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Free Economics Dissertations - Political Risk Transition

Political Risk Transition

How s does political risk affect the inflow of FDI in transition countries:

Turkmenistan

Abstract

It is generally accepted that political risk is most prevalent in relation to countries that are in a transitional stage of political and economic development and that corporations have a need to assess the level of risk and develop strategies to enable them to efficiently manage this risk prior to and during the FDI process. These assessments include an element of perception rather than factual information, a position which is generally accepted by academic and professional observers.

This research was designed to evaluate how this perception changes given certain conditions. It was found that there needs to be two new models introduced into the theory surrounding the perception of political risk to make it complete.

These relate to the influence that a specific country has upon the perception of political risk (SCPR) and the concerns related to external political pressure that might be exerted upon the host nation (EIPR).

It is concluded that these two factors have an impact upon political risk that can be seen to customise the perception to a specific set of circumstance in addition to those expressed within the general literature relating to this discipline.

Acknowledgements

Chapter 1 - Introduction

1.1 Introduction

Risk is part of the harsh realities of every aspect of corporate activities and operations (Robock and Simmonds 1973) and accompanies most corporate opportunities. Therefore identifying, evaluating and assessing whether the business is prepared to accept that risk or walk away from the opportunity is an essential element of the business corporate strategy.

In essence this decision will be determined by the perception that the impact of risk will have upon the future financial performance of the business, the potential loss of resources it might suffer if it ignored the consequences of the risk and the extent to which the risk can be managed and mitigated.

Many risks encountered by corporations are generated by external issues and environments outside of their control. Of these, perhaps the most complex in terms of understanding, assessment and managing, is political risk, over which corporations have limited influence (Agmon 1985). As with all risk, there are varying degrees of political risk.

They can occur because of changes in government policy, the type of government in power or from the level of political instability that exists within a particular country. From this understanding, it is clear that multinational corporations face the greatest threat from political risk and, furthermore, that nowhere is this more likely to manifest itself than when these corporations are considering economic investment in operations in countries which are in a process of transition, in other words the world’s emerging economies.

The difficulties facing these multinationals is that many of these transitional nations have significant levels of natural resources, which are crucial to the economic stability of the developed world. The most critical of these is oil and gas, which are two of the worlds most traded and sought after commodities (Noreng 2005, p.33).

Therefore, political risk that interferes with the flow of these products is of serious concern, both to the western powers and, equally importantly, to the multinational corporations involved with the exploration, extraction and transportation of these commodities (Lax 1983).

It is the political risk, and the corporation’s and other stakeholders’ perception of this risk as it relates to these products that has inspired this research. Of particular interest in this respect is the increasing discovery of oil and gas reserves in the CIS regions. With the perceived need to reduce dependency upon the Middle East for these natural resource products, major international players in the oil and gas industry are concentrating more of their efforts upon developing operations within this area of Europe.

However, with many of these independent states, most of which have only recently emerged from the former Soviet Union, at a very delicate stage of democratic development, political risk has become a major aspect of the corporate strategy of international trade in this region.

This research project, using Turkmenistan as a case study, intends to expand the understanding of the extent to which political risk in this environment affects the level of oil industry foreign direct investment into these transitional states. It will also include an overview of what elements the political regime within the host country perceives as influencing the level of political risk that is present.

1.2 Aims and Objectives

Based upon the intentions outlined in the previous section, the aim of this research is to evaluate the accuracy of the following hypothesis, this being that: -

“The perception of political risk and instability in transitional economies such as Turkmenistan is having an adverse impact upon the level of foreign direct investment into the country.”

To address this aim, secondary and economic data relating specifically to Turkmenistan and its oil and gas resources and strategy will be included within the research. These will be supported by interviews and discussions that have taken place with corporate representatives from the oil and gas industry and other stakeholders. To provide a framework for this study, the following three objectives have been set: -

• Political risk

To provide an understanding of the theoretical and practical elements of political risk, including an overview of how these can be measured, managed and mitigated by corporations intending to invest in nations where such risk is evident. In addition, the intention is to provide a comparison between the external and internal view of the determinants of political risk within the host country.

• Perception of Political risk

Using Turkmenistan as an example, the intention is to assess the perception of political risk, together with its causes and effects, from the viewpoint of different stakeholders within the oil and gas industry.

• Foreign direct investment

To provide an overview of FDI, including the beneficial impact it provides for emerging and transitional economies. In addition, this objective will also focus upon the extent to which political risk impacts upon the decision-making process for FDI and/or the levels of investments being made.

1.3 Overview

This research project dissertation has been organised in the following manner. Directly following this introduction, a critical literature review of existing studies and publications relating to the issues being addressed by this research, namely the elements of political risk and the models adopted for management of this risk, will be presented in chapter two.

In chapter three it is intended to explain the methodology used for this study which, following an overview of the various research methods available, will contain a explanation of the reasons for the chosen route and a brief guide to the manner in which the research was performed. The findings from secondary data, particularly that which relates to the political structure and oil and gas industry of the case study nation, Turkmenistan, is presented and discussed in chapter four.

Following this, the findings resulting from the primary data sources, these being mainly based upon interview responses, will be outlined in chapter five. A discussion, evaluation and comparison of the findings from both the preceding chapters will take place in chapter six.

Finally, the research will be brought to a conclusion in chapter seven, where appropriate recommendations, both in terms of the practicalities of FDI into transitional economies and areas where it is considered that further research would add value to the results of this project.

Attached to the main body of this study is a bibliography of the resources that have been relied upon and referred to during the course of the research. In addition appendices, including information that is considered by the author to add to the understanding of the research content, for example the transcripts of the interviews conducted, are attached.

Chapter 2 Literature Review

This critical literature will focus upon the existing discussions that have been published in relation to three aspects of political risks for foreign investment. These include the definition and theories of political risk, how it manifests itself within developing and transitional economies and the management and mitigation of that risk.

2.1 Theoretical definitions of political risk

According to Brinks (2004, p.3), political risk first became recognised as a discipline that needed to be considered by corporations and academics in the mid 1970’s. It is generally believed that this occurrence coincided with the oil energy crisis that occurred in 1973 although other academics, such as Lax (1983), Turnock (2005), Marinova and Marinov (2003) indicate the increase in the process of globalisation had an equally important impact upon the expansion of political risk studies.

As is often the case with academic studies, the finding of a generally accepted definition of the subject being studied is not easy, particularly where a complex issue is being addressed. Such has proven to be the case with political risk, which has generated a number of definitions and theories within the academic publications from various international business sources.

One of the examples of political risk is given by Agmon (1985, p.7), who defines it as “the unanticipated changes in political factors that affect the relative prices of traded factors of production, goods and services caused by the actions and reactions of governments and other political groups within and between countries”. Although this definition can give a clear picture of what political risk is, it is argued by (Leopold G, 1998) in his study that it is restrictive in contrast to the extensive definition, in that it encompasses only political instability and is originated exclusively in the state activities.

