Political Risk Assessment in Nigerian Multinationals

Tue, 22 Mar 2016 16:30:00 GMT

The Business School’s Emerging Markets Research Group (EMERGE) heard James Mshelia from the University of Huddersfield, present his research on political risk assessment (PRA) by multinational firms in Nigeria.

James Mshelia became a PhD student in Huddersfield few years ago after his service in the Nigerian Navy where he developed a fascination for subjects such as operations and transport management. James has now completed a thesis that investigates the risk and rewards for multi-national firms that invest in his home country and is due to have his viva in few weeks.

James says about his research “The importance of Political Risk Assessment (PRA) for multinational firms investing in emerging markets has increased significantly with the growing rate of Foreign Direct Investment (FDI) globally. PRA is used for managing political risk, decision-making processes during firms’ internationalisation, and has been identified as one of the key determinants of FDI into developing countries. However, only a few empirical studies on PRA have been undertaken on emerging markets. Previous studies have shown that political risk has been evolving and has resulted in a range of consequences that have influenced the type of strategies which firms adopt, due to differences among countries. It is in recognition of this that the need to identify a country’s specific political risk factors and their consequences for multinational firms that this study is undertaken in Nigeria. Despite the flux in the political environment of the country with its population divided along cultural, ethnic, language and religious lines within its different geographical regions, Nigeria has witnessed a continuous inflow of FDI.

This research contributes to the assessment of political risk by identifying the determinants and indicators to examine how the consequences of political risk impact upon multinational firms, with a view to understanding the managerial practices associated with managing political risk in Nigeria. Six objectives were identified as follows: to investigate the determinants of political risk; to examine their impacts; to investigate the variables and indicators used to forecast political risk, to investigate the consequences of political risk; to explore practices of PRA in multinational firms and to identify strategies used to manage and mitigate political risk in Nigeria. Likewise, four hypotheses underpinning these objectives were formulated to understand the dynamics of the relationship between political risk and multinational firms in Nigeria. This study empirically used mixed methods to analyse data collected through statistical methods as well as using thematic and content analysis from 74 multinational firms in Nigeria. The dataset of the International Country Risk Guide (ICRG) PRA annual rating for Nigeria within the period 2011 to 2015 was also analysed.

Eight determinants of political risk in Nigeria were identified, which are significant for understanding how political risk emerged in different forms in the country. Twenty four risk indicators used for forecasting political risk were also identified with some appearing major and not retaining the same value within the country. Political risk types and their consequences for multinational firms vary from one part of the country to another and are significantly influenced by factors such as their perception of political risk, outcome of political risk assessment, degree of internationalisation, leverage, low financial risk and perceived rewards of internationalisation into a specific emerging market. This identifies a reason why some firms internationalise to specific countries and why some have been able to manage and mitigate political risk. The case of Nigeria has shown that the presence of high political risk does not deter firms if the financial and economic risk is low. It reveals also that the practice of PRA differs within firms and that the strategies used to mitigate political risk mostly involve the conduct of PRA and engagement in Corporate Social Responsibility (CSR). The study also shows that PRA methods or techniques are like theories which cannot be true or false but only more or less useful, depending on the accuracy of the data and the results obtained from a country. The study offers an insight into the dynamics of the relationship between political risk and multinational firms in the context of emerging markets. My thesis represents the first piece of empirical PRA research conducted on Nigeria.”

Professor John Anchor, Director of the Emerging Markets Research Group, says “James’ research makes an important contribution to knowledge about political risk assessment in emerging markets. It also has practical implications for the conduct of political risk assessment by multinational firms in a variety of geographical contexts. Although there are a variety of interesting elements to his findings, I have been particularly struck by the regional differences which have emerged from the Nigerian case study”.

Back to news index - March