworks from other disciplines, as well as reinventing new approaches in the global world order.   

References

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Author’s Bio 

Soumya Tiwari is a doctoral researcher in international business at FORE School of Management, New Delhi. She has completed her Bachelor’s degree in Political Science from Maitreyi College, University of Delhi, and Master’s Degree in Political Science with specialization in International Relations from the University of Delhi. She currently serves as the Deputy Head of Academics at the International Association for Political Science Students (IAPSS), Montreal, Canada. She previously served as a two-term chair of the Asia and Oceania Student Research Committee (AOSRC). Her areas of research include emerging markets, political risk, geopolitics, multinational enterprises, corporate political activities, trade and multilateralism. She has presented her research papers in several conferences of repute, both at the national and the international levels, such as the Academy of International Business (AIB) Annual Conference in Seoul, South Korea, and European International Business Academy (EIBA), and the most recent one was the Academy of International Business (AIB) Annual Conference in the United States of America. Further, at the AIB, she also served as a reviewer to review manuscripts for the Annual Conferences.