According to Leopold (1998 p.17), political risk should be considered as a financial phenomenon, and defined as resulting from the unpredictable demands raised by foreign state or society on the assets, returns or profits achieved for shareholders from corporation international investment. Another common example of extensive definition of political risk is offered by Robock and Simmonds, (1973).

These authors suggest that political risk in foreign direct investment exists when discontinuities occur in the business environment, when they are difficult to anticipate, and when they result from political change. It can be seen that the definitions of the political risk given above have progressively become more descriptive in nature, and thus can potentially reduce understanding of the subject. Political risk is a complex issue that has produced widespread coverage in recent decades, which is perhaps why it is so difficult to find a single simple explanation of this phenomenon.

However, other academics have sought to simplify these definitions in an attempt to make their use within research more practicable. For example, Brink (2004, p.18) has founded her work on the basis that political risk is simply related to the impact that actions taken by a host government has in reducing the revenue or profits of a corporation operating within its state.

This simplified definition is also used by others, such as Olcott (2005) and Brada et al (2005). However, in the international environment, perhaps the simplest and most practicable definition is provided by Dan Haendel (1973, p.5), where he identifies political risk faced by foreign investor as being “the risk or probability of occurrence of some political events that will change the prospects for the profitability of a given investment”.

Thus, Haendel is concurring with Brink’s (2004, p.1) view that foreign investment projects are subject to the sovereignty or the host state and therefore likely to be at risk from any change in that states political nature, structure and the legislation that it introduces.

To conclude the definition of political risk, Leopold (1998) in his study provides an informal and descriptive list of factors that should be considered by the foreign investors entering a new territory. These political risk issues for investors have been outlined as follows:

• Stable economic government, without high inflation

• Fair and equal treatment from the host government

• Freedom from arbitrary and changing government laws

• Free movements of profits from the host country in both directions as well as an to be able to sell or liquidate investment and furthermore withdraw funds from the country

• Political willingness and ability to make structural reforms

Source: See Eng v. Maximo et al. (1998); Global finance 2nd ed., USA, p. 427.

2.2 Component parts of political risk

Although these definitions of political risk cover the overall discipline, within this area it is also important to analyse the intention of the risk itself. For example, one has to identify whether different distinctions must be made when assessing if a new regulation passed by the government poses a direct threat to the company’s investments or if the stability of the structure of the government itself is creating the risk.

In an article by Daniel Wagner, (2000) of the International Risk Management Institute, the author outlines two different political risk kinds. One is a firm-specific political risk and second is a country-specific political risk. According to Wagner, firm-specific political risk is of a discriminatory nature, as this is directed towards a single company or industry sector.

For example, this sort of political risk happens when a country raises tariffs for a particular product, which is an industry-wide risk, or nullifies the product sharing agreement (PSA) with a specific corporation. Country-specific political risk is more generalised in that it poses a threat to the performance of all corporations operating within that national environment, whereas that which is aimed at a specific firm or industry is discriminatory.

An example here could be government’s decision to put limitations on the amount of profits that can be withdrawn from the country, or currency convertibility limits. Indeed, as the studies of Marinova and Marinov (2003) and Lax (1983) show, it is possible to make further distinctions that relate to specific industries.

For example, with natural resources, such as the oil and gas sector, it is possible that the actions of host governments will be targeted towards all of the corporate players within this industry, whilst having no impact on foreign corporations operating outside of this industry.

Another distinction to be made in the analysis of political risk, and which is again promoted by Wagner, is that which exists between government risks and instability risks. Wagner argues that government risk is self-made and has a specific political purpose, whether legal or not, and that it arises from the actions of the government to tackle any given issue that they think is appropriate, like tax increases etc.

In contrast, instability risks can arise because of the structural nature of the government operating in the target country, or from political power struggles, both of which can create political instability. In essence all of these aspects can be analysed within the following matrix (figure 1).

Figure 1 types of political risk

Brink (2004, p.19) also suggests that there is another identifying factor between country and political risk. Her research suggests the former label can be applied to a state that is unable to repay debt whilst the latter can be related to a country that is unwilling or refusing to repay debt.

This theme is echoed by Marinova and Marinov (2003, p.61-62) who suggest political risk brings with it the potential for currency risk. However, to a certain extent it could be said that these financial conclusions are an automatic consequence of the impact of the issues outlined within the matrix in figure 1.

2.3 Political risk in developing economies

Lax (1983), Carmignani (2003), Brink (2004) and other academic are all agreed that political events and actions are having an increasing impact upon the expansion of corporate operations abroad. With this process set to continue for the foreseeable future, the importance of including political risk within the development of international strategic decisions is self evident.

In order to ensure that inherent risks attached to the actions within the varied political environments that exist around the globe, these risks need to be addressed. This is particularly the case when the corporation is dealing with developing and emerging economies, which would include the study country of Turkmenistan.

Olcott (2005, p.16), Ascher and Mirocitskaya (2000, p.2) and Campos and Nugent (2003, p.533), whose studies are particularly related to the CIS states in Central Asia, consider that most of the states within this region are still displaying elements of political instability. The consensus drawn from the conclusions of these studies is that this is having the effect of increasing the political risk for those foreign corporations considering investment within these areas.

However, in addition to the level of political instability that might exist within the transitional county, a number of other factors can contribute to the risk element. Bevan and Estrin (2004, p.8) have indicated specific issues that foreign corporations need to face when assessing the viability of investment in nation’s displaying political instability.

A key element within these issues is the political attitude being displayed towards FDI, with many emerging nations showing reluctance to accept the loss of political control that they perceive will accompany such a move. Therefore, there is an inclination to introduce polices that might be considered unfavourable to the foreign investor.

In addition, serious consideration needs to be given to the existing “tax regimes, the transparency of legal regulations and the scale of corruption” as adverse action within any of these areas will have an impact upon profitability and the return on investment achievable.

By their very nature transitional economies, especially those that are evolving from a historically communist background, also have property rights issues (Walters 2000, p.7). The concept of confiscation without recompense is historically inbuilt within the cultural development of the political structure of these transitional nations and is therefore not something one can expect to be addressed in a few years.

As Walters (2007, p.7) notes in his study, the oil industry is attempting to address this specific situation through the introduction of “production sharing agreements (PSA’s).” The purpose of these agreements is to create a situation whereby, through their commitment to the contract, both parties, being the government and the corporation, become answerable under international law to fulfil the terms and conditions of the agreement.

However, the difficulty is that the PSA’s have to be ratified by the host country’s national government and, more importantly, that government has to be relied upon to comply with international law should a dispute arise that requires intervention from this source, even if that intervention is contrary to what the government in question perceives to be their rightful cause. It follows that these PSA agreements are therefore only as valuable and enforceable as the host government is prepared to allow them to be.

Therefore, it is not surprising that, within the developing and transitional economies of the world, the risk of political stability has been found to be higher than it would be within a developed nation (Minova and Marinov 2003, p.61-62). As discussed previously, this is certainly likely in a situation where that country is at an early stage of transition, as has been witnessed in some of the eastern European countries such as Russia and others within the former Soviet Bloc.

