California Management Review

Abstract

A rational, sophisticated approach to the foreign investment decision process requires a careful examination by the firm of numerous factors which relate to both the general environment of a proposed investment and the specific operating functions of the firm in that environment. A vital element of the environmental analysis is the question of political instability. There are other types of political risk, but the emphasis here will be upon instability since it is generally the most significant form of political risk. Also, while many examples of political risk in relatively stable environments can be cited, the most dramatic, most common, most arbitrary actions normally result from political instability. Consequences of any political risk can be substantial. They run the spectrum from uncertainty and mild inconvenience to confiscation and violence. Past studies generally have indicated that businessmen attribute great importance to the potential impact of political instability while making foreign investment decisions.

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