 STRATEGIC MANAGEMENT - POLICY RISKS AND RISK FUTURES OF THE GLOBALIZATION PROCESS 1. Definition of Risk and Method Risk is defined as exposure to or the chance of injury or loss; in terms of insurance it defines as the hazard or chance of loss. As each entrepreneurial decision taking has the possibility of resulting in gains or losses in various degrees, risk means acceptance of loss and is in any case the perceived extent of possible loss. Risk refers to probabilities of phenomena, which are relative to the - Observer as individual, entrepreneur, investor, corporation, consultant, project group - Perception and thoughts on what might be risky - Cognition of what might succeed or fail - Decision taking and action needed for risk prevention Risk perception and risk cognition play a major part in the assessment of risk. As risk is not only regarded as loss, for any investment and business activity in complex environments it will be very important to know in advance how much and why either gains or losses are possible, how investments will be develop over a certain period of time. As risk is not only a quantitative phenomenon to be assessed according to the probability, it is rather qualitatively based on thoughts, sentiments, perceptions, imaginations and cognition building up the underlying structure for management processes and business practices. Therefore, risk assessment and analysis are particularly based on analytical methods and intellectual skills - researching and exploring the business environment and - applying the method of reasoning and rationalizing the findings. For defining what the expected loss will be, specifically the extent of loss, risk management in its principle stages foresees following preliminary stages of tasks: - Risk identification (depending on risk perception) - Risk evaluation (researching, exploring and monitoring) - Risk assessment (probability and determination of level of risk) - Risk analysis (determination of causes/sources of risk through reasoning and imagination) - Risk cognition (for assumptions and expectations, strategy and policy) 2. Definition of Political Risk In a broader sense than above definition of risk, political risk is referring to political, security and business practice issues, the impacts of political decisions and adopted policies, possible conditions or events in a country or region which will effect the business climate and the environment. Political risk is crucial for investments, especially if they are not meeting the expectations. All kind of structural changes within the political and economic system can be identified as sources of political risk. 3. The Globalization Process 3.1 Definition and Stages The globalization process is not starting today or just recently, it has been starting during the industrial revolution and was interrupted with the beginning of both world wars last century. Since the Cold War was ending 10 years ago, the globalization process is determining the world economy in different stages; the globalization process can be defined as: The globalization process as aggregate of political, economic and cultural forces means spatial economic integration and competition between inter-dependent regional and local world markets with competitive advantages, divers structures and opportunity sets utilizing resources and allocating factors for production, trade and consumption, finance and investment for national economies shaping the World Economic System. 3.2 Determinants of the Globalization Process Political and Economic structures, functions and processes, time and the political and economic space are decisive determinants for local and regional development effecting the business environment (Model). Global markets at local places and in regional areas are based on different - Geography, economic and terrestric structures, - Political management functions and processes, - Economic and political concepts for policy formulation and strategy implementation. 3.3 Changing Variables and Parameters of the Real World System (Model) These determinants are forming the cultural, political and economic space and are reason for competition based on divers structures, dynamics, integration and competitive functions, diversification and decentralization, localization and centralization. Policies of political – economic formation, transformation and transition are creating changing economic variables, parameters and patterns of factor allocation and exchange performed by global markets. 3.4 Policy Risks and Risk Futures For all business entities is it prime target to utilize these above determinants to gain and sustain competitive advantage on global markets, regionally and globally by managing the variables and parameters. Here, individuals, investors, corporations and governments are making choices and decisions towards strategies and policies, which imply chances, but also risks. Therefore we are talking about policy risks as well as about risk futures as policies are determining future outcomes. Global formation and transformation – sometimes transition – processes are indicating: - integration of markets - new technology - increasing knowledge enhancement of efficiency and productivity - intense human activity - emergence of complex diversified structures with special functions and processes 4. Political Risk Management 4.1 Method, Functions and Tasks - Policy and Strategy Formulation Risk identification, evaluation, assessment, analysis and cognition are crucial tasks in performing political risk management as integrative of the decision taking process. Companies applying the political risk management method for anticipating policy changes will be more successfully conduct - dynamic and efficient decision taking - maximizing possible gains - minimizing operational risks - determining financial objectives - qualified estimation of the extent of possible loss - improving their market position and competitive advantage - identifying new markets by meeting choices - re-evaluating investments These due diligence efforts are based on: - regulatory and legislative risk analysis - analytical methods to assess forces of the policy environment - consideration of company’s assets - including intellectual and human capital - transformation of good information in good decision taking and communication - development of understanding (rationalizing the perceptions) of outcomes produced by the business and political environment Last is focusing on particular political issues effecting the environment and leading to the analytical questions - what can happen with which policy - which target may be reachable or not - why under which conditions (reasoning) - and how to proceed and implement the strategic goal Political risk assessment is here targeted on the determination of the level of risk or probability of losses, depending on particular situation. As the description of the present conditions and situation may be not enough for decision taking, the assessment should include also a scenario or/and forecast (1 – 5 years) on conditions in future time when investments achieve certain maturity. Political risk analysis is determining the causes or sources of risk and designs the interrelationship, dependencies and interdependencies between them. Information can be analyzed, the stability of policy decisions foreseen, varying assumptions about preferred policies undertaken and certain means for early actions can be adopted. Forecasts and trend analysis can estimate probabilities of policies taking place and particular business changes. Scenarios can be taken for analyzing policy implications and strategic options to estimate possible outcomes. Mitigation between forecasts, trends, scenarios and the simulation of policy impacts in the political and business environment may provide - more transparence on the political environment - a deeper understanding of political dynamics of particular issues - resources can be efficiently allocated These means provide a higher degree of monitoring, evaluating and managing the policy risk which is a dynamic process. (Political Risk Management – Model ) 4.2 Country Risk Management – Determinants of Political Risk (Model) The application of above political risk management method, functions and tasks on different countries and therewith different political and business environments have following priorities: - Analysis of political stability - Analysis of key players - Analysis of operational obstacles - Analysis of security environment 4.3 Risk Policies and Strategies According to the determinants of risk, corporations and investors are confronted with a broad spectrum of risks, especially political risk, as it is associated with foreign ventures and investments, and their exposure to different cultures, customs, operational procedures, micro and macroeconomic environments etc. The political and economic variance of a country and its economic system has made the political risk management to become an essential component of any corporate strategy, of any profitable investment strategy or project implementation. To become and to remain competitive, it requires to integrate the political risk strategy into the decision making process and to use the risk methodology as a guide for policy formulation. The political risk strategy is suggesting alternatives according to different risk scenarios and is bridging the gap between the strategy implementation and the assumptions and expectations investors or project owners have. Political risk assessment and analysis are targeted on rationalizing arguments regarding single minded perceptions which might be hampering investments or projects regarding the efficient and dynamic allocation of resources. Meeting business opportunities means primarily the exposure to risks, and also facing the risks or negative consequences of unprofitable business environments, meaning possible losses. 5. Conclusion In summary, political risk management is not only contributing to the planning process, it is also providing guidance - to analyze the business environment and its socio – economic and political impacts - to figure out the expected value (cost, time and quality) of an investment - to rationalize the expectations - to project the level and extent of the risk exposure Therefore, following the political, economic and financial risk management method is a basic tool - to gain competitive advantage, - to cope with the globalization process, - to challenge market opportunities, - but also to face the probability of loss. That means also to foster members of corporations, the public sector and societies to enhance the management capacity through flexible and broader participation, innovation and creativity of individuals and groups to meet opportunities as well as risks. 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