Country risk refers to a country’s inherent risks that may affect its businesses and result in losses to multinational business organizations. These evolving risk factors are

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Country-risk measurement and analysis: A new conceptualization and

managerial tool

Article  in  International Business Review · August 2014

DOI: 10.1016/j.ibusrev.2014.07.012

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International Business Review 24 (2015) 246–265

Country-risk measurement and analysis: A new conceptualization and managerial tool

Christopher L. Brown a,b,d,*, S. Tamer Cavusgil c, A. Wayne Lord a,d

a World Affairs Council of Atlanta, Georgia State University, GSU Buckhead Center, Tower Place 200, Suite 500, 3348 Peachtree Road NE, Atlanta, GA 30326,

United States b Department of Political Science, College of Arts and Sciences, Georgia State University, Atlanta, GA, United States c Institute of International Business, Center for International Business Education and Research (CIBER), Robinson College of Business, Georgia State University,

United States d Robinson College of Business, Georgia State University, United States

A R T I C L E I N F O

Article history:

Received 30 March 2012

Received in revised form 28 February 2014

Accepted 18 July 2014

Available online 14 August 2014

Keywords:

Big data

Country risk

Critical thinking

Education

Index

Organizational context

State development

Strategy

A B S T R A C T

Country risk analysis has been a topic of investigation for decades, often focused on forecasting the risks

to business profitability and assets when investing in a country. While there have been gradual

improvements in the analytic techniques and overall breadth of the research, many scholars and

practitioners continue to focus on limited conceptualizations of risk, measures with a relatively small

number of variables, and/or expert analysis. Others point to the need to expand the inquiry, produce

better tools and models, take advantage of the greater availability of data and enhanced computing

techniques, and tackle puzzles differently. Advancing this discussion, we make the case for a new

conceptualization and measurement of country-level risk and introduce the Robinson Country Risk

Index (RCRI), a tool which incorporates four broad dimensions—Governance, Economics, Operations, and

Society (GEOS). Within this holistic macrostructure, the RCRI encompasses 70 sub-dimensions, 126

countries, and, at present, 8 years of data. Its ecological conceptualization, multifaceted goals, and

embedded functionalities complement and offer advantages over other risk indexes. The RCRI addresses

concerns surrounding the conceptualization and measurement of country risk and provides a dynamic

new instrument for educators, researchers, and practitioners.

� 2014 Elsevier Ltd. All rights reserved.

Contents lists available at ScienceDirect

International Business Review

jo u rn al h om epag e: ww w.els evier .c o m/lo cat e/ ibu s rev

1. Introduction

‘‘Keynes. . . used to say that his best ideas came to him from ‘messing about with figures and seeing what they must mean.’ He could be as excited as any economist at discovering correlations in the data. Yet he was famously skeptical about econometrics—the use of statistical methods for forecasting the future. He championed the cause of better statistics not to provide material for the regression coefficient, but for the intuition of the economist to play on. He believed that statistical information in the hands of the philosophically untrained was a dangerous and misleading toy.’’

* Corresponding author at: World Affairs Council of Atlanta, United States.

Tel.: +1 404 413 6198; fax: +1 404 781 0938.

E-mail addresses: [email protected] (C.L. Brown),

[email protected] (S.T. Cavusgil), [email protected] (A.W. Lord).

http://dx.doi.org/10.1016/j.ibusrev.2014.07.012

0969-5931/� 2014 Elsevier Ltd. All rights reserved.

Robert Skidelsky, ‘‘The Return of the Master’’

It is now commonplace to theorize and examine how 21st century globalization is changing the playing field for businesses, governments, and non-governmental organizations (see, for example, Atsmon, Child, Dobbs, & Narasimhan, 2012; Cusimano, 2007; Friedman, 2008; Isdell, 2009; Khanna, Palepu, & Sinha, 2005; Perez-Aleman & Sandilands, 2008; Porter & Kramer, 2011; Reich, 2007). Strategic thinkers can be overwhelmed by the many different types of state-level and other challenges they face as they try to plan, carry out operations, invest, or achieve a wide range of other goals. Intertwined with the multitude of state-level risks leaders must consider are vast differences among countries in such areas as history, size, geography, culture, language, ethnic diversity, and other contextual dynamics. To be sure, assessing country risk has been a topic of academic investigation for decades, often focused on the risks to business profits and assets when investing in a country. Yet, while there have been gradual improvements in the analytic techniques and overall breadth of the research, many researchers and practitioners continue to focus on limited conceptualizations of risk, measures with a relatively

C.L. Brown et al. / International Business Review 24 (2015) 246–265 247

small number of variables, and/or expert analysis (Bouchet, Clark, & Groslambert, 2003; Coccia, 2007; Cruces, Buscaglia, & Alonso, 2002; Funston & Wagner, 2010; Nath, 2008; Oetzel, Bettis, & Zenner, 2001).

More recently, Nath (2008) has focused on the urgency and opportunities to expand the inquiry, produce better models, and tackle new puzzles, pointing specifically to the changing global environment, greater availability of data, and enhanced computing techniques. Cukier and Mayer-Schoenberger (2013) point to the new abilities of researchers to use ‘‘all the data’’, not small subsets, as well as the opportunity ‘‘big data’’ offers to drill into the data, find nuances, and ‘‘unlock new forms of value.’’ Cavusgil, Kiyak, and Yeniyurt (2004) and Coccia (2007) address the challenges, and yet utility, in building taxonomic schemes for countries and variables. Ravallion (2012) assesses existing composite or ‘‘mash-up’’ indices and argues for stronger theoretical clarity and recognition of the ‘‘tradeoffs’’ conceptual foundations embody. He points to the sensitivity of indices to weighting and structural changes, as well as data quality, and the ongoing importance of country-specific contextual factors.

The present research seeks to advance this discussion by addressing existing conceptual issues in understanding and measuring country risk, while making the case for a new comprehensive tool, the Robinson Country Risk Index (RCRI), which puts a unique, dynamic, and integrated mix of functionali- ties in the hands of the user. By striving to be uniquely holistic, integrated, and interactive, the RCRI is complementary with many existing services and tools. Yet, by shifting the emphasis away from forecasting and prediction and toward dynamically leveraging extensive data at the country level to foster diverse strategic thinking and academic goals, the RCRI helps craft new forms of value (see comparative Table 1 in Section 2 and the discussion of results and uses to date in Section 5). The RCRI’s conceptualization rests on four broad dimensions—Governance, Economics, Opera- tions, and Society (GEOS)—across 70 sub-dimensions, 126 coun- tries, and, at present, 8 years of data. Countries are ranked according to their overall aggregate level of risk across a wide range of factors; the investigator is actively able to ‘‘drill down’’ and focus on any of the 273 variables; time-series variable and country cross referencing, weighting manipulation, and other functionalities are put at the user’s fingertips; countries are clustered by region (Africa, East Asia, Europe, Former Soviet Union, Latin America, Middle East, North America, Oceania, and South Asia) and perceived level of development (Advanced, Developed, Emerging, Frontier, and Least Developed); and a number of embedded or otherwise available modeling and statistical techniques allow the user to transform the index given a specific strategic construct or academic investigation.

Extant indices include portions of the conceptualizations or functionalities found in the RCRI. However, we argue that the RCRI helps address the concerns and opportunities outlined above, offers a new instrument for researchers, educators, and organiza- tional leaders, and serves as a robust and comprehensive alternative measure of country development. In harmony with the introductory quote about John Maynard Keynes above, this tool is best used in conjunction with comparative-historical and qualitative approaches, such as those found throughout the development and comparative political economy literature (see, for example, Acemoglu & Robinson, 2012a; Gourevitch, 1986; Haggard, 1990; Hall, 1989; Katzenstein, 2005; Kohli, 2004; Moore, 1966; Park, 1984; Rapley, 2007; Sachs, 2005; Sen, 1999) and in some existing risk services (see a sampling in Table 1).

In the remainder of this paper, we first address the relevant background and literature on country risk and discuss why we believe the RCRI adds to the understanding of country risk conceptualization and measurement. As we progress, we examine

issues surrounding the holistic approach, dynamic interactivity, variable and country clustering, rank ordering, and parsimony in the age of big data. We conclude by discussing RCRI results and use to date, as well as implications and future avenues for investiga- tion.

2. Country risk and taking a holistic, big data approach

Country risk can be broadly defined as the probability of particular future events within a state that could have an adverse effect on the functioning of a given organization (or, for that matter, an individual), whether that organization be a business, government agency, non-governmental organization (NGO), or other type of body (see, for example, Bouchet et al., 2003; Fitzpatrick, 1983; Harland, Brenchley, & Walker, 2003; Jensen & Young, 2008). The multidimensionality inherent within this definition suggests that the specific factors underlying risk change with the context of the organization involved and the specific operationalization of the dependent variable. What is a significant risk factor to one business or agency, for example logistics bottlenecks for an NGO such as CARE, might be an opportunity for another, for example a logistics supplier such as UPS. A certain type of risk, such as a prevalence of malaria or water scarcity, may be much more important to one organization than it is to another, and possibly an opportunity for yet another. A risk might be a concern because of potential short-term profit losses for one organization, because of human suffering for another, and because of national security threats to yet another. This lack of specificity has posed challenges for those seeking to conceptualize and measure country risk, both broadly as well as with respect to specific organizational profiles (Oetzel et al., 2001).

