Political risk assessment by multinational firms in Nigeria

The study offers an insight into the dynamics of the relationship between political risk and
multinational firms in the context of emerging markets. Political Risk Assessment (PRA)
importance for multinational firms investing in emerging markets has increased significantly with the growing rate of Foreign Direct Investment (FDI) globally. It is used for managing political risk, and 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 in 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. 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 critically analysing 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. This study empirically used a sequential mixed
method strategy to analyse statistically as well as using thematic and content analysis data
collected through a multi-method approach 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.
The study identifies eight determinants that contribute to the emergence of political risk.
It highlighted factors that influence the consequences of political risk on multinational
firms which supports the conceptual premise for identifying reasons why firms manage and mitigate political risk in countries, and why some internationalise into specific countries. Empirically, it showed that the impact of political risk varies from one part of a
country to another, as do the consequences of their impacts which inform why multinational firms are located more in some parts of the country, and how the consequences of political risk will differ between firms, depending on their location in a country. These findings have implications for practice and showed that firms could improve their conduct of PRA, influence the type of strategies they adopt and how to
explore quantitative PRA methodologies when operating in similar emerging markets. This
study also showed that some risk indicators used for forecasting political risk appeared
major and did not retain the same value within the country. The case of Nigeria showed
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)