Business and international political risk

Business and international political risk

Business and International Political Risk Karel Niebling Division Head, Shell International Petroleum, The Hague Martin Shubik Seymour H. Knox Profes...

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Business and International Political Risk Karel Niebling Division Head, Shell International Petroleum, The Hague

Martin Shubik Seymour H. Knox Professor of Mathematical Institutional Economics, Yale University Karel F. J. Niebling was educated at the Universities of Utrecht and Leiden, graduating in physical and organic chemistry. His career has been entirely in industry, embracing a wide range of managerial responsibilities in the Royal Dutch Shell Group, Johnson Continental Engineering and Constructors J o h n Brown, before taking up his present post in 1975. He is a Fellow of the Royal Ghemical Society. He lives in Wassenaar and is married with three children. Martin Shubik received his BA and MS degrees in Mathematics and Political Economy from the University of Toronto, Ontario, Canada, in 1947 and 1949 respectivcly. He reccived his AM and PhD degrees in Economics from Princcton Unlvcrsity in 1951 and 1953 respcctively. Dr. Shubik is a Fellow of the Econometric Society and the World Academy of Arts and Sciences, and has becn consultant to many major corp orations and government agencies. He is author of approximately tcn books and 180 articlcs and spccializcs primarily in stratcgic analysis.

The assessment of political risk becomes increasingly a more important component of the strategic planning process of multinational corporations. In this article the authors review a comprehensive portfolio ofrisk-analysis techniques and relate these essentially academic approaches to the planning requirements of MNCs. 12

'There can be no rule or state witho u t the military; maintaining the military requires wealth; wealth is garnered from the subjects of the state; the subjects can only prosper through justice; without role and the state there can be no justice.' (A paraphrasing of the Cycle of Equity of Mustafa Naima) This 17th century Turkish view eloquently states the delicate balance between politics and economics. A political rule with justice and protection of the welfare of the individual enables enterprise to flourish. A flourishing enterprise provides the resources required for a state to supply justice and protection to its members. At some point in their path towards decline, political rulers may forget the delicacy of the relationship between political and economic health and wealth. When dealing with foreigners, be they individuals, private trading companies or governments, it is easier to forget these fundamental rules even sooner. International law is sufficiently tenuous that there is a temptation to view foreigners as a part of the environment to be exploited. The local politicians, in general, do not consciously try to kill the goose that lays the golden eggs b u t frequently they act under the impression that it can be roasted, sliced, and fed to all at the table and will continue to produce the golden eggs. The national and international political environments are facts of life. The necessity for economic productivity and the value of international trade are also facts of life. Individuals or small national firms are individually too small either to influence their environment directly or to be selected as special targets by the political forces. This is not so for the large corporation. If the political environm e n t is fragile, it is in the self-interest of the individual or small firm to do some basic political predictions. A timely assessment may help the individual to decide that Hitler is not just a passing p h e n o m e n o n and that leaving Frankfurt is a good idea for a German Jew. It might also tell a member of the Cuban or the Iranian middle classes that not all will

necessarily become well after the fall of Batista or the Shah. Basic political prediction and assessment has been ndc~ssary throughout virtually all of history for those who wish to survive. The large firm, be it national or international, has all the problems of the individual plus the problems of being a large enough visible, identifiable target with resources and .. economic power. If the large corporation is to survive, prosper, and be economically valuable, its management must not only utilize political predictions and assessment; it must also produce strategic plans which take into account its visibility, vulnerability, and power. Business as usual is not business alone. It is a blend of economics and politics. The growth of international trade from around 300 billion in 1961 to around 1100 billion in 1980 (in 1975 dollars) and the growth of world population in the same period from around 3-4~/~ billion give some indication of the importance of international trade. Transnational data flows have been increasing exponentially for the past fifty years. Governments and government bureaucracies have also grown. Whether we like it or not, we are linked into one world. The open frontier is gone and the large business entity, if it is to survive, must not merely react to its environment; it has to take an active, strategic part in shaping its environment and influencing the type of future that will emerge. Influencing the environment is a managerial, moral, and intellectual task. The corporation must have societal values and must be willing to make explicit what it deems to be good international corporate citizenship. One cann o t plan fruitfully without at least understanding and indicating the goals of the corporation. Corporate strategic planning, to be of use, requires managerial processes which are highly interactive so that planning does not take place in a vacuum. Intent and process is not enough. There has to be an intellectual input. The methods and techniques of forecasting and planning must be known and used by the staff. The new theories

and ideas must be understood and the possibility for utilizing them must be appreciated. A corporate planning staff is not a university and should n o t even be an extended post-doctoral sinecure. The corporation may well wish to sponsor research work and to even collaborate with research institutions but strategic planning groups are not research institutions in and of themselves. The enormous growth in corporate planning groups I has not taken place through intellectual curiosity and a desire to sponsor pure research, b u t because of operational necessity. The first thrust was in operations research and economics because the techniques were improving, the measures were there, and the payoffs were reasonably clear. The growth in the next ten to twenty years will be in political forecasting and risk assessment, even though the techniques are still relatively shaky and the measures are poor. The need is there -- it is growing daily -- and the stakes are high. Before we discuss the different types of political events which may influence the corporation and the type of resources which are at risk, a certain amount of terminology is called for in order to make the clear distinction between the planning process for political risk assessment and the theories, methods, and techniques involved in the forecasting of political events. There are at least eight types of forecasting or contingent forecasting methods used. They are as follows: 1 2 3 4 5 6 7 8

Event prediction Objective probability prediction Subjective probability prediction The construction of qualitative indices The construction of quantitative indices Cross impact analyses and other accounting schemes Loose scenario construction Formal model construction

Even t prediction Reagan will be elected in 1980, Khomeni's regime will be overthrown

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before 1984. These are unhedged predictions. The author of such a prediction has 'put his m o n e y where his m o u t h is'. He is going to be either right or wrong and there is a fairly clear test to determine whether he is right or wrong. Such forecasts can rarely be made with unhedged certainty in human affairs. There is always a gnawing doubt. The forecast itself may either cause or prevent the p h e n o m e n o n from occurring. Financial consultants who sell newsletters predicting where gold or the stock market will go occasionally use this form of prediction, as it appears authoritative to the simple-minded. News, like coffee, is generally consumed hot; once it has cooled it is thrown away. Individual and institutional memories tend to be short. The wrong forecasts are frequently forgotten and the correct forecasts are puffed. For the serious corporate planner it is important to recognize the fallibility of any forecasting activity. Some criterion of error or lack of perfect confidence needs to be supplied. The two c o m m o n ways of doing this are by supplying either objective of subjective probabilities.

Objective probability estimation Without going into the details of the philosophical problems faced in defining objective and subjective probability (and there are many), a few simple examples will serve for the purpose at hand. The probability that the toss of a fair coin will result in heads or tails is fifty-fifty to an operationally sufficient degree of accuracy. A frequency interpretation can be given to what y o u expect to happen upon tossing the coin m a n y times. This has use in direct industrial applications such as quality control. Unfortunately, most political and other behavioural events do not fit nicely into a frequency interpretation.

Subjective probability

estimation We call a probability assignment to the occurrence of any one of a set of events a subjective probability if there 14

is no underlying, direct frequency interpretation or controlled experiment that can be replicated to justify the selection of the probabilities. The assignment of subjective probabilities m a y come about as the result of much thought, research, and calculation and one way they can be regarded is as the betting odds assigned b y an intelligent, risk-neutral bookmaker or insurer. Thus, the statements that Reagan will be elected with a probability of 0.6, Carter with a probability of 0.395, and Anderson with a probability of 0.005 provide an example of the assignment and subjective probabilities or fair betting odds for a one-shot event. The danger associated with the assignm e n t of specific numbers to subjective probabilities is that an appearance of spurious accuracy may be signalled. There is a wise saying in operations research: 'When anyone tells y o u about a calculated risk, ask to see the calculations that accompanied the t "aking of the risk'. It is easy to become fascinated with the apparent accuracy of numbers. In doing so we m a y forget that it is not what the numbers are but what the numbers mean.

The construction of qualitative indices Although it m a y not be possible to assign numerical values to probabilities or to p h e n o m e n a such as the level of political instability in a country, it may be possible to attach a believable 'moreor-less' measure; in other words, it may be possible to state that one situation appears to be riskier than another witho u t being able to state precisely b y how much. There is a general debate in the social sciences between those who believe that it is possible to construct a numerical measure for virtually anything and those who believe that such a measure m a y be virtually useless because of the intrinsic difficulties in describing what is being measured. When King Solomon suggested cutting the baby in half as a fair division and one d a i m a n t was in favour while one was opposed, Solomon attached more 'mother-like' qualities to the one who was opposed than to the other. In this situation it is unlikely that

he either needed, or was in a position to construct, a ' m o t h e r h o o d index' on a scale from zero to one. Frequently it is neither reasonable nor necessary to construct a numerical scale; an ordering will do. If two countries offer more or less the same economic opportunities, all other things being equal, b u t the political instability in one appears to be enormously larger than in the other, one may not need a numerical measure to arrive at an investment decision.

The construction of quantitative indices If y o u can measure, you might as well do so. A single n u m b e r such as temperature or the a m o u n t of m o n e y at stake contains an enormous a m o u n t of information in a very compact form. The problem with political risk assessment is in Finding features of the political process which are susceptible to measurement. There are natural items such as the number of suicides, the n u m b e r of murders, the n u m b e r of political assassinations the work hours lost due to strikes, and m a n y others. All of them are helpful in painting a numerical picture of a society but the key problem comes in interpretation. Suicides in Finland m a y have an enormously different significance in the measurement of political instability from that they have in Greece.

Cross-impact fo recasting

h o m e computer expands the market for printed circuits and cost improvements in printed circuits expand the market for the h o m e computer. The input--output analysis of Leontief a is an example of cross-impact forecasting4 via an economic accounting scheme. Political cross-impact forecasting is as yet in a relatively early stage of development.

The loose scenario construction A scenario is a mixed verbal/numerical description of the firm, its competitors, and its environment. It is the setting of the stage in which the action is to take place. It is less structured and less formal than a mathematical model, but more structured and more formal than either an essay or a mere list of measurements. The scenario writers are concerned with context. The best scenario writers have frequently had training as historians or have an appreciation of history s.

Formal analytical models A way of predicting in physics or in mechanics is b y means of a formal mathematical model with causal relations given from theory, verified b y experiment, with parameter settings measured and verified by observation. The spirit behind the large-scale econometric models is the same but unfortunately both the theory and measurements are shakier 6. The socio-political models leave even more to be desired 7.

Many highly useful forms of forecasting are nothing more than careful accounting. If y o u wish to forecast the Political Risk Assessment and n u m b e r of young adults there will be in Corporate Strategic Planning another ten years time, given no major Political risk assessment is part of the war or famine, the way to do it is to job of corporate strategic planning. It project forward from the n u m b e r of makes use of political forecasting, children who are already in existence. If methods, modelling, and theory and one wishes to forecast when a new proassesses risk by considering alternative duct such as a h o m e c o m p u t e r will 9corporate strategies in the light of become economically viable, it is possible corporate goals and measures and other to break up the forecast into several information on political uncertainty. pieces where each piece is a forecast on a major cost reduction in a specific subThe political cycle must be viewed in assembly. The overall forecast is contin- tlle context o f major economic investgent upon sub-events. It is also possible m e n t and political risk assessment has as that the introduction of new technologies its horizon anywhere from n o w u n t i l five, helps each other 2. Thus, for example, the ten, or even fifteen years into the future.

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Risk can only be assessed with respect to alternatives. The alternatives for the large corporation are not only external acts b u t are also influenced and even created by the acts of the corporation itself. Strategic planning calls for a realistic assessment of the policy choices of the corporation as well as its goals. Given these and the political forecasts, then the risk profiles of different policies as they are influenced by political events can be assessed. The type of political risk exposure varies with the nature of the corporation and its business operations. For example, lending, trading, and manufacturing and investing are distinctly different s. Two types of national risk and regional risk are frequently worth distinguishing. In particular, for the country one m a y wish to distinguish between radical changes, brought about by political instability or war, and gradual, even somewhat predictable, long-term continuous changes in politico-economic climate such as nationalization or unionization. The key distinguishing feature between the two is that it is considerably harder to be confident a b o u t one's estimates of the dangers of disastrous risk when faced with war, revolution, or a new coup d'dtat than it is to assess risk with an ongoing, even oppressive, regime which has a long-run 'style'. The devil y o u k n o w is still easier to assess than the devil you don't.

ability to avoid heavy risk may in and of itself cut d o w n on the risk to which the corporation is exposed. If the political powers are taught that the golden goose is agile enough to waddle across the border before it is killed they m a y decide that it is in their self interest to keep it at least minimally fed but still in place. The type of political risk run under creeping nationalization are quotas, increased participation by the host government in the ownership of a foreign subsidiary, limitation of the activities of foreign companies to certain sectors, legislation affecting repatriation of profits or m a x i m u m rates of return, special conditions placing the firm at a handicap in competition with nation state enterprises for labour, capital, or local markets, and last b u t n o t least essentially forcing the firm to be more politically active in support of the local regime than it would choose otherwise. In addition to forecasting discontinuous and continuous political events in a single country, it is also necessary to make assessments at a regional and even global level. The world frontiers are no longer open in the way that exit or flight is necessarily possible. If creeping nationalization is observed everywhere then a comparative analysis becomes imp erative for survival.

Policies and Resources One way of looking at political uncertainty is to ascertain h o w business operations are affected. Van Agtmael s has suggested that operations can be separated under the following categories:

It well may be that in a country such as Bolivia where a coup d'~tat can be expected with great frequency, predictions can be made. But even there, there is always the danger that the next coup 1. Trading d'Otat is n o t merely the next round in a Trading, selling, and buying are political musical chairs b u t will bring affected by political stability in a country with it a radical change in policy. One ,and its region b u t n o t by nationalization. can do business under m o s t conditions as In m a n y ways trading, selling, and buying long as the rules are k n o w n and are n o t afford the greatest flexibility and the changing too fast; although nationalizasmallest risk exposure. tion and creeping nationalization m a y spell the long-term cessation of business, the risk exposure of the corporation 2 Lending does n o t have to be u n d u l y large. In fact The lender has the advantage of having an intelligent display of an intention and an involvement with a specific horizon 16

(the duration of the loan) together with the reluctance of countries to lose their credit standing. In fact bankers have probably had many more problems with economic inability to pay than with political unwillingness to pay, although inability to pay can easily be the result of political instability. The frequent result is a reschednling of the loans. Even given the high flexibility of the lender, the exposure in terms of amounts is often very large and the return in relation to the risk is much smaller than that of, for example, a manufacturing operation. In particular, this means that the lender must be particularly sensitive to the potential of catastrophic losses even though they occur only with an extremely low probability. There are some who are still waiting for the settlement of the Tzarist bonds.

The real assets include institutions considered as a whole, fixed immovable assets, real movable assets which are not easy to liquidate, real movable assets which can be easily liquidated, and knowledge industry assets such as patents, processes, experience, and established connections.

Personnel includes employees who are local citizens, citizens of the corporation's home base, and third country citizens. Their families and other dependants must also be considered. There are important moral and political problems involved in the rescuing of human hostages which are qualitatively different from protectin~ non-human assets. There are also deep and as yet unresolved problems concerning corporate and national loyalties. In one sense, the intemational corporation is an important agent for the growth of an international 3 Investing in manufacturing order. International trade is a precursor and other direct investments of international law and as such the personnel of an international corporaRisk exposure depends on the sensitition are far more exposed than their vity of the industry to nationalization, brethren who work at home in an the degree of capital intensivity and the environment where the game is played return on capital investment. Oil and according to only one set of rules. mining companies seem to be highly prone to nationalization. The governFinancial assets include currency of all ments of developing countries feel that types, accounts payable, prepaid taxes, they have a legitimate hegemony over other short-term loans and credit, longtheir own natural resources (a UN term credit extensions, bonds, shares, resolution has stated this unequivocally). and other financial paper. As financial What is more, technology is becoming instruments are, in essence, creations of increasingly available on a management national law the issuer of the instrument contract basis, the quadrupling of oil may have the power to use it as ahostage. prices has given oil-producing countries The laundering of money and the use of the wealth to pay for nationalization third parties is an art form in and of itself. and the rush of nationalization has, of A pleasant example was given to one of course, a significant demonstration the authors some time ago by an Iranian effect. Retail trades and agriculture are acquaintance who bought US traveller's also on the list of vulnerable industries, cheques in Tehran, noted their numbers, followed by low-technology industry. burned them, and then left the country, Specialized, financial operations and thus passing the inspection at the airport. high technolrgy are the least susceptible to nationalization because they require Methods for Political scarce skills and sophisticated research "Uncertainty Evaluation and and development.

Risk Assessment

Another way of looking at the key This brief overview touches on both components of international risk expothe different methods utilized and the sure is to consider the three types of type of individuals doing the work. assets which are at stake in international trade. They are real assets, personnel, Many businessmen feel that a qualitaand financial assets. tive judgement rather than a quantitative

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analysis is unavoidable when it comes to considering political risk. This, unfortunately, poses a false d i c h o t o m y which if resolved by sticking strictly to a qualitative j u d g e m e n t m a y result in scarcely elevated guesswork, in which political risk is either conveniently ignored or emerges as a hodge-podge combination of various intuitive inputs combined with scattered observations on recent historyg, l~ A second, although perhaps less important, reason for the lack of soplfistication is that m a n y people feel uncomfortable with analytical tools .especially those which are quantitative, as long as their predictive value has not been proven.

making process. The writing of Gold. hamer 11 on the role of the adviser to political leaders illustrates b o t h the strength and weakness of the adviser role. Old hands and experienced diplomats, generals, lawyers, or negotiators are in general n o t methodologists, theorists, systems analysts, or in most instances managers. Thus, their value depends highly u p o n file design of internal cor. porate planning processes which can utilize and appropriately interpret their inputs. One way to assess the political climate is to send a management team and go and see for itself. Unfortunately the dangers are great that file executives may be given a biased view by those who share their values and want their business (on occasion even those w h o despise their views sometimes want their business). The view of Iran from the Shah's entourage was not the same as the view that could be obtained from the Bazaar.

A third reason is that m a n y businessm e n would like to avoid having to consider themselves as actors on the political stage. They would prefer to stick to the lfighly attractive b u t irrelevant view of the small businessman pursuing his Individual wisdom and experience is a economic ends guided by the impersonal, invisible hand and having nothing to do rare and precious c o m m o d i t y . 'Know with the politicians who he b o t h fears and w h o ' is frequently more valuable than ' k n o w how', b u t reasoning by analogy and despises. the skilled telling of war stories has its The m e t h o d s used in political fore- dangers. It is especially dangerous to use casting and risk assessment include: only advisers, verbal inputs, and occa(1) advisers, briefings, situation reports, sional site visits when there is accounting newsletters, and grand tours; (2) the and other forms of numerical information devising of socio-political checklists, t h a t do n o t match with the stories being indices, and measures; (3) net assess- told. m e n t and strategic audit methods; In academic circles and more recently (4) Delphi techniques, scenarios, games, in application to business, checklists for and simulations; and (5) mathematical the measurement of indices of political models and sensitivity explorations. uncertainty have been suggested. The Business folk law abounds with sayings pioneering work of Lewis Richardson 12 such as 'There is no substitute for know- was that of a pacifist scientist with an ing y o u r business'. There is u n d o u b t e d l y earnest concern to join measurement and a great a m o u n t of truth in such a saying. theory together to provide deeper underUnfortunately the businessman's business standing of the dynamics of war and is not politics, and the politician's busi- h o w to prevent it. The production of ness is n o t business. Secret service agents, indices to measure international tension retired ambassadors, generals, newspaper was also pioneered in the work of correspondents, and retired members of 9Quincy Wright 13. R u m m e l and Heenan 14 the Cabinet all have considerable experi- and Van Agtmael s have been concerned ence and all are trained to interpret with m e t h o d s for assessing political political and diplomatic factors for stability utilizing lists of measures. has considered twelve political or news dissemination purposes. R u m m e P s It is an open question as to h o w weU measures of domestic conflict for over they can communicate their insights to 100 countries. These include internal be used wisely in an economic decision- warfare, rioting, terrorism, and so forth.

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An example o f a crude checklist, primarily to be used for developing countries is that of Van Agtmael 8. Another, more refined list is attached (Appendix) which tries to force the investigator to dig a little deeper into a country, and also to b e c o m e more aware of his 'feelings' (see also deVulpian (Paris) and Yankelovitch, Naisbitt, etc., in the USA). In this respect there should be mentioned the psycho-analytical, passive, m e t h o d of computer-analysing speeches of important leaders (5.4.774 Mots pour convaincre) 16, to obtain insights into motivation b y studying closely cherished key-words. Related to this passive m e t h o d are the more active ones, such as the Richelieu technique (insulting or provoking someone, or a group of people to test their reactions) to obtain a

better picture of underlying tions or beliefs.

motiva-

These active methods can be highly effective, and equally, lrigtfiy dangerous, because of the often uncontrollable and/or unanalysable reactions. Nevertheless, in the range of 'subjective' methods the authors feel that the dynamic interchange with the sociopolitical environment will always remain a vital source of information and that the design and use of pilot experiments should be considered to a larger extent than is done currently. Of c o u r s e , j o u r nalists, particularly TV interviewers, use these techniques increasingly. A further analysis can be carried o u t b y a m e t h o d called the subjective stability trend m e t h o d (SSTM). It can be used in addition to the checklist o f

Table 1 Thirteen subjective stability indicators Indicators

Greece Period of trend

Resultant effect of trend

Trend 1 9 6 8 - 7 0

Stable

Strong increase Modest increase

X X

Increase

X

Indifferent

Unstable

A. Economic factors

1 Nationalincome per capita 2 Private savings through official establishments 3 Investments by private foreign enterprises 4 Balance of payments (visible and invisible) 5 Price level of consumer goods

x

Deterioration

x

Moderate increase Subscore

3

Increase Increase



x 2

1

Constant

x

x

Increase Slow decrease

x

x x

2

3

x

X

I

1

B. Sociological factors

6 Agricultural output 7 Private home ownership and home building activities 8 Emigration (permanent and temporary) 9 Metropolization and urbanization 10 Religious attendance of population

Subscore



2

C. Violence factors

11 Number of strike days 12 Criminal offences per 1000 inhabitants 15 Frequency of anti-government occurrences inside the country

Decrease Slow increase Decrease Subscore Total score

7

5

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Table 2 Thirteen subjective stability indicators Indicators

A. Economic factors 1 National income per capita 2 Private savings through official establishments 3 Investments by private foreign enterprises 4 Balance of payments (visible and invisible) 5 Price level of consumer goods

B. Sociological factors 6 Agricultural output 7 Private home ownership and home building activities 8 Emigration (permanent and temporary) 9 Metropolization and urbanization 10 Religious attendance of population

Greece Period o f trend

Resultant effect of trend

Trend 1971--3

Stable

Unstable

Strong increase Low increase Increase Deterioration



Strong increase

X

Subscore

1

Increase Slower increase

X

Decrease

x

2

2

X

Increase Slow decrease Subscore

C. Violence factors 11 Number of strike days 12 Criminal offences per 1000 inhabitants 13 Frequency of anti-government occurrences inside the country

In-

different

2

Increase Slow increase

X

X X

2

2 •

X

Increase in latter half

X x

Subscore

0

1

3

Total score

3

5

7

Conclusion: Less stable than period 1968--70

the Appendix for the analysis of more developed countries and for the intercomparison of cotmtries. The SSTM approach is a subjective one and the view of the situation is meant to be compiled b y a team of staff that has followed events carefully b u t at a distance. 'Keesing's Archives', which lists country political occurrences in timesequence, is a useful source for this approach. In Tables 1 a n d 2 examples are given

from the political scene in Greece. These tables were compiled in 1970 and in 1973 b y students at the Foundation for Business Administration at Delft (Rotterdam--Delft Universities Interfaculty).

T h e stability indicators were selected

on the basis of the following assumptions: 9 there is a strong interrelation b e t w e e n economic welfare and political stability, 9 sociological structure has astrong influence u p o n the stability of a country, 9 violence reported and visible i~ only a small part of the total a m o u n t of violence latent in a country. T h e w e i g h t given to e c o n o m i c s and s o c i o l o g y was j u d g e d to b e a b o u t equal (a score o f 5), a n d s o m e w h a t higher than

the weight given to violence (a score of 3), because violence was considered to be more a result of underlying problems J

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than a primary reason. (Please remember these were the views of an analysis team consisting of young Dutch graduates l)

9 economic climate,considering the trends in national product, inflation, external debts.

Attempts have been made to 'classify' countries by research on the ways in which individuals react to different problems. One of the most notable of these is by Hofstede 17, who measures, relates, and compares four main sociological dimensions of countries: (1) the 'Power--Distance' Index between individuals, (2) the 'Uncertainty Avoidance' Index of individuals, (3) a measure of individualism of the countries' inhabitants and (4) a 'Masculinity' Index that measures an individual's degree of willingness to hake risk rather than choose security. Hofstede classifies and positions the forty countries-according to combinations of these dimensions. One of the many conclusions that can be drawn from his research work is that countries] societies differ considerably in their attitudes to various economic/political problems. However, the SSTM m e t h o d to measure stabilities is n o t greatly affected because it is trends, rather than absolute values, that are measured and compared with trends occurring in other countries. Whereas the SSTM m e t h o d is based on the analysis of incidents that have actually taken place in two different periods and tries to assess the prevailing trends by subjective assessment, Rummel and Heenan describe the use of integrated analysis techniques combining individual, intuitive, or subjective assessments with quantitative methods for a number of sociological, economic/political, and criminal dimensions. Rummel's and Heenan's research suggests that the political destiny of a nation is influenced by a number of major independent dimensions:

Rummel's and Heenan's work is very close to the work carried out by one of the authors and a group of students at the Delft Foundation for Business Administration. It is our opinion, however, that even when using an integrated approach the selection of file indicators and the weight allocated to them is an individual and subjective process, and different analysis teams or work on different countries will usually result in the use of other sets of indicators for valid and explainable reasons.

9 domestic instability, as measured by tendencies towards subversions, rebellion and turmoil, 9 foreign conflict, ranging from diplomatic exchanges to military violence, 9 political climate, ranging from left/right swings to the role of unions, military forces, etc., in the political arena,

There are undoubtedly many difficulties with the construction of checklists and attempts to produce subjective or objective indices to be weighed in file production of a measure of political uncertainty. We have not even touched on the many problems in human perception and judgemental abilities. A perceptive evaluation of these difficulties applied to forecasting and planning is given by Hogarth and Makridakis elsewhere 18. Here we merely note that the needs for political assessment are now so large that both research and operational attempts in index construction would be justified if their only products were better questions, better data-bases, and a different set of inputs to check against the advice of old-timers, wise men and gurus. Net assessment methods and strategic adults are more explicitly directed towards strategic planning. They have direct history in military thought. The military has been concerned with the evaluation of both the capabilities and intentions of all strategic players. In the past thirty-five years the development of the methods of the theory of 9 games has provided a guidance for the construction of a strategic checklist. This includes scope, time frame, description of strategic actors, rules of the game and domain of choice, goals and payoffs, and assumptions concerning behaviour. It is relatively easy to sketch such a checklist b u t the actual production of useful answers involves much hand-tailoring. 21

The type of strategic analysis suggested by the language of the theory of games is closely related to the type of strategic analysis written about by the military strategists such as Sun Tzu, Clausewitz tg, Mahan, and many others. The main distinction is that the great strategic thinkers stressed the implementation of strategic analysis and the activities of war, economic competition, and political competition as belonging to the domain of social life rather than science and pure analysis. The audits and the net assessments are proper tasks for a strategic planning staff but the selection of strategy is a key part of a social process. The Delphi technique involves the use of a questionnaire to be answered independently by a group of experts in a controlled feedback system =~ The data from the First round are processed and presented to the experts independently for their use in subsequent rounds. The anonymity allows for a control which avoids the social pressures and the type of group-think that can characterize brainstorming and other face-to-face sessions. The problem with utilizing the Delphi m e t h o d is that it depends considerably u p o n the quantity, quality, and motivation of the experts being used. Political experts are scarce and their motivation is highly diverse.

Although it is n o t difficult to believe that an international corporation could utilize a gaming exercise like the political military exercise for its own purpose it would require considerable enthusiasm and application by participating executives as well as the construction of appropriate scenarios. The type of tradition present in the military more or less guarantees that any officer going through staff college expects that at some time in his career he wiU follow military tradition and play in some form of gaming exercise. This tradition is not yet part of corporate culture. The business games of the American Managem e n t Association and even games with a specific international twist such as the international operations simulation of Thorelli, Graves and Howells 22 have had a role in business education and life somewhere between entertainment and mildly interesting, educational devices.

Even though gaming itself may not be particularly used in corporate strategic planning, the construction of useful and imaginative scenarios is an odd form mixed with scientific, historical, and bureaucratic insight which is of value in itself. Among its other uses, a wellconstructed scenario tends to provide the context for checklists of factors considered in the study of political instability. The scenario is a way-stationbetween the Delphi methods are relatively cheap, taxonomic listing of factors and the coneasy to understand, and intrinsically struction of formal causal models. It is attractive to those who want 'a quickie a useful way to mix numerical and verbal study'. A weU designed Delphi study inputs. may easily provide a cheap additional check to forecasting or contingent foreAmong the commercial success stories casting done in a different manner. in the social sciences, the large econoScenario writing was originally devised metric models stand high. The first in the military for setting up the context efforts at econometric modelling came as for the playing of war games and more a relatively natural outgrowth of work in recently for the providing of the back- macro-economic theory. The commercial ground for the playing of political mili- utilization of these models by firms such tary exercises s. The political/military as Chase Econometrics, DILl, and Wharton exercise 21 was designed to explore the Econometrics is a relatively recent actions and reactions of the main strategic phenomenon. By hand-tailoring in special players in important hypothetical situa- micro-econometric segments the micro~ tions such as the China-Vietnam war of macro models can be used to answer 1985 involving claims to major oil 'what if?'questions for specific industries, discoveries several hundred miles off- such as what will happen to the jet airshore from Vietnam, on reefs with Ul- craft engine industry given a change in the Department of Defence budget? defined ownership. J

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It has long been recognized that attempts to utilize macro-economic models over periods of several years cannot be successful without attention being paid to political and social factors. In the Eastern European bloc, the International Institute for Applied Systems Analysis and in Western academic circles considerable interest has been envinccd in the construction of integrated global models for social science modelling of international trade, politics, and conflict. There are now several dozen models which have bccn usefully summarized by Ward and Guetzkow 2s. A brief sketch of some of them is also given elsewhere by one of the present authors. None of these models was directly aimed at the strategic planning problems of the firm. They all can be best regarded as preliminary academic attempts at modelling causal structures at a depth beyond that of using simple linear combinations of political indicators. Between science and science fiction lie the formal mathematical models of complex socio-political behaviour. The d i g ferential equations of Richardson, suggesting conditions under which wars might break out, and the catastrophe theory applications of Zeeman provide examples 24. The analogies are rich and the mathematics impressive and forthose reasons alone the work is of interest. However, mathematical analysis and modelling perception of fuzzy or squishy systems is not the same. Even if one believed many of the more extreme claims for catastrophe theory, its application to systems with more than three or four control factors would be enormously difficult to carry through. At this time the results do not seem to be commensurate with the effort.

What Can Be Done For the large corporation, and especially for the international corporation, strategic planning is n o w a fact of life. It will become even more so. Whether they want to or not, the management of such institutions must take into account the political realities and their own influence on these realities. As a powerful, goalorientated entity, the corporation must

face up to defining what it means by trying to be a 'good corporate citizen' in fifty different and sometimes diametrically opposing jurisdictions. Its strategic problems involve a mixture of ethics, perception, and analysis. Knowing what y o u want, for example, unthreatened ownership, protection of technology, and management control; knowing the corporate biases and dangers of group-think, such as shared stereotypes, rationalizations and illusions of morality; all of these are organizational problems involving the installation of appropriate managerial processes. They are not analytical or academic problems. Most of the techniques and theories of forecasting and strategic analysis have come from the universities and research institutions. To be utilized in strategic planning they have to be set in context. The accuracy of political forecasting is still relatively poor. But it needs to be done, even if the only result is to measure h o w inaccurate the forecasts are. Given that information, the strategic planners can cut the cloth accordingly. Risk selection is the conscious act of a strategic player who understands his own goals and capabilities and knows how good or poor his forecasts are. Given the level of uncertainty, his own intentions and abilities, political risk can be calculated and a reasonable policy selected. Most of the techniques of political forecasting have been and are being developed by academics. The connection between academics and strategic planners should probably remain strong and some corporate sponsorship of academic work would probably pay off for all in the long run. But it is important to keep in mind that the interests and tasks of the academic political event forecasters and the corporate strategic risk assessors are different although complementary. A good strategic planning operation 'will probably use virtually all of the methods noted above. Part of its task is to contrast the methods and use them to keep each other honest. As scholars we see the manydifficulties in political prediction but as strategic planners 'as regards the fnture our task is n o t to predict it, but to make it possible'.

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?pendix: . spects oJ the Country he Balances) The OECD organization, and each countries' institutes, are rich sources of factual information. In addition, the analyst must get a 'feel' for the country, particularly for the 'irrationalities' of the country. Hence this random sample of relevant and irrelevant questions. Good analysts try to penetrate deeply into the 'psyches' of a country. Those who only read The Times and never the Sun, or vice-versa, are disconnected from the real world.

1 Sample of Questions and Actions 9 Using Hofstede's sociological dimensions place or locate the country on his multi-dimensional maps.

Which countries resemble the country y o u want to analyse closest? How does this situation compare with your own feelings? Does the location on these cultural maps clarify your views ? For an example, taking the Netherlands' views on South Africa, how could you explain the deeper motivations of their continuous leadership amongst the Northem Hemisphere's states in attacking the government of South Africa, bearing in mind the blood relations between the two countries ? As another example: Taking the conflicts, or competition (post-1945) between Germany and France. Can the competitive modes between these countries be explained better by thinking through the cultural dimensions, using Hofstede's analysis ? 9 Are there great differences in religious and cultural habits between segments of the population?

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Are there signs of religious, cultural or ethnic clashes? Taking Spain as an example, is it possible to get a closer feel for the Basque situation in Spain by looking at theavailable numerical data as well as the historical perspective? How do we characterize the difficulties in absorbing minorities? What are the driving forces ? 9 Is it valuable to computer-analyse speeches of spokesmen of the most imp ortant political segments and search for recurring 'key' words? In listing key words of important speakers can we relate 'key' words to recent political history? For example: Is it possible to obtain a better insight in the minds of leading politicians by psycho-analytical techniques such as looking for recurring 'key' words? Can we get a feel for strength of real inner convictions? Does this make prediction of future policies easier? (taking into account of course that most speeches are prepared by teamwork). 9 Has the country obtained land or lost land in recent history? List the occurrences and the magnitude of marginal populations involved. As an example Poland and the Germanies; Does the removal of millions of Germans create a long-term stable or unstable situation? How can we interpret signals in the second and third generation displaced persons ? How strong are the urges for the children's children to return to the land they never saw? How strong are myths, nostalgia and irrationalities ? Can better answers be obtained by comparisons with other historical displacements ? (Israel; Palestine).

300

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200 180 r"

Greece

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120

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100 80 60 40 20

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1966 67

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69

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1970

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71

72

73

74

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Fignre 1 Cumulative West German investments in Greece and Turkey.

Should we use cultural mapping to explain apparent differences? In how far is the Polish situation affected by the signals received from the Germanies ? 9 How important are large cities? Are they different from the country as a whole? In what respect? Why? What are the roles of large cities in providing the cadre for reformation or revolution? Are strong counter-cultures born in large conglomerates? What is their overall effect on the country? As an example: Paris. Are new ideas generated in the megalopolis' melting pot of thought and culture? Or are ideas generated in the peripheral areas and then transferred to the centre of government ? What are the interrelations between politicians, bureaucrats,

mediae and the universities and institutes ? Do the provinces stimulate or diminish the interaction? What are the relations between say Marseille and Paris in this interplay? How do we identify the nature and size of the really influential minorities? How do they obtain support of those further removed from the centre?

2 Government 'Feel' Get a feeling for and rate govemment-owned services such as postal service, railways, telephone, and compare the rating with that of your own country. Is there a lot of political small talk? Do politics occupy a large share of newspapers' attention? List the common problems found in popular newspapers (not the highbrow papers).

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9 Are there active political minorities diametrically opposing riding government ? Hyper-active churches, religions, anti-technology lobby? List these. 9 Look for recent analysis of voting behaviour. Is the trend to conserve or t o change? Are party programmes converging or diverging? 9 Is the police omnipresent or almost absent? How are they dressed; almost as civilians, really martial or fancy? 9 Are the departments of interior and justice separated? How are the judges nominated? To whom do they report? 9 Have you seen many military? How do they look? Are the defence and interior ministries disconnected? What is your impression of the military ? Threatening to you or harmless ? History of politicization of military ? Coups ? 9 How did you passborders? Easy? Difficult ? In what respect?

3 Economics 'Feel' 9 List relation employed/unemployed over last three years. Any drastic change? Reason? 9 Count foreign investment as percentage of total investment, overall, and per main sector of economic activity. Any absurdities ? 9 Rate educational and technological level, e.g. by looking at shop windows, at quality of dress, at variety of international brands in food markets. 9 Howefficient are banks? Cumbersome? Many restrictions on money flows? Registration of action? Experience with insurance ? Efficient or slow? 9 Rate average car-park and driving behaviour. Bold? Wild? Rules observed? 9 Are there many fine intersectional, interfunctional social

structures? (Rotary, etc., chaff. table societies, ecologic, sports, technological societies, etc.) Try to obtain view of the fine networks operating. Are they link. hug the different economic levels, or separating them ?

4 Sample of possible recommendations for large industrial enterprises 9 Form links between business planning and academic institutes working in the area of political forecasting and societal scanning. 9 Construct a number of different socio- and geo-political scanning units, overlapping each other, to provide useful duplication, com. posed of blends of bureaucrats and mavericks, carefully selected to avoid the 'two-of-a-kind' bind. 9 Develop a network of individual consultants, each selected for a particular, timely, functional reason. Change the network frequently. 9 Select and develop a breed of highly sensitive employees; sensitive to straws in the wind, to smells in the ,air, and encourage their involvement in business planning. 9 Construct a reference fire and data collecting system to enable future search and comparison of actual (future) occurrencies with forecasts. 9 Develop a number of strategic planning techniques, including the development of business scenarios and train management in all business functions to understand and apply these techniques.

References I Naylor, T. and Schauland, H., 'Experience with corporate simulation models -- a survey', Long Range Planning, April 1976. J

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2 Cetron, M. J., Technological Forecasting, Gordon and Breach, New York, 1969. 3 Leontief, W., 'The structure of the US economy', Scientific American, April 1965. 4 Gordon, T. J. and Hayward, H., 'Initial experiments with the crossimpact matrix method of forecasting', Futures, 1965, 1(2), 100--116. 5 De Leon, P., 'Scenario designs: an overview', Shnulation and Games, 1975, 6, 39-60. 6 Hickman, B. G. and Klein, L. R., 'A decade of research by Project LINK', Social Science Research Council Items, 1979, 33 (3-4), 49--56. 7 Guetzkow, H. and Valadez, J. J., 'Substantive outcomes: simulated international processes vis-fi-vis international relations flmory', Simulated International Processes: Theories and Research in Global Modelling (ed Guetzkow and Valadez), S age, Beverly Hills, CA, 1981. 8 Van Agtmael, A., 'How business has dealt with political risk', Financial Executive, January 1976, 26-30. 9 Ascher, W. and Overholt, W. H., Political--Economic Forecasting for Policymakers, Basic Books, New York, 1982. 10 Kobrin, S. J., 'Political assessment by international firms; models or methodologies?', Journal of Policy Modelling, May 1981, 3(2), 251-70: also Lamont, D. F., Foreign State Enterprises, Basic Books, New York, 1978. 11 Goldhamer, H., The Adviser, Elsevier, New York, 1978. 12 Richardson, L. F., Statistics of Deadly Quarrels, Quadrangle Books, Chicago, 1960: and Arms and Insecurities, Quadrangle Books, Chicago, 1960. 13 Wright, Quincy, A Study of War,

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University of Chicago Press, Chicago, 1942. Rummel, R. J. and Heenan, D. A., 'How multinationals analyse political risk', ttarvard Business Review, January 1978, 67-76. Rummel, R. J., 'Dimensions of conflict behaviour within nations 194659', Journal of Conflict Resolution 1966, 10(1), 65-73. Cotteret, J. M., Emen, C., Gerstle, J. and Moreau, R., Giscard d'EstaingMitterand, 54774 Mots Pour Convaincre, Presse Universitaire de France, Paris, 1976. Hofstede, G., Organization-related VahLe Systems in Forty Countries, 9th World Congress of Sociology at Upsala, Sweden, 1978. Hogarth, R. M. and Madridakie, S., 'Forecasting and planning: an evaluation', Management Science, February 1981,27(2), 115--38. Clausewitz, Carl von, On War (original in German, 1832); Translation Pelican Classