IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpif/0512002.html
   My bibliography  Save this paper

Measuring Risk: Political Risk Insurance Premiums and Domestic Political Institutions

Author

Listed:
  • Nathan M Jensen

    (Washington University)

Abstract

There is a renewed interest in political science on how political risk affects multinational corporations operating in emerging markets. Most existing studies suffer from data problems where researchers can only offer indirect evidence of the relationship between political institutions and political risk. In this paper I utilize a new data resource to explore how domestic institutions affect political risks for multinationals. Utilizing price data from political risk insurance agencies I test how domestic political institutions affect the premiums multinationals pay for coverage against 1) expropriations and contract disputes and 2) government restrictions on capital transactions. I find that constraints on politicians lead to marginally lower expropriation and transfer risks. Democracy, on the other hand, greatly reduces expropriation risk but has no impact on transfer risk.

Suggested Citation

  • Nathan M Jensen, 2005. "Measuring Risk: Political Risk Insurance Premiums and Domestic Political Institutions," International Finance 0512002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0512002
    Note: Type of Document - pdf; pages: 45
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0512/0512002.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    2. Kumar, Mohan & Moorthy, Uma & Perraudin, William, 2003. "Predicting emerging market currency crashes," Journal of Empirical Finance, Elsevier, vol. 10(4), pages 427-454, September.
    3. Jodice, David A., 1980. "Sources of change in Third World regimes for foreign direct investment, 1968–1976," International Organization, Cambridge University Press, vol. 34(2), pages 177-206, April.
    4. Stephen J Kobrin, 1979. "Political Risk: A Review and Reconsideration," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 10(1), pages 67-80, March.
    5. Witold J. Henisz, 2002. "The institutional environment for infrastructure investment," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 11(2), pages 355-389.
    6. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
    7. Leblang, David & Mukherjee, Bumba, 2004. "Presidential Elections and the Stock Market: Comparing Markov-Switching and Fractionally Integrated GARCH Models of Volatility," Political Analysis, Cambridge University Press, vol. 12(3), pages 296-322, July.
    8. Caves, Richard E, 1971. "International Corporations: The Industrial Economics of Foreign Investment," Economica, London School of Economics and Political Science, vol. 38(149), pages 1-27, February.
    9. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
    10. Oecd, 2004. ""Indirect Expropriation" and the "Right to Regulate" in International Investment Law," OECD Working Papers on International Investment 2004/4, OECD Publishing.
    11. Oxley, Joanne E, 1997. "Appropriability Hazards and Governance in Strategic Alliances: A Transaction Cost Approach," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 13(2), pages 387-409, October.
    12. Gatignon, Hubert & Anderson, Erin, 1988. "The Multinational Corporation's Degree of Control over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(2), pages 305-336, Fall.
    13. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
    14. Leblang, David & Bernhard, William, 2000. "The Politics of Speculative Attacks in Industrial Democracies," International Organization, Cambridge University Press, vol. 54(2), pages 291-324, April.
    15. Nathan Jensen, 2002. "Economic reform, state capture, and international investment in transition economies," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(7), pages 973-977.
    16. Witold J. Henisz & Bennet A. Zelner, 2001. "The Institutional Environment for Telecommunications Investment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(1), pages 123-147, March.
    17. W. J. Henisz, 2000. "The Institutional Environment for Economic Growth," Economics and Politics, Wiley Blackwell, vol. 12(1), pages 1-31, March.
    18. Theodore Moran & Gerald T. West, 2005. "International Political Risk Management : Looking to the Future," World Bank Publications - Books, The World Bank Group, number 7430, December.
    19. Theodore H. Moran, 2004. "International Political Risk Management : The Brave New World," World Bank Publications - Books, The World Bank Group, number 15039, December.
    20. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
    21. McGILLIVRAY, FIONA, 2003. "Redistributive Politics and Stock Price Dispersion," British Journal of Political Science, Cambridge University Press, vol. 33(3), pages 367-395, July.
    22. Gerald T. West & Ethel I. Tarazona, 2001. "Investment Insurance and Development Impact : Evaluating MIGA's Experience," World Bank Publications - Books, The World Bank Group, number 13844, December.
    23. John R. Freeman & Jude C. Hays & Helmut Stix, 1999. "Democracy and Markets: The Case of Exchange Rates," Working Papers 39, Oesterreichische Nationalbank (Austrian Central Bank).
    24. Li, Quan & Resnick, Adam, 2003. "Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries," International Organization, Cambridge University Press, vol. 57(1), pages 175-211, January.
    25. Adam L. Resnick, 2001. "Investors, turbulence, and transition: Democratic transition and foreign direct investment in nineteen developing countries," International Interactions, Taylor & Francis Journals, vol. 27(4), pages 381-398, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Juhan Kim & Jinsoo Kim, 2018. "Optimal Portfolio for LNG Importation in Korea Using a Two-Step Portfolio Model and a Fuzzy Analytic Hierarchy Process," Energies, MDPI, vol. 11(11), pages 1-18, November.
    2. Restrepo, Diana & Correia, Ricardo & Población, Javier, 2012. "Political risk and corporate investment decisions," DEE - Working Papers. Business Economics. WB 13114, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    3. Spagnoletti Belinda & O'Callaghan Terry, 2011. "Going Undercover: The Paradox of Political Risk Insurance," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 5(2), pages 1-23, July.
