The GW Center for the Study of Globalization
2033 K Street, NW, Suite 230 • Washington, DC 20052 • Phone: (202) 994-5206 • Fax: (202) 994-5284
Email: gwcsg@gwu.edu • http://gstudynet.org/
The total risk of an investment is typically measured by the volatility of its returns, cash flows, or other financial variables. In addition to industry, business cycle, and price risks, part of the total risk of foreign investments consists of political risks arising from operations in foreign countries. This project proposes to examine the political risks of U.S. direct foreign investments from a quantitative financial perspective. Specifically, it seeks to improve measurement of political risk by first calculating the total risk of U.S. direct foreign investments, and then removing observable causes of risk in order to focus on the unexplained risk.
The proposed empirical model identifies a country-specific component of risk, other than business cycle and price risks, which most likely represents political risk associated with U.S. investment abroad. A second objective of this project is to use the financial measures of political risk to quantify the effects of political risk on outflows of direct foreign investment from the United States. Once the effect is determined, U.S. government policies altering political risk—such as those of the Overseas Private Investment Corporation (OPIC) insuring U.S. corporations against foreign political risk—will be evaluated. This project will contribute to knowledge of globalization in two areas. First, it will advance the risk literature in finance by extending the analysis to unobserved sources of risk, and to political risk in particular. Second, it will advance the political risk literature in international business and international political economy by providing market-based, quantitative measures of political risk. The results also contain implications for managers and shareholders that are confronted with the tasks of assessing and managing political risk, as well as for government policymakers whose decisions are capable of altering political risk.
Reid W. Click (PI), Associate Professor, Department of International Business
How Risky is U.S. Direct Foreign Investment? A Study of Financial and Political Risks
Occasional Paper, CSGOP-02-05
The GW Center for the Study of Globalization
2033 K Street, NW, Suite 230 • Washington, DC 20052 • Phone: (202) 994-5206 • Fax: (202) 994-5284
Email: gwcsg@gwu.edu • http://gstudynet.org/