Taleb, Goldtein, and Spitznagel (2009) and Funston and Wagner (2010) point out that broad-based risk intelligence and manage- ment are key means to the end of not just organizational survival, but also organizational value creation. As such, researchers and risk services have worked to tackle the conceptual issues surrounding country risk. Broadly, these efforts can be categorized as qualitative and quantitative, though there is often overlap (Bouchet et al., 2003; Coccia, 2007; Nath, 2008). Qualitative assessments generally attempt to tackle head on the complexity of the political, economic, and social aspects of risk without sacrificing granularity and context, often weaving key statistics into their analysis. They generally rely on the perceptions of expert analysts and can sometimes lack a structured format, making it difficult for users to compare countries. Still, whether the format is structured or unstructured, the fullness of each country can be examined in extensive detail. The Economist Intelligence Unit (EIU), Stratfor, and Business Environment Risk Intelligence (BERI) offer risk analyses which fit in this category. Also in the qualitative grouping are services, such as the World Economic Forum’s Global Competitiveness Report (GCR), which ask for expert, Likert-scale, perceptive scoring from lowest to highest across a menu of variables. The benefit here is that the final average scores lend themselves to quantitative analysis.

Some quantitative measures and services, such as those provided by Political Risk Services’ (PRS), Maplecroft, and Roubini

Global Economics, attempt to rank order countries relative to each other or otherwise give them a risk rating. Rank ordering can be broad across all countries, with respect to clusters of countries (such as ‘‘Latin America’’ or ‘‘Emerging Markets’’), or at the micro- risk level (such as ‘‘infectious diseases’’ or ‘‘transportation infrastructure’’). Risk Ratings can be through qualitative expert perceptions (noted above) or based on hard data (or both). This field of inquiry includes a variety of methodologies, which vary given the different goals and conceptualizations of the investiga- tion involved. Some rank orderings are not necessarily focused on

Table 1 Comparison to relevant sources.

Source Description/Goals Structure Functionality RCRI Comparison

Economist Intelligence

Unit (EIU)

The EIU is a commercial

service that provides

extensive raw data,

qualitative country and

sector risk analysis and

forecasts, and content tied to

being part of the Economist

magazine. The EIU also offers

specialized indices, such as its

Democracy index and Where

to be born index. Its risk

briefing seeks to quantify the

risks to business profitability

and forecast the coming two

years.

The EIU’s various reports help

put the written context and

analysis around its wide-ranging

data resources. Its risk briefing is

centered on 10 dimensions

(security, political stability,

government effectiveness, the

legal and regulatory

environment, macroeconomic

risks, foreign trade and

payments issues, labor markets,

financial risks, tax policy, and the

standard of local infrastructure)

and includes 66 qualitative and

quantitative indicators used to

forecast future business risk, as

opposed to simply extrapolating

present trends into the future.

The EIU’s rich raw data tool

allows for some longitudinal

graphing for selected countries.

Its Risk Briefing includes a

customizable risk tracker which

looks at ranks and scores and

allows for the construction of

matrices (choosing countries,

risk dimensions, and industry

sectors).

The EIU’s various reports,

briefings, and articles

complement the RCRI,

helping put the written

context and analysis around

the numbers. Also, although

the RCRI does not incorporate

EIU raw data because of

copyright issues, some of the

data points the EIU provides

are the same as those

incorporated into the RCRI

from other sources. The

service’s risk briefing

includes a few broadly

similar dimensions and

variables to the GEOS

macrodimensions, but

emphasizes business risk and

forecasting. It does not share

the RCRI’s holistic, dynamic,

and academic approach

aimed at differential

diagnoses of countries

generally and given a wide

variety of risk lenses.

Maplecroft Maplecroft is a commercial

service that through its

Global Risk Portfolio (GRP)

constructs some 200 indices

across a variety of country

risk categories. The goal of

the service’s quantitative

tools and qualitative analysis

is to monitor and forecast

country risks for

multinational companies,

financial institutions,

governments, and NGOs.

Maplecroft’s products (indices,

dashboards, interactive maps,

country scorecards, etc.)

measure country risk across

political, economic, societal, and

environmental factors. The

company incorporates 6 years of

data and 1500 variables to

construct 200 risk indices

covering 200 countries. It does

not aggregate these indices into

an overall structure, but includes

tools for customization.

The GRP includes extensive

functionality through their

interactive dashboards and risk

calculators. indices, maps, and

scorecards can be tailored by

sector and geographic business

interest.

While similar to the RCRI

with extensive scope and

coverage, Maplecroft&#