Similarly, the type of political structure that such countries develop will also have an impact upon political risk. For example, as Lax (1983), Marinova and Marinov (2003) and Brinks (2004) have all discussed, where there is an authoritarian or dictatorial regime in place, as will be shown to be the case with Turkmenistan, the political risk is likely to be greater than in other emerging countries that have already begun to move towards a more democratic political structure.

Examples of the benefits of this latter position can be seen in the case of Poland and Romania, both of whom have recently become fully accredited members of the European Union of member states. In both cases the political environment is more democratically advanced than some of their neighbours.

Because of these adverse political situations, and the instability they create, it follows that the investing corporation is more at risk from total financial loss when that investment is being made in a transitional economy (Brinks 2004). For example, this catastrophic event could occur because of nationalisation or confiscation policies being introduced by the host government (Brink 2004, p.19).

It is perhaps not surprising therefore, that there is a relatively low level of corporate investment interest in a nation that is in the early stages of the transition process (Marinova and Marinov 2003, p,.178), or indeed, in a nation that does no show any immediate sign of moving towards a democratic environment. This can be evidenced by the impact the dictatorship that exists in Turkmenistan has had upon past foreign direct investment in this country.

As the research conducted by Turnock (2005, p.40) reveals, during the decade from 1995 to 2005 the inflow of FDI into Turkmenistan had shown no significant increase. Similarly, the same research (ibid, p.43) shows that Turkmenistan’s stock of FDI inflow and outflow had been one of the poorest of all the developing countries, even those within the transitional stages of development.

Countries in the more advanced stages of transition and with a more democratic structure are much more likely to attract FDI. This is because corporations have a responsibility to their shareholders and other stakeholders to provide added value and high levels of political risk threaten this objective.

One particular difficulty that exacerbates the problems of political risk to corporate operations is that of natural resources. As Lax (1983, p.5) and Noreng (2005, p.84) rightly observe, for many of the developing countries this is the one asset that they have which is attractive to corporations in other countries, particularly those in the developed sector.

Furthermore, natural resources are also heavily relied upon by host nations because of the impact it has upon their own economy. However, often they do no want to see control of these resources past to an external organisation or country and, as has been seen in the case of Russia’s recent and ongoing involvement with the TNK-BP dispute (BBC News 2008), this can create a significant political risk for the corporation. Similarly, international disputes can create a risk for commercial corporations by reducing revenue and profitability levels.

Here again, the EU and international threat of sanctions against Russia following its invasion of Georgia provides an example. If these threats were to be carried out, which is unlikely from the EU aspect due to its member states dependency upon Russian oil and gas supplies (Watson and Bremner 2008); they would have a significant financial impact upon the foreign investing corporation in this industry. For example if Russia were to carry out its threat to reduce its gas and oil exports, this would threaten the revenues of foreign corporations operating within this industry sector, such as BP.

Because of Turkmenistan reserves of gas and oil, which are considered reasonably extensive, a similar situation could develop in this country as well. An anonymous (McKiver Institute 2008) analysis of the current situation within this countries reported that “the status of both the foreign exchange regime and the autocratic government discourages foreign direct investment,” This despite the fact that the president has issued a declaration that was supposed to protect FDI (Anon 2008) and foreign corporations.

In fact, the ultimate result of the political instability and risk that currently exists in transitional economies has a detrimental impact upon both parties, as a report commissioned for the World Bank in 2000 demonstrated (Walters 2000, p.1). In this report, which concentrated upon CIS states, it was estimated that, in order to facilitate the realisation of the “full potential of the region’s oil and gas supplies” there was an investment requirement of approaching $200 billion.

To date, only a fraction of this amount has been invested into these nations’ natural resource development programmes, thus inhibiting their ability to achieve sustainable economic growth. Conversely, because corporations are concerned about the level of political risks that exists within these regions, their willingness to invest is also reduced (Kutan and Yigit 2005, p.27).

Therefore corporations are missing the opportunity of being able to benefit financially from the unique natural resource opportunities that exist within these environments, simply because of the political instability that exists, with the consequence of this reluctance being felt by the host nation.

2.4 Political risk in Turkmenistan

As a late starter in terms of the development and growth of its oil and gas industry (Dr Akiner in Taylor Francis Group, 2004, p.12), Turkmenistan has only begun to attract the attention of foreign investors in the oil and gas industry in recent decades. Therefore, it can be argued that the country is still at the early stages of its transitional journey towards the development of a stable democratic political culture and environment.

In fact, prior to the recent death of its President Niyazov, who ran the country in the manner of a dictatorship, it could be argued that rather than the transitional process in this case being viewed as a progressive step towards democracy, the political structure was regressing. Evidence of this occurrence can be found in the structural changes made by President Niyazov.

This regression is identified in the process of reorganisation that he inflicted upon the oil and gas industry not long before his demise, the key elements of which were: -

• Turkmenneftegaz has been brought under the direct control of the oil and gas ministry.

• Oil export-trading is now the exclusive reserve of the State Commodities Exchange.

• Gas export-trading is the exclusive reserve of state gas concern Turkmengaz, which is also responsible for drilling operations.

• The Turkmenbashi refinery complex now co-ordinates all refinery and export procedures.

Source: Control risks 2004

Resulting from these moves, it became apparent to most corporate observers that “conducting business of any kind in Turkmenistan is a high-risk operation and the oil and gas industry is no exception” (Crandell 2005, p.105). A situation that has further exacerbated this opinion is the fact that, during the same period, Turkmenistan had been forging close links with Russia and Iran with regard to oil and gas supply and transportation. To many corporate investors from western developed nations, this act will be deemed to have increased the potential political risk attached to corporations from the developed nations (Noreng 2005, p.90).

The new President of Turkmenistan has indicated that the government has changed direction again, and is now looking to advance political reforms by seeking a closer and more cooperative approach to the western developed nations in terms of their involvement with the further development of its oil and gas industry.

However, despite this change of political direction, it is likely that multinational corporations will continue to exhibit caution and continue to delay decision regarding investment in this industry sector until there are clear indicators that these messages of good intentions are being translated into actions. In other words, at present the trust and confidence in the political regime in Turkmenistan is still lacking in strength.

2.5 Political risk models

All of the authors included within this review have outlined political risk models that need to be introduced by the corporation within their international strategy to ensure that business decisions in respect of FDI are based upon the most secure calculations possible. This means that they need to take account of the potential cost of political risk when determining contract and resource agreement.

For example, Charlotte H. Brink (2004) in her publication “Measuring the political risk, Risks to Foreign Investment” studies the analysis and management of political risk in order to create an essential tool that can be used by decision makers during the viability assessment processes.

Her conclusion is that “Making and implementing complicated choices regarding foreign investment that impact directly on profitability of an organisation, often takes places under circumstances of extreme uncertainty. The analysis and management of political risk aims to decrease such uncertainty and to at least offer decision makers an idea of “what is out there””

Howard Lax (1983) carries out a similarly type of risk analysis, although in his case this is specifically focused upon the assessment and measurement of political risk as it relates to the international petroleum industry. In this book, the author has done a full-scale study of the contemporary techniques for political risk analysis as they applied to the global oil and gas business.

