Term:
Spring 2003 Fax: (212) 658-9800
Course
Number: PSCI 498-640 PHONE: (484) 432-5239
Course
Location: Williams 421 office
hours: by appt.
Course
Time: T 6-9:10 p.m.
The 2001 World Trade Center attack, the European Union’s imposition of deal killing conditions on the proposed GE/Honeywell merger in the same year, the 1994 collapse of the Mexican peso after a political inspired government spending spree, and the 1990 Gulf War all represent instances where political risks inflicted serious economic costs. Generally speaking, political risks refer to issues at the macro- and micro-level such as war, regime change, political instability, economic sanctions, and government immobilization that can impose meaningful financial losses. These risks, which may result from the actions of societal groups, governments, and international organizations, can produce serious business downturns, painful asset expropriations, and troublesome capital controls.
This course will draw upon practitioners, renowned works on political risk management, and class discussion to address five key questions:
(1) What are the types of political risks that businesses confront?
(2) How does one assess country risk in the international and domestic realms? What are the “risk indicators” and frameworks that scholars and risk managers in the private and public sectors use to gauge the potential for specific political risks to impose losses?
(3) How does one analyze risk at the supranational level? What factors increase the chance for adverse policy decisions by international organizations?
(4) How does one evaluate risk at the subnational level?
(5) What are the organizational structures and financial instruments that businesses can use to manage political risk?
This class also will develop your ability to provide financially relevant on-the-spot briefings and reports to clients such as senior managers, investors, lenders, currency traders, and insurers.
Version: January 12, 2003
COURSE REQUIREMENTS (*all requirements are
subject to change)
(1) Regular attendance and active class participation (25%).
(2) One or two presentations of the readings (depending on their length) listed under the heading “required readings” (20%).
(3) Two on-the-spot individual, unannounced briefings (10%).
(4) A midterm (20%) currently scheduled for March 18.
(5) A 20-25 page team risk report/presentation on an industry such as the banking, energy, or high-tech industries, or a “risk issue” such as global norms, non-governmental organizations, or human rights (25%). Detailed instructions will be provided on February 11. Note: Students will submit one peer evaluation on their team members. Poor evaluations could have an adverse effect on the grade received for the course.
COURSE MATERIALS
a) The following texts are required for the course and available at the Penn Book Center, 130 S. 34th Street, (215) 222-7600:
b) The following texts are required and should be ordered ASAP through Harvard Business School Publications (http://www.hbsp.harvard.edu/products/cases/index.html or call 800-545-7685).
(1) Busang: River of Gold (A), product #798002; (2) Note on Political Risk Analysis, product #798022; and (3) White Nights and Polar Lights: Investing in the Russian Oil Industry, product #795022.
II. Reader: Available at Campus Copy Center, 3907 Walnut Street, (215) 386-6410.
III. Magazines: Students are required to subscribe to The Economist, which I will distribute in class. The cost of the subscription is approximately $25 for the semester. You can pay with a check (made out to The Economist) or cash (in the exact amount). All payments must be made by the 2nd week of classes.
COURSE SCHEDULE (*all aspects are subject
to change)
I. January 14 - Introduction to Course
and the Topic of Political Risk
What is political risk? Why should we care? What political risks should we study
(clients, fires, and theories)? Where
can we obtain information on political risk?
► Required readings
Dickson, Thomas I. 1983. “Use of Government Information Resources in Investment Searches: A Case from Southern Italy,” pp. 161-167 in BOOK 1.
Marks, Siegfried. 1988. “Sourcing Information for Improved Risk Analysis,” pp. 187-194 in BOOK 3.
Raddock, David M. 1986. “Political Risk: Some Salient Questions,” pp. 1-9 in BOOK 2.
Roberts, Edward G. 1988. “Country Risk Assessment: The Union Carbide Experience,” pp. 1-12 in BOOK 3.
Sassi, John D. and Shaheen F. Dil. 1983. “The Art of Corporate Crystal Ball Gazing: Political Risk Analysis Experiences at Gulf Oil Corporation,” pp. 1-13 in BOOK 1.
► Recommended readings
Johnston, Richard and Jason Cook. 2000. “Managing Global Emerging Markets Risk.” In Ezra Zask, ed., Global Investment Risk Management: Protecting International Portfolios Against Currency, Interest Rate, Equity, and Commodity Risk (New York: McGraw-Hill). pp. 223-236.
Markwick, Sandy. 1998. “Trends in Political Risk for Corporate Investors.” In Theodore H. Moran, ed., Managing International Political Risk (Malden: Blackwell Publishers), pp. 44-56.
Moran, Theodore H. 1998. “The Changing Nature of Political Risk.” In Theodore H. Moran, ed., Managing International Political Risk (Malden: Blackwell Publishers), pp. 7-14.
Wells, Louis T. 1998. “God and Fair Competition: Does the Foreign Investor Face Still Other Risks in Emerging Markets?” In Theodore H. Moran, ed., Managing International Political Risk (Malden: Blackwell Publishers), pp. 15-43.
II. Jan. 21 - Library Orientation Tour
III. Jan. 28 - The Political Risk Industry
Who are the players in the political risk
industry? What do these players
do? Who should be responsible for risk
management? What facets does a risk
assessment program need to incorporate?
► Required readings
Bruce, David. 1983. “Integrating Political Risk Methodologies at a California International Bank,” pp. 131-139 in BOOK 1.
Coplin, William D. and Michael K. O’Leary. 1986. “Uses of Political Risk Information,” pp. 235-247 in BOOK 2.
Gould, David F. 1983. “Political Risk Assessment in the Corporate Planning Environment,” pp. 15-25 in BOOK 1.
McCullock, Wendell H. 1986. “Country Risk Assessment (CRA) by Banks,” pp. 121-135 in BOOK 2.
Roberts, Edward G. 1988. “Country Risk Assessment: The Union Carbide Experience,” pp. 1-12 in BOOK 3 (REPEAT READING).
Spar, Debora, Heidi Deringer, and Jennifer Wang. 1997. Note on Political Risk Analysis (Cambridge: Harvard Business School Publishing, 9-798-022).
► Recommended readings
Butterworth, Mark. 2001. “The Emerging Role of the Risk Manager.” In James Pickford, ed., Mastering Risk, Vol. 1: Concepts (Harlow: Financial Times/Prentice Hall), pp. 21-25.
Kelly, William P. 1983. “Political Risk Assessment: Half the Equation,” pp. 149-159 in BOOK 1.
Li, Richard P. 1983. “Investment and Political Risk Analyses: Framework and Strategies,” pp. 115-129 in BOOK 1.
Suzman, Cedric L. and Mahendra Srivastava. 1986. “Country Risk Assessment by Regional Banks,” pp. 101-120 in BOOK 2.
IV. Feb. 4 - Risk Assessment Models I: The
Private Sector: Consultants, Corporations, and Rating Agencies
What is the Moody’s model? What is
PRINCE? What is the General Motors
model? What is the Standard & Poor’s model? How does one use these models?
What variables do these models emphasize? What are the limitations of these models?
► Required Readings
Coplin, William and Michael O’Leary. 1986. “The Frost and Sullivan Method: Applying the ‘Prince.’” In David M. Raddock, ed., Assessing Corporate Political Risk: A Guide for International Businessmen (Totowa: Rowman & Littlefield), pp. 163-175 [READER].
Rayfield, Gordon. 1988. “General Motors Political Risk Ratings: Assessment of a Track Record,” pp. 172-186 in BOOK 3.
Nye, Roger P. 1988. “Capital Markets and Country Risk: Sovereign Credit Assessment at Moody’s,” pp. 13-35 in BOOK 3 (SKIM).
Nye, Roger P. 1997. “Sovereign Credit Ratings: A Subjective Assessment,” pp. 101-118 in BOOK 4.
► Recommended readings
Beers, David. 2000. “Sovereign Credit Ratings: A Primer.” In Ezra Zask, ed., Global Investment Risk Management: Protecting International Portfolios Against Currency, Interest Rate, Equity, and Commodity Risk (New York: McGraw-Hill). pp. 139-159.
Culp, Christopher, Ron Mensink, and Andrea M.P. Neves. 2000. “Value at Risk for Asset Managers.” In Ezra Zask, ed., Global Investment Risk Management: Protecting International Portfolios Against Currency, Interest Rate, Equity, and Commodity Risk (New York: McGraw-Hill). pp. 187-214.
Howell, Llewellyn D. 1986. “Area Specialists and Expert Data: The Human Factor in Political Risk Analysis,” pp. 47-84 in BOOK 2.
Irwin, William T. 1998. “Political Risk: A Realistic View toward Assessment, Quantification, and Mitigation.” In Theodore H. Moran, ed., Managing International Political Risk (Malden: Blackwell Publishers), pp. 57-69.
Jordan, Patrice M. 1998. “Rating Debt Issues Secured by Offshore Receivables.” In Theodore H. Moran, ed., Managing International Political Risk (Malden: Blackwell Publishers), pp. 112-119.
V. Feb. 11 - Risk Assessment Models II (The Public Sector: Government and International Organizations). Discussion of research/presentation project
What is the Export-Import Bank model? What is the Canadian Export Development
Corporation model? How does one use
these models? What variables do these
models emphasize? What are the
limitations of these models?
► Required Readings
Doyle, Patrick. 1983. “Political Risk Assessment: The View from an Export Credit Agency,” pp. 27-54 in BOOK 1.
Nairne, Stephen. 1997. “Political Risk on Shifting Sands,” pp. 24-42 in BOOK 4.
► Recommended readings
Stephens, Malcolm. 1998. “A Perspective on Political Risk Insurance.” In Theodore H. Moran, ed., Managing International Political Risk (Malden: Blackwell Publishers), pp. 148-168.
VI. Feb. 18 - The Causes of Great Power War, War in the Developing World, and Terrorism
What are great powers and what
increases/decreases the likelihood of great power war? What is the developing world and what
factors increase/decrease the prospects for war among developing states?
► Required readings
Holsti, K.J. 1992. “International Theory and War in the Third World,” pp. 37-60 in Brian L. Job, ed., The Insecurity Dilemma: National Security of Third World States (Boulder: Lynne Rienner Publishers) [READER].
Jervis, Robert. 2002. “Theories of War in an Era of Leading Power Peace,” American Political Science Review, Vol. 96, No. 1 (March), pp. 1-14 [READER].
LaFeber, Walter. 2002. “The Post September 11 Debate over Empire, Globalization, and Fragmentation,” Political Science Quarterly, Vol. 117, No. 1 (Spring), pp. 1-17 [READER].
Levy, Jack S. 1989. “The Causes of War: A Review of Theories and Evidence.” In Philip E. Tetlock et al., eds., Behavior, Society, and Nuclear War, Vol. 1 (New York: Oxford University Press), pp. 209-333 [READER].
► Recommended readings
Ayoob, Mohammed. 1995. The Third World Security Predicament: State Making, Regional Conflict, and the International System (Boulder: Lynne Rienner).
Huth, Paul K. 2002. The Democratic Peace and Territorial Conflict in the Twentieth Century (Cambridge: Cambridge University Press).
Lemke, Douglas. 2002. Regions of War and Peace (Cambridge: Cambridge University Press).
Van Evera, Stephen. 1999. Causes of War: Power and the Roots of Conflict (Ithaca: Cornell University Press).
Vasquez, John, ed. 2000. What Do We Know about War? (Lanham: Rowman & Littlefield).
VII. Feb. 25
- Revolutions, Regime Change, and Political Instability
What factors
produce revolution? Why should we
care? What is regime change and how can
it affect business adversely? What
causes regime change (e.g., coups d’état) and under what conditions is it more
likely? What is political instability
and what are its implications for business?
What forces lead to political instability (e.g., ethnic strife) and
under what conditions is it likely to be more severe?
► Required readings
Andriole, Stephen J. and Gerald W. Hopple. 1983. “An
Overview of Political Instability Research Methodologies: Basic & Applied
Recommendations for the Corporate Analyst,” pp. 75-98 in BOOK 1.
Goldstone, Jack A. 1994. “The Comparative and
Historical Study of Revolutions.” In Jack A. Goldstone, ed., Revolutions: Theoretical, Comparative, and
Historical Perspectives (Fort Worth: Harcourt Brace), pp. 1-17 [READER].
Taras, Raymond C. and Rajat Ganguly. 1998. Understanding Ethnic Conflict: The
International Dimension (New York: Longman), pp. 3-40 [READER].