    4. Alexander Braun & Marius Fischer, 2018. "Determinants of the Demand for Political Risk Insurance: Evidence from an International Survey," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(3), pages 397-419, July.
    5. Violeta IFTINCHI & Gheorghe HURDUZEU, 2018. "Bilateral Investment Treaties: Last Resort Strategy to Mitigate Political Risks?," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 19(1), pages 4-14, March.
    6. Violeta Iftinchi & Gheorghe Hurduzeu, 2016. "The place of Political Risk Insurance in the political risk management strategy of multinational corporations," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(60), pages 201-212, June.
    7. Marina Azzimonti-Renzo & Pierre-Daniel G. Sarte, 2007. "Barriers to foreign direct investment under political instability," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 93(Sum), pages 287-315.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Krishna Chaitanya Vadlamannati, 2012. "Impact of Political Risk on FDI Revisited—An Aggregate Firm-Level Analysis," International Interactions, Taylor & Francis Journals, vol. 38(1), pages 111-139, January.
    2. Rodolphe Durand & Robert M. Grant & Tammy L. Madsen & Sinziana Dorobantu & Aseem Kaul & Bennet Zelner, 2017. "Nonmarket strategy research through the lens of new institutional economics: An integrative review and future directions," Strategic Management Journal, Wiley Blackwell, vol. 38(1), pages 114-140, January.
    3. Alfredo Jiménez & Juan Fuente & Juan Durán, 2011. "Is There an East-West Structure in the Location of FDI in Europe? The Role of Institutions and Political Risk," Research in Economics and Business: Central and Eastern Europe, Tallinn School of Economics and Business Administration, Tallinn University of Technology, vol. 3(1).
    4. Busse, Matthias & Hefeker, Carsten, 2007. "Political risk, institutions and foreign direct investment," European Journal of Political Economy, Elsevier, vol. 23(2), pages 397-415, June.
    5. Lammertjan Dam & Bert Scholtens & Elmer Sterken, 2007. "Corporate Governance and International Location Decisions of Multinational Enterprises," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(6), pages 1330-1347, November.
    6. Federico Carril‐Caccia & Elena Pavlova, 2020. "Mergers and acquisitions & trade: A global value chain analysis," The World Economy, Wiley Blackwell, vol. 43(3), pages 586-614, March.
    7. Marie-Ange VEGANZONES-VAROUDAKIS & SEKKAT, 2004. "Trade and Foreign Exchange Liberalization,Investment Climate, and FDI in the MENA Countries," Working Papers 200430, CERDI.
    8. Céline Azémar & Rodolphe Desbordes, 2009. "Public Governance, Health and Foreign Direct Investment in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies, vol. 18(4), pages 667-709, August.
    9. Jakob Müllner & Sinziana Dorobantu, 2023. "Overcoming political risk in developing economies through non-local debt," Journal of International Business Policy, Palgrave Macmillan, vol. 6(2), pages 159-181, June.
    10. Pierre-Guillaume Méon & Khalid Sekkat, 2007. "Revisiting the relationship between governance and foreign direct investment," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(1), pages 41-61.
    11. Gossel, Sean Joss, 2018. "FDI, democracy and corruption in Sub-Saharan Africa," Journal of Policy Modeling, Elsevier, vol. 40(4), pages 647-662.
    12. Taylor, Mark Zachary, 2007. "National innovation rates: the evidence for/against domestic institutions," MPRA Paper 10997, University Library of Munich, Germany.
    13. Jan Hendrik Fisch & Bjoern Schmeisser, 0. "Phasing the operation mode of foreign subsidiaries: Reaping the benefits of multinationality through internal capital markets," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 0, pages 1-33.
    14. Vladimír Benáček & Helena Lenihan & Bernadette Andreosso-O'Callaghan & Eva Michalíková & Denis Kan, 2014. "Political Risk, Institutions and Foreign Direct Investment: How Do They Relate in Various European Countries?," The World Economy, Wiley Blackwell, vol. 37(5), pages 625-653, May.
    15. Lukoianove, Tatiana & Agarwal, James & Osiyevskyy, Oleksiy, 2022. "Modeling a country's political environment using dynamic factor analysis (DFA): A new methodology for IB research," Journal of World Business, Elsevier, vol. 57(5).
    16. Witold J. Henisz & Jeffrey T. Macher, 2004. "Firm- and Country-Level Trade-offs and Contingencies in the Evaluation of Foreign Investment: The Semiconductor Industry, 1994–2002," Organization Science, INFORMS, vol. 15(5), pages 537-554, October.
    17. Jan Hendrik Fisch & Bjoern Schmeisser, 2020. "Phasing the operation mode of foreign subsidiaries: Reaping the benefits of multinationality through internal capital markets," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 51(8), pages 1223-1255, October.
    18. Luis Fernando Medina & Marcelo Bucheli & Minyoung Kim, 2019. "Good friends in high places: Politico-economic determinants of the expropriation and taxation of multinational firms," Journal of International Business Policy, Palgrave Macmillan, vol. 2(2), pages 119-141, June.
    19. Caterina Moschieri & Roberto Ragozzino & Jose Manuel Campa, 2014. "Does Regional Integration Change the Effects of Country-Level Institutional Barriers on M&A? The Case of the European Union," Management International Review, Springer, vol. 54(6), pages 853-877, December.
    20. Jiménez, Alfredo & Luis-Rico, Isabel & Benito-Osorio, Diana, 2014. "The influence of political risk on the scope of internationalization of regulated companies: Insights from a Spanish sample," Journal of World Business, Elsevier, vol. 49(3), pages 301-311.

    More about this item

    Keywords

    FDI; political risk; expropriation; insurance;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpif:0512002. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: EconWPA (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.