Elements of both of these models will be used within the case study on Turkmenistan and will be discussed in more detail in the following chapters relating to the findings and their analysis and discussion.

What is apparent from a review of the current literature however, is that the political risk analysis must contain economic as well as political and environmental factors (Brink 2004, p.11), which must be accompanied by an analysis of historical events. This is essential if the model is intended to provide an efficient measurement of the trends that develop over time in a manner that will help to provide an accurate assessment of the extent of potential risk (Brink 2004, p.13).

For example, whilst Marinova and Marinov (2003, p.3) suggest that founding the foreign investment strategy on the basis of minimising transaction costs to provide a way of mitigating political risk, this is only a partial response. Certainly in the case of the oil and gas industry, which forms the crux of this research, such an approach is not always possible, simply because of the high level of investment required and the lengthy time from exploration to production, during the course of which the political risk can change considerably, as Lax (1983) has discovered.

Clark and Tunaru (2001), suggest that in effect there are two main methods of political risk assessment and measurement currently in use within the corporate strategy for international trade. On the one hand there are the techniques that use methods of comparison, which can be conducted through a process of rating and mapping the various elements of political risk that will need to be managed.

At the other end of the spectrum is the more analytical approach, where information if gleaned from specialist reports and “dynamic segmentation.” In reality, taking into consideration the fact that all corporate strategy should be approached from a position of appropriate knowledge, experience and data availability, it perhaps should be argued that the most efficient and effective risk model must combine the best attributes from both of these methods.

2.6 Managing political risk

As Lax (1983, p.5) observes in the introduction to his study, international corporations, due to their experience in “repeated confrontation and negotiations” should be automatically aware and recognise the fact that political risk is an integrated factor of foreign direct investment, which to a certain extent is undoubtedly true. A consequence of this recognition is the need to seek measures by which this risk can be effectively managed.

This is especially true where the investment involves operations connected with natural resources, such as the oil and gas industry. This specific industry requires considerably more in terms of investment than others, both in respect of the initial capital costs and the working capital needed to fund the exceptionally long period of years from initial exploration to the extraction and eventual sale of the product.

Managing political risk involves the consideration of a number of factors. For example, the analysis of the risk, upon which the management will depend, has to take place before any investment has been committed to the project (Lax 1983, p.173 – 174). In the case of the oil and Gas industry, this also means that the analysis has to cover a significant future time study. In this industry, as indicated earlier, the time from exploration to production, which is the first stage at which the investment begins to show a return, is significantly longer than for other industries. Therefore, the potential for political change and risk is equally increased.

For example, during this time the laws governing petroleum and gas operations can alter and the potential for the licence being suspended for non-compliance will be an ever-present threat (McIntyre 2007). Product sharing agreements (PSA) and/or joint activity agreements (JAA) have been introduced in an attempt to manage and mitigate the risk.

However, as McIntyre (2007) and others have commented, this does not fully cover the situation as the host governments will virtually always retain the right to purchase back or requisition the share of the business that is owned by the foreign investor. Even in terms of the former option, the share purchase, on most occasions this would not fully compensate that corporation in total for the effort and investment that has been expended on the project.

Furthermore, as the economics of the host nation alter, or the needs of a corrupt government become more acute, the levels of taxes can change almost instantaneously, any increase to which might severely reduce the profitability of the venture. In addition, the extent to which governments in transitional countries will honour these agreements also needs to be considered.

However, in addition to the elements required to be considered by the business when planning their political risk management strategy there is an external element to be included, one that is often overlooked by corporations. This element is the requirement of the host country (Lex 1983, p.184). It is an important part of the risk analysis to include the calculation of cost and benefit to the host state.

The reason for this is that, unless there is a balance in favour of benefit accruing to the host in this equation, the potential for political risk is likely to increase. Although it is accepted by all researchers that the corporation must be protective of its own interests, as Lax (1983) advices, if that corporation wishes to minimise or reduce the potential for political risk, it also needs to be “sensitive and responsive to the concerns of the host state.”

If host governments see that the gains from the use of their national resources are being unfairly distributed in favour of the commercial organisation, they are likely to react to this in a negative manner and that will not bode well for the investor or the positive relationship that is being built between the two partners to the contract.

As recent events involving the TNK-BP partnership in Russia have shown, lack of trust between the foreign investor and corporate partners and the political regime in a host country can create significant difficulties.

The other element that is used by organisations as an integral aspect of their political risk management strategy, and which specifically relates to the task of protection against loss, is to put in place a risk premium insurance policy. The downside of this event of course, is that although it provides some protection this comes at a cost.

Bearing in mind that actuaries who calculate the risk policy premium will undertake the same type of risk assessment and evaluation process as the corporation, often the cost of this cover will reduce the attractiveness of the project even if, as is the case with Turkmenistan, the geographical location and level of natural resource reserves are attractive (Noreng 2005, p.83).

From these studies, it can therefore be concluded, “Risk management entails identifying risks, assigning a value to them, anticipating the losses, and making objective decisions about what steps to take before losses occur so that they have the least impact on the operations of the enterprise. It also includes a loss control program in order to help prevent or reduce the incidence or severity of losses” (Lax 1983, p.173), which should incorporate a consideration for the cost and benefit attributable to the host country and, where appropriate and affordable, risk premium cover.

2.7 Summary

The literature reviewed within this chapter has provided an in-depth understanding of the elements relating to the cause and effect of political risk. It has also provided an overview of the various models that can be used to assess this phenomenon and the processes that will be needed to allow corporations to manage political risk.

However, in the author’s opinion, an area that is not covered so deeply within these academic studies is the element and impact of perception. Brinks (2004) raised this issue when she mentioned that analysis of political risk took place in “circumstances of extreme uncertainty.” Where there is uncertainty and lack of information, analysis and results have to be based upon what is perceived rather than factual data.

Furthermore, the perception of a particular issue will change dependent upon the stance of the organisation analysing that issue. In relation to political risk therefore, it can be argued that perception will have a different influence upon the assessment of that risk, dependent upon whether the corporation involved is an existing or potential investor. Furthermore, perception within political regimes can also lead to an alteration of the level of risk.

The primary research conducted for this study is intended to evaluate the affect that perception has upon the various stakeholders’ understanding and analysis of political risk and how it affects FDI decisions relating to a specific country.

Chapter 3 Methodology

3.1 Introduction

The intention of this research project is to present a detailed evaluation of the effect that political risk has upon corporate decisions in respect of FDI, which is a complex and intricate commercial issue. It is therefore important that the research question, and the methodology used to reach a conclusion, is appropriate for the complexities of the issues being raised.

The oil and gas industry was used as a foundation for this research for two reasons. In the role of these natural resources in the global context, together with the rapid depletion of currently known reserves, makes this an issue of importance to stakeholders that have an interest in continuity of supply.