Veit, Winfried. 1986. “Political Instability and
Political Risk: Some Observations from German Foreign Policy and Economic
Relations,” pp. 22-36 in BOOK 2.
► Recommended readings
Abrahamian, Ervand. 1994. “Structural Causes of the
Iranian Revolution.” In Jack A. Goldstone, ed., Revolutions: Theoretical, Comparative, and Historical Perspectives
(Fort Worth: Harcourt Brace), pp. 129-146.
Byman, Daniel and Stephen Van Evera. 1998. “Why They
Fight: Hypotheses on the Causes of Contemporary Deadly Conflict,” Security Studies, Vol. 7, No. 3
(Spring), pp. 1-50.
Green, Jerrold D. 1994. “Countermobilization in the
Iranian Revolution.” In Jack A. Goldstone, ed., Revolutions: Theoretical, Comparative, and Historical Perspectives
(Fort Worth: Harcourt Brace), pp. 136-146.
Green, Justin and Daniel Druckman. 1986. “Experts in
Political Risk Analysis: A Risky Basis for Estimates,” pp. 85-100 in BOOK 2.
Gurr, Ted Robert. 1995. Minorities at Risk: A Global View of Ethnopolitical Conflict
(Washington, DC: United States Institute of Peace), pp. 123-138.
Houman Sadri A. 1997. Revolutionary States, Leaders, and Foreign Relations: A Comparative
Study of China, Cuba, and Iran (Westview: Praeger).
Mueller, Anton P. 1986. “On the Utility of the Price
Index and the Government Budget as Country Risk Indicators,” pp. 197-211 in BOOK 2.
Raddock, David M. 1986. “Assessing Domestic Politics.”
In David M. Raddock, ed., Assessing
Corporate Political Risk: A Guide for International Businessmen (Totowa:
Rowman & Littlefield), pp. 6-40.
Walt, Stephen M. 1996. Revolution and War (Ithaca: Cornell University Press).
VIII. March 4 - Public policy making at the country level and state capacity
Who are the key actors in policy
formulation? How do their interests
filter into the policymaking process?
How do we evaluate the potential for adverse policy changes? How do we determine the ability of a country
to maintain order? How do we assess the
capacity of a country to implement an economic development strategy? How do we evaluate the ability of a country
to keep its project specific promises?
► Required readings
Anderson, David H. 1997. “The Brazilian Personal Computer Industry: A Business Environment Assessment,” pp. 147-170 in BOOK 4.
Brewer, Thomas L. 1986. “The Political and Economic Environment of Government Controls on MNCs’ Funds Transfers: Evidence from Argentina and Its Implications for Country Risk Analysis,” pp. 226-234 in BOOK 2.
Snider, Lewis W. 1988. “Political Capacity and the Credit Worthiness of LDC Debtors: Combining Aggregate Data with Quantified Judgment,” pp. 117-152 in BOOK 3.
Spar, Deborah, Jeffrey Bell, Christine Dinh-Tan, and Philip Purnama. 1998. Busang (A): River of Gold (Cambridge: Harvard Business School Publications, 9-798-002).
Williamson, Sandra D. 1997. “Mexico 1994: Devaluation Should Not Have Been a Surprise,” pp. 171-194 in BOOK 4.
► Recommended readings
Jones, Randall J. 1988. “Forecasting Hostile Government Actions against Oil Companies: The Case of Nigeria,” pp. 195-204 in BOOK 3.
Risse-Kappen, Thomas. 1991. “Public Opinion, Domestic Structure, and Foreign Policy in Liberal Democracies,” World Politics, Vol. 43, No. 4 (July), pp. 479-512.
Snider, Lewis W. 1986. “Political Capacity and Political Risk: The Development and Validation of a Measure,” pp. 152-179 in BOOK 2.
Thompson, Robert Smith. 1986. “Political Risk Assessment and the People’s Republic of China,” pp. 37-46 in BOOK 2.
IX. March 11 – SPRING BREAK. NO CLASS.
X. March 18 – MIDTERM/Possible Guest Speaker.
XI. March 25 - Subnational Actors and Political Risk
► Required readings
Thiers, Paul. 2002. “Challenges for WTO Implementation: Lessons from China’s Deep Integration into an International Trade Regime,” Journal of Contemporary China, Vol. 11, No. 32 (August), pp. 413-431 [READER].
Von Der Mehden, Fred R. 1983. “Sub-National Issues in Political Risk Analysis,” pp. 55-63 in BOOK 1.
Yang, Dali L. 1994. “Reform and the Restructuring of Central-Local Relations.” In David S.G. Goodman and Gerald Segal, eds., China Deconstructs: Politics, Trade, and Regionalism (London; Routledge), pp. 59-98 [READER].
XII. April 1 - International Organizations and IO policy making
How do international organizations pose
political risks? Who are the key actors
in policy formulation? How do their
interests filter into the policymaking process? How do we assess the prospects of adverse policy changes?
► Required readings
Hix, Simon. 1999. The Political System of the European Union (New York: St. Martin’s Press), chaps. 1, 7-8, 12 [READER].
Pentland, Charles. 1989. “International Organizations and their Roles.” In Paul F. Diehl, ed., The Politics of International Organizations (Chicago: Dorsey Press), pp. 5-14 [READER].
► Recommended readings
Nugent, Neill. 2001. The European Commission (New York: Palgrave).
Randall, Julian and Bridget Treacy. 2001. “Digital Buccaneers Caught in a Legal Web.” In James Pickford, ed., Mastering Risk, Vol. 1: Concepts (Harlow: Financial Times/Prentice Hall), pp. 169-175.
XIII. April 8 - Risk Management Tools
What instruments can risk managers exploit
to diversify or hedge against political risks?
What is the value of scenario planning?
► Required readings
Brewer, Thomas L. 1988. “MIGA: A New Organization to Promote and Protect Private Direct Investments in Developing Countries,” pp. 36-45 in BOOK 3.
Gregory, Ann. 1988. “Integrative and Protective Techniques in Reducing Political Risk: A Comparison of American and Canadian Firms in Indonesia,” pp. 98-116 in BOOK 3.
Management International. 1983. “Country Risk Management-An International Banker’s Approach,” pp. 141-147 in BOOK 1.
Spar, Deborah, William W. Janosz, and Julia Kou. 1995. White Nights and Polar Lights: Investing in the Russian Oil Industry (Cambridge: Harvard Business School Publishing, 9-795-022).
Rossiter, W. David, Richard S. Karplus, and Nicholas Jones, “Managing for the Future: The Scenario Technique,” pp. 136-151 in BOOK 2.
► Recommended readings
Harley, Mike. 2001. “Lowering Exposure by Spreading the Risk.” In James Pickford, ed., Mastering Risk, Vol. 1: Concepts (Harlow: Financial Times/Prentice Hall), pp. 53-57.
Moran, Theodore H. 1998. “Lessons in the Management of International Political Risk from the Natural Resource and Private Infrastructure Sectors.” In Theodore H. Moran, ed., Managing International Political Risk (Malden: Blackwell Publishers), pp. 70-84.
Moran, Theodore H. 1998. “Political Risk Insurance as a Tool to Manage International Political Risk.” In Theodore H. Moran, ed., Managing International Political Risk (Malden: Blackwell Publishers), pp. 139-147.
Salinger, John J. 1998. “The Future of Private Political Risk Insurance.” In Theodore H. Moran, ed., Managing International Political Risk (Malden: Blackwell Publishers), pp. 169-172.
Schwartz, Peter. 2001. “The Official Future, Self-Delusion, and the Value of Scenarios.” In James Pickford, ed., Mastering Risk, Vol. 1: Concepts (Harlow: Financial Times/Prentice Hall), pp. 42-46.
Zask, Ezra. “Trading Risks in International Investments-Why Market-Neutral Strategies Sometimes Fail.” In Ezra Zask, ed., Global Investment Risk Management: Protecting International Portfolios Against Currency, Interest Rate, Equity, and Commodity Risk (New York: McGraw-Hill). pp. 215-222.
XIV. April 15 – Political Risk and the Pharmaceutical Industry, Part I
No assigned readings
XV. April 22 – Political Risk and the
Pharmaceutical Industry, Part II, Course Conclusion, and PRESENTATION
OF TEAM RISK REPORT