Political Risk and Its Impact on Supply Chains
Political risk refers to political decisions, events or conditions that can result in significant financial loss if a business is not adequately prepared. These conditions include everything from taxes and development to revolutions and terrorism.
Without effective management of all types of political risk, your current and future business at great risk. Adverse political actions can range from very detrimental, such as widespread destruction due to revolution, to those of a more financial nature, such as the creation of laws that prevent the movement of capital.
In order to either grow new business and/or improve existing business in foreign markets, you must fully identify and carefully manage political risk— one of the PESTLE risk categories.
The Two Types of Political Risk
The two broad types of political risk are macro-level and micro-level political risk. Macro focuses on conditions that would impact all foreign firms. This can include government currency actions or expropriation. Micro focuses on conditions that are specific to an industry, business or project, which may include new regulations or the creation of a law that affects solely one industry. To truly mitigate risk, companies must be aware of and be prepared to manage these two types of political risk.
The Many Categories of Political Risk
Within the macro and micro political risk types, there are many different categories and causes of political risk. Here are some of the most common types of political risk that should be examined in a political risk analysis:
- Taxes. An increase in taxes can have significant adverse effects on a company’s profitability. And while a minority of large businesses may be able to find loopholes to dodge taxes, many small businesses can be hurt by complex tax rules. Any new taxes and rules can greatly impact multinational businesses.
- Legislation. New legislation may impact a business directly through government action or indirectly by affecting the purchasing habits or demands of customers. Direct impacts would include legislation that requires operational changes.
- Civil Disturbance. This category is broad and includes the following political risk examples, but is not limited to: civil/external war, terrorism, riots, coups and revolutions. Civil disturbances can result in threats to worker safety and supply chain disruption with associated operational and financial damage.
- The Economy. The administration and political climate of a country have great influence on the economy. This can directly impact businesses in many ways, including interest rates, which affect bond prices, inflation risk, currency risk and more.
It’s crucial to identify and manage all types of political risk to prevent supply chain/business disruptions. The political risk landscape is incredibly volatile companies must monitor for emerging threats.
How to Manage Political Risk
To best defend against adverse effects on profits and future success, companies must monitor for warning signs of political risk and other supply chain risk categories in order to create a truly effective supply chain risk management strategy. Designed as a cost-effective, off-the-shelf solution, LexisNexis Entity Insight helps customers proactively monitor political risk factors in their supplier and third party portfolio.
Unlike negative news monitoring using a traditional search engine and alerts, LexisNexis Entity Insight leverages a wide range of market intelligence and premium news sources that are often unavailable on the open web to help companies capture signs of reputational, regulatory, financial, and strategic risk and share those insights across the enterprise via RSS feeds, as well as on a dashboard that highlights risk trends. LexisNexis Entity Insight helps you anticipate and manage risk more effectively, gain better visibility and market intelligence on your supply chain and third-party portfolio