Turkmenistan was chosen as the case study target host country because it is an economy that has recently reached the transitional stage of economic development and its political structure has been undergoing significant changes ever since the country gained independence from the Soviet Union.

The purpose of research question set for this study was to provide additional insight into the political risk faced by foreign corporations when assessing the opportunity of entering a new market. It is also intended to address the gap in current literature in relation to how a host country like Turkmenistan affects this political risk and corporate decision making process.

It is for these reasons that the chosen method of data collection is important (Glatthorn and Joyner 2005 and Larson and Poist 2004). That chosen method is explained within this chapter, as is the manner in which the research was performed.

3.2 Choice of research method

For a commercially orientated research project, essentially there are two main methods of data collection. The first is the secondary method, which usually relies upon the collection of information from existing publications and resources. This can include the use of a case study. The second method is known as the primary data collection process. In this case, the data relied upon is normally gathered using surveys and interviews.

After consideration of the merits of these two methods it was decided to use a combined approach for this project. It was considered that the use of either method in isolation would not provide a sufficient depth of analysis of the issues.

For example, with the case study aspect, the geographical location of the target host country, together with the range of data that was required to provide efficient results would not have been representative of the industry or country sector being addressed based solely on a case study (Denscombe 1998, p.367). Furthermore, relying upon pre-published data does not allow for the inclusion of current views and opinion or the comparison of theoretical studies against physical practices.

Primary data has its advantages and limitations. The limitations are normally related to time, cost, geographical location and sampling. In this instance this was not considered an issue because a limited number of interviews were conducted. Sampling was also not an issue.

Unlike consumer related issues, this research required expert views and opinions from management personnel that were intimately involved with the gas and oil industry. Therefore the survey approach was considered irrelevant. The conduct of a small number of interviews with highly qualified corporate members was considered sufficient and appropriate for this study.

3.3 The Interviews

As already indicated, the interview process is the chosen route for this project (Saunders et al 2003, p.3). The beneficial aspect of this approach is that the researcher can, providing the level of sampling is appropriate to the task, secure meaningful results relied upon as indicative of corporations operating within the selected industry sector (Bell 1995 and Fisher 2007).

The use of this primary approach in tandem with the secondary method provides the researcher with the ability to evaluate and compare the findings of both (Riley et al 2000). It allows for the perception of interviewees beliefs, opinions and perceptions relating to the issue of political risk in FDI to be compared against the practical experiences of other similar corporations.

Similarly, when addressing the issue of managing political risk, this approach enabled the researcher to evaluate the relevance of theoretical and empirical studies reviewed within secondary data process to the corporate strategy implemented within interviewee’s environments.

There were two important element of the interview process. One was the selection of interviewees. In this respect it is important to achieve a cross section of viewpoints from a range of stakeholders. Therefore, our selection was aimed to cover the political and corporate spectrum, with the latter having a diversity of interviewees, including industry specific interviewees from organisations domiciled in developed, emerging and transitional countries, as well as a mix of investors and potential investors.

The advantageous aspect of this approach is that we can see whether, in addition to existing theories on political risk, there exists one not yet fully examined, namely externally influenced political risk (EIPR) as seen from the perspective of the internal organisation and political regime.

The second aspect was the content of the questions. Firstly, as some respondents were existing investors and others still assessing the potential, two questionnaires were designed to address the variance of external and internal viewpoints. Furthermore, the content of the questions was important. In the opinion of the author, these had a duality of purpose.

In addition to assessing the extent of theoretical application in a practical environment, they also needed to determine whether one could identify elements of political risk that were unique to a specific country or location (SCPR).

To assist in the objectives for the interview questions, their content was only finalised once the majority of the secondary data had been collected, analysed and evaluated. This provided the opportunity a) to ensure that all of the salient points relating to political risk and FDI were addressed to the interviewee and, b) that there was the opportunity to include any other issues arising from the secondary data that the author might not have considered (Fisher 2007).

3.4 Research Ethics

In any research that contains a primary data collection content, as Saunders et al (2007, p.162) correctly comments, it is important for the researcher to consider the issue of ethics and ensure that the method of approach has paid attention to this area. In the case of this project, the author considered that the question of ethics arose in three main areas, these being: -

• Data protection

• Privacy issues

• Truthful representation.

It was explained at the outset of the interview process that the reason the research being conducted was twofold. The interviewee was informed that the project was being conducted as part of the researchers educational studies and, secondly, that the objective was to add value to existing research into the disciplines being studied.

In terms of data protection and privacy, it was made clear at the start of the interview that participation was voluntary and that, if the interviewee wished to terminate his involvement with the process at any time this would be respected. It was further explained that the publication of the finalised project and their participation within it, would not be made available for public consumption without the interviewees express permission.

The interviewees were also informed that, upon completion of the interview a transcript would be produced. A copy of this would be forwarded to the interviewee for perusal and the content of the transcript would not be included within the research until the interviewee had provided their agreement to the fact that the transcript was an honest representation of the interview that took place.

3.5 Performance of the research

Once the research question had been decided the first stage of the research performance was to collect secondary data. This entailed the use of libraries, research locations, journals and magazines. Internet resources were also utilised, but in this case the authenticity of the information was vigorously checked and cross referenced for confirmation purposes.

Upon the completion of this stage the interview questions were constructed and finalised. Arrangements were then made with the interviewees for a suitable time to conduct the interview. As agreed with the interviewees, transcript were typed out and forwarded for agreement.

During the period before the interviews took place secondary data was analysed and evaluated to ensure its relevance. Additional information considered beneficial was also gathered. The author then commenced the initial stage of constructing the content of the study, which included the secondary findings.

Once the interviewees’ agreements had been received, the findings from the data collected were included in the research. The discussion, analyse and evaluation of the findings were then completed, conclusion drawn and recommendations considered. The final part of the research performance was completing the dissertation and including the appropriate additional information. Once this had been completed, the dissertation was assessed and re-evaluated in terms of the accuracy of content. The correctness of presentation, accuracy in terms of grammar and spelling was checked prior to the dissertation being finalised in preparation for submission.

Chapter 4 Background of case study country: Turkmenistan

Turkmenistan was formerly part of the Soviet Union. Although it is almost completely landlocked, a small part of its borders is formed by the Caspian Sea (see figure 2), with other borders abutting to Iran and Afghanistan and other CIS States. The border with Uzbekistan has still not been fully defined and is therefore still in dispute (Olcott 2005, p.219).

Figure 2 Turkmenistan

It is considered by some experts that Turkmenistan’s oil and gas reserves are amongst the world’s largest (Neff (2007), Ascher and Mirocitskaya (2000, p.2) and Nuttall (2008)).

4.1 Political development

Until recently, Turkmenistan operated under a virtual political dictatorship system that amounted to a virtual dictatorship, with almost total power held by President Niyazov (Abdrakhmanov 2007). This was reflected in the FDI stock within the country, which stood at a lowly $1.114 billion (Brada et al 2005, p.33).

However, following Niyazov’s death in late 2006 and the appointment of President Berdymukhamedov, the political situation in Turkmenistan has changed significantly (Abdrakhmanov 2007). Foreign policy has also changed, with the concentration of effort being placed on securing a better economic position and improving the country’s external relationships (Abdrakhmanov (2007).

These political changes have already begun to show economic benefits. One area where this is most evident is the levels of foreign direct investment. As can be seen from the following graph (figure 3), there has been a significant rise in the FDI inflow since the middle of 2003, which has continued unabated for the past four years.

Figure 3 FDI Inflow Turkmenistan

Source: http://www.fdi.net/country/sub_index.cfm?countrynum=199

4.2 Current opportunities

During the course of the past two years, Turkmenistan’s government has actively sought to increase its oil and gas trade with the developed countries of the western world. It announced that it was “open for broad-scale partnership in all areas of activity” (Gorst and Dombey (2007), which was seen to be a referral to the direction that the country was seeking for its oil and gas industry.

To a certain extent, this new political approach has achieved its objectives. At least four of the world’s major petroleum corporations, Chevron, BP, Total and Conoco-Phillips have already expressed interest in seeking partnership deals within the country (Gorst and Dombey 2007. Andy Inglis, the head of BP’s exploration and production sector, even went on record on Turkmenistan TV to state, “We are confident that Turkmenistan has unique oil and gas resources and believe that our participation in their development could be a profitable business" (Reuters 2007).

However, despite these positive reactions, there are still issues that many potential investors feel need to be addressed. The most important of these is that most want to see whether the promises being made will turn into positive action before they make a final commitment, or at least witness the countries intent by the signing of heads of intention and agreement (BBC News 2007).

Chapter 5 Analysis of Interview findings

Five interviews were conducted for this research project. These included the following spread of stakeholder groups: -

• Three existing investors

• Two potential investors

• One former Host country political minister

Transcripts from all of these interviews are attached within the appendices. It should be noted at this stage that the political minister is in exile and requested anonymity. Therefore the name used is a protective identification.

As mentioned earlier, there was some variation between the questions put to the different groups. However, the concentration of questions one and two was focused on discovering the participant’s definition of political risk and its importance to their respective stakeholders. All considered political risk one of the most important.

However, whilst in general all of the respondents identified political risk as being associated with the political regime that existed within the host country, which concurs with the definitions presented by Brink (2004, p.180) and Haendel (1973, p.5) three of the interviewees also brought up the issue of external influence.

This included both of the interviewees in group b and the Politician in group c. Conversely, it was not seen to be as relevant to existing investors. However, in introducing this element into the definition of political risk a senior manager of Mannesmann DMV explained it as follows:

“The main risks are quick and unexpected changes in the laws and regulations; high personnel fluctuation on the level of decision makers in the country (minister etc.); possible influence from neighbour countries i.e. from Russia on the political situation in the country.”

The politician concurred with this view, citing the political activities of Russia as relevant to political risk in Turkmenistan. This addition to the existing academically accepted definition of political risk raises a new element that needs to be considered when corporations are evaluating the extent of that risk.

From the research conducted for this project, whilst some comment upon the effect of international activity, few have studied in depth the effect that political actions in other countries have upon the political regime in a transitional economy. For example, whilst Wagner (2000), Walters (2000) and Brada (2005) concentrate their researches on specific countries or regions, little consideration is given to how the perceptions of external issues affect the political risk. Wagner (2000) comes closest when he talks about the Russian hatred of the West, but provides little analysis of how this manifests itself in political action, for example by increasing political policies of protectionism.

However, from the responses received it is apparent that “externally influenced political risk” (EIPR) is part of the equation of measurement of political risk for potential investors and, in terms of the political regime does influence their actions. For example, the politician indicated the extent of the economic impact of Russia’s invasion of Georgia.

This raises the spectre of how developing, emerging nations, and those in a transitional stage, might react towards a host country if its government move towards a deepening relationship with the west and its corporations. It might therefore be argued that an element of the political risk will be driven by government concern regarding the potential of intervention from external governments, thus introducing the EIPR element into the equation.

In response to considering which countries are considered politically risky (question 3), by definition all but the politician included Turkmenistan within this group. The general definition of “politically risky” countries given by all the respondents is most succinctly described by the response from Vital Zees of Mannesmann DMV: -

• Countries with not so long democracy tradition

• Countries with extreme separatist or extremism movements

• Geographical locations near to “hot” areas of the world

It is clear that this perception is based upon the component parts of political risk that was described with the research of Lax (1983) and Wagner (2000), which identified that such risk can originate from government action or instability factors. However, in point three, Zees also confirms the existence of EIPR in the minds of the potential investor. However, existing investors contradict this view of external influence. When posed this question Barry Coniine stated, “it has not really had an effect on our views or assessment of political risk.”

The politician’s response did not include his own country, focusing instead on Russia. Initially it was felt that this response was the result of bias. Although, as evidenced from other replies, there is no that such bias exists, after further consideration of his reply it was seen it included a strong reference to the influence of EIPR.

If this politician’s views can be said to reflect the views of other members of Turkmenistan’s political regime, the fear of Russia’s political actions might be said to be present when it is considering actions that might be perceived externally as adding to political risk.

There was also a bias towards Russian observed from the response of the Lukoil representative when responding to risk countries. Although one has to agree that in terms of his description Russia is not a totalitarian state, it is evident that in some quarters the perception is that recent events involving Russia are adding to political risk in this region of the world.

What can be concluded from the analysis of these responses is that the paradigm of EIPR is stakeholder dependent. Our research shows suggests that it is perceived by host governments and potential investors to be an issue, but is not considered of such high importance to existing investors.

The next question (3 or 4, dependent on the question format) asked about access to information relating to the political situation in Turkmenistan. The availability of information relating to political risk was an area dealt with in depth by Brinks (2004) and, is one of the reasons why she concluded that analysing political risk from an external viewpoint included a high level of uncertainty.

The responses confirmed this situation, by indicating that, with the exception of the existing investors, there was not a direct communication channel existing between the Turkmenistan political regime and this group of the stakeholders. All were reliant upon information gleaned mainly from media and website resources, the latter of which did include information made available from opposition parties within the country.

The problem with this situation is that it reduces the accuracy element when measuring political risk in the country, which was a point raised by Carmignani (2003) and others. Furthermore, as most of the sources used are providing information relating to historical events and government sanctions, the ability of the stakeholders to discuss their concerns with the political regime and to put in place preventative measures to protect their interests is severely compromised.

One other interesting observation drawn from these responses was the lack of commercial cooperation with regard to issues of knowledge management. It appears to the author that, despite the need to maintain individual competitive advantage, pooling or sharing of knowledge and experiences would have a beneficial impact upon the industry as a whole. However, if the responses are accurate and this was not merely an oversight, such cooperation does not at present exist.

The next issue that the interviewees were asked to consider was a) whether they considered Turkmenistan to be a high political risk country and b), using a scale of 1 to 10 as a measurement of that risk level, with 10 being the highest risk level, where this country would be placed on that scale. There was a sharp division on the first part of this issue, with the politician and the Luckoil (existing investor) representative not considering Turkmenistan a risk, whilst the other responses the country figured highly in terms of risk.

However, it was seen that there was some dichotomy in the more negative responses to Turkmenistan’s high risk position. For example, the politician, whilst emphatically stating that Turkmenistan was not high risk, and rating similarly, did consider that entry into this market should be slow and considered (see responses to question 8). The same dichotomy of view was also evident in the Luckoil and Considine responses.

Other researches indicate that the level of confidence in the country’s political regime bears a direct relationship to the speed of foreign direct investment (Campos 2003 and Bevan and Estrin 2004). However, the results from the primary research conducted for this project indicates that the speed of investment was not directly linked to confidence.

However, what needs to be considered is whether these results relate to the perception of risk in a specific country (SCPR) or can be applied generally applied to countries that are in a transitional stage of development, as is suggested within the research of Brinks (2004) and Clark and Tunaru (2001).

Given their previous responses the interviewees were then asked to explain the motivational forces for investing in Turkmenistan. As expected, the majority gave the abundance of natural gas and oil resources and the need to develop their business in this area as the overriding driver. However, an interesting additional comment came from the Sphinx corporation representative, who included the following within his reply: -

“Presently we are investing more securely, using more foreign investors’ money than own, as we already had bad experiences. For example, assets like houses and land has been taken away. Using the foreign money is more secure as you are backed by the foreign multinationals.” (Mr Suleymanov).

This spreading of the financial risk by using the capital of others shows that developing trust in the political environment in Turkmenistan is still a specific issue of high priority if the level of FDI into the country is to be sustained and maintained.

The representative from Luckoil took a more pragmatic view on this issue. In essence his response was to invest now and hope to gain benefit in the future once the political environment had become more settled. However, as the response from Mr Suleymanov shows, this can be a costly stance to take. Balancing future benefits against present costs is fraught with danger, as the certainty of the present is not matched with the same level of certainty in respect of the future.

As Brinks (2004, p.19) and Marinova and Marinov (2003, p.61-62) indicated, the economic impact of political risk will be an important consideration in risk evaluation and these responses support this theory. However, most agreed that the level of uncertainty would diminish over time, although the general opinion was that this would take several years.

The interviewees were then asked to indicate what issues would lead to them considering withdrawal of or ceasing direct investment in Turkmenistan. Whilst this was viewed as a “very last option” (Vitali Zeis), generally it was agreed that a change in the experience of the political risk levels might lead to this decision if these were severe enough, a view held by most academic and other observers (see Bevan and Estrin 2005).

These results generally can be seen to be interrelated to the perception that the interviewees held with regard to their assessment of the level of risk specific to this country (see questions 5/6). However, Considine’s response to this question introduced a different element altogether.

He confirmed the opinion of Lax (1983) when he replied that his organisation would cease FDI in Turkmenistan “If the oil and gas reserves disappeared!!” As Lax’s research confirms, these corporations invest in transitional economies predominantly for their own objectives and this is the only reason that they need to consider political risk. If the natural resource was not present, neither would the corporation be there.

Recent incidences, including the Russian invasion of Georgia and the problems that TNK-BP were having in the Russian gas and oil industry were then brought into the interview and the respondents were asked how these events had affected their think in terms of investing in transitional economies.

All apart from the Lukoil representative said that a) it reinforced the concerns and speed of entry that they had already expressed and b) if anything it would make them extra cautious. The Lukoil representative stated, “it would have no effect at all,” although he did caution that careful selection of partners was a vital consideration when deciding upon FDI.

Unless these responses can be confirmed to be country specific, or equally importantly to relate to the stage of transition reached, this conflict’s with existing research views that speed is related to level of perceived risk. In the case of Turkmenistan, despite the political advances, in terms of the interviewees that were included within this research, caution, therefore a slower approach was still considered to be the appropriate strategy.

Interestingly, the response from the politician to this question reinforced the concept of EIPR mentioned earlier, which one can clearly see evidence of within his reply: -

“Regardless of its independent status, Turkmenistan still practically remains a satellite country of Russia. The dominant exporter of the TM’s gas is Gasprom, Russian state controlled giant. Such a state of affairs means Gasprom has a strong say in gas industry in TM. In all the probability, seeing the actions of Gasprom (and the Russian government) as the benchmark, the officials of TM are more prone to adopt a stance similar to its Russian counterpart.”

In summary therefore, several issues have become apparent from these interview results. The most obvious result is that the concern regarding political risk is a much higher level of priority with corporations that remain in the position of potential investors than it does with those already operating within the environment, particularly regards to Turkmenistan.

Furthermore, it is also apparent that where foreign investing corporations come from a domiciliary environment that has previously been through the process of transition, they are more comfortable in dealing with political risk that those corporations from developed countries.

An example of this can be garnered for the differences in responses between the Sphinx and Lukoil representatives. In essence, this reinforces the comment made about sharing knowledge and experiences for, if there was a flow of such knowledge between the two corporations mentioned it is likely that some of the concerns and experiences witnessed by the Sphinx representative could have been more appropriately addressed.

This suggests that there is a gap in existing literature. For example, whilst the research of Lax (1983), Clark and Tunaru (2001) and Olcott (2005) have studied the political risk related to specific industries and the development stages of nations, the difference between the corporate perceptions of this risk has largely been lacking.

For example, the primary research results from this project, although limited in number, has shown that a different perception of political risk exists between existing and potential investors. Furthermore, it also reveals such a variation will also occur between corporations that have different corporate head office domiciles. For example, a corporation domiciled in an emerging or developing country will not perceive political risk in a transitional economy in the same way as a corporation domiciled in a developed and democratic country.

Another important finding from these interview responses is that the corporations do tend to treat each country as a specific political risk, although this is additional to the prevailing theories of political risk as promoted within the research of Brinks (2004) and other researchers.

This is particularly revealed in the response from the Mannesmann representative who mentioned the need for “compliance” to the specific rules that operated within Turkmenistan, and confirmed in the response of Considine, who stressed the need for continual communication with the political regime with the host country.

Therefore, it can be said that, although in the general sense foreign corporations may adopt elements of a similar approach to their investment in all emerging and transitional economies; these are tempered and customised by the introduction of measures to identify and address specific country political risk (SIPR). This is then used to design the investment approach and strategy that will be used within that unique environment.

Finally, as already mentioned, the other important issue that has been raised within this interview process is the impact that EIPR has upon the FDI decision making process and entry strategy. In the case of Turkmenistan this external influence comes predominantly because of their preoccupation with the Russian political environment.

Furthermore, the change of US rhetoric, moving from a conflict approach to Iran to one that is now focused on Russia, and the EU involvement in the Georgia conflict might influence the political reaction in Turkmenistan towards western corporations in the gas and oil industry, thus increasing the political risk.

Similarly, although they have not specifically been addressed within this research, the close proximity in terms of its border with Afghanistan and the disputed border with Uzbekistan provide yet further evidence of the potential for political risk in Turkmenistan being increased due to the intervention of external political regimes.

Another area of concern is the timetable of events. As previously mentioned, taking oil and gas project from the initial signature of agreement to full production and sale of the products takes a number of years. As Julia Nanay (Gorst and Dombey 2007), a senior director with an energy group mentioned, this time issue even extends to the contract itself, where she commented, “Negotiating contracts tends to take years and first they need to decide the framework of the contract.” It is concluded that this time scale and this specific industry, is the main reason why the speed of FDI does not equate to that which academics have applied more generally in their researches.

Chapter 6 Evaluation and comparison

The response received from the primary data collection showed that, in many respects, the corporations and stakeholders involved within the gas and oil industry in Turkmenistan, and those who were considering entry into this market, defined political risk in similar ways to that proposed by Leopold G, (1998), Brinks (2004) Lax (1983) and others.

However, these results have revealed other issues of importance relating to political risk. In particular, these are directly related to the variance in the degrees of perception held by various stakeholders regarding political risk and the level of influence that this has upon there FDI decision-making process. This research has indicated that two new models need to be considered when assessing, evaluating and managing political risk, these being “Specific Country Political Risk” (SCPR) and “Externally Influenced Political Risk” (EIPR).

6.1SCPR and EIPR

The basis and theory of political risk as outlined within the researches of Brinks (2004), Lax (1983) starts from the premise that political risk is an issue that occurs between countries that have different types of political structures in place and are at varying levels of economic development.

Therefore, most academics perceive that the highest level of political risk is evident within economies that are within the transitional stages, this being somewhere between an undeveloped economy, that might exist within some countries in the African continent, and those that are fully developed, such as the US and EU states. However the author would argue that this is simply the first stage of a pyramid of the perceptions of political risk (see figure 4).

There are two reasons why this element has been put at the top of this pyramid model. The first is that the basis premise and theory of political risks applies to all countries that are within the transitional stages, irrespective of their location and which of these stages a particular country is currently at. The second reason is that perception of political risk at this level is applicable to all corporations as they view transitional economies, irrespective of whether they have an interest in investing in a particular country.

However, the perceptions of political risk changes when a corporation has a desire to invest in a specific country. It is only when this situation arises that the perception of risk becomes more focused. At this stage two more tier stages will be added to the manner in which the corporation will make their assessment of political risk and develop a policy to manage that risk.

The first of these stages is the perception that the corporation has of the political risk relating to the specific country being considered for investment. Depending upon the access to information relating to that country, and the extent of the communication process that exists between the political regime and the international community, the perception of SCPR and its potential danger will either be heightened or lessened. As mentioned before, the author concurs with Brink’s (2004) view that lack of communication heightens uncertainty.

The next tier of the pyramid relates to location and surrounding neighbours. As the study has shown, potential investors have concerns relating to the potential influence that Russia has upon former CIS states. Taking a more generalised approach a similar level of concern might exist when investing in Asian countries and their geographical relationship to China.

Therefore, the corporation will need to incorporate their perception relating the influence that external factors, specifically political interference, might have upon their investment policy. Hence the reason why they will perceive that EIPR is an important part of the political assessment process and again, this perception will influence the political risk model that is developed by the corporation and the methods and strategies introduced to manage that risk.

However, as the primary results have also shown, the degree to which SCPR and EIPR are relevant to a corporation’s consideration of the political risk influence changes dependent upon their position in relation to the host country. For example, the perception of the influence of external risk upon a host nation is perceived to be considerably less significant to those corporations that are existing investors within that country.

As Lax (1983) states, their major concern is to protect their investment from the potential political instability that exists within the host nation and perceive this as a far more important element of risk to be concentrated upon in relation to future corporate strategy. Therefore, it could be argued that as a corporation moves from potential to actual investor, the tiers of the pyramid of perception reduce to three. As shown in figure 5, the EIPR tier has all but disappeared and is not included within continuing political risk that exists within the host nation.

Chapter 7 Conclusions and Recommendations

7.1 Introduction

From the research conducted for this project, including the critical review of literature relating to the issue of political risk and the influence it has upon FDI decisions, it is concluded that as a general theory it is confirmed that the corporation’s perception of the level of political risk will affect the strategy developed for investment.

Furthermore it will have an affect upon the speed of this investment and the methods used to manage and protect that investment. Therefore it can be concluded that the hypothesis set in the introduction to this research has been proven, namely that: -

“The perception of political risk and instability in transitional economies such as Turkmenistan is having an adverse impact upon the level of foreign direct investment into the country.”

There is no doubt that the FDI inflows into host countries where economies are within a transitional stage are significantly influenced by risk (Bevan and Eskrin 2004, p.26) and that political problems affect the efficient development of industries within these countries (Crandell 2006, p.3).

• Observations

However, it has also been shown that this perception is influenced by different factors, which are dependent upon the stakeholders’ position within the FDI process. As discussed in the previous chapter, perceptions relating to the specific country (SCPR) and external influences upon that country’s political regime (EIPR) are given different levels of importance for the potential investor to that of an existing investor.

These subtle changes in perception in these two specific areas in the view of the author will change the corporations approach to political risk assessment and management. In particular they increase the reluctance on the part of the potential investor, which is economically damaging for the corporation and the host country.

In particular, from a commercial aspect the findings of this research indicate that it provides existing investors with a significant competitive advantage, as Barry Considine has indicated to be the case with the telecommunication organisation that he represents.

• Recommendations

Resulting from these conclusions, the following recommendations are considered appropriate, both in terms of actions that should be considered by commercial organisations and areas of future research that could validate and improve upon the findings of this research.

7.3.1 Corporations

From the author’s observation and research of the issue of political risk, the most noticeable area of concern was the extent to which corporate perception is influence by the availability of information and knowledge, together with the efficiency of the communication process between the political regime in the host country and the international stakeholders.

It is considered that the adverse affect of perception it these areas could be reduced if there was a system of communication developed between potential and existing investors. Whilst it is appreciated that this might seem to be diluting competitive advantage, the benefits are that it increases the presence of foreign corporations within the host country and this might produce a greater level of political stability as the government experience the economic benefits of increased foreign investment.

Furthermore, the increased international presence resulting from these corporations operating within the country will also increase the deliberations of the political regime when considering changes that might have an adverse impact. For example, the reliance of employment, economic growth and stability increases with the numbers of foreign corporations present in the country and these are benefits that politicians will think twice about damaging.

7.3.2 Future research

Having developed the ”pyramid of perception” and introduced the models of EIPR and SCPR within this research, it is acknowledged that the sample, both in terms of the selected host country and the numbers of stakeholders included within the primary research is limited. It is therefore recommended that addition research needs to be undertaken to validate and add value to these models.

It is therefore suggested that similar research to that conducted for this project be conducted across a wider range of transitional economies to assess whether the findings can be seen to apply more generally to the international environment.

In addition, it is also recommended that the numbers of stakeholders included within this further research should be extended to include not only a greater number within the oil and gas industry, but those within other industries as well. This will prove whether the findings of this research are industry specific or can be determined as being generic in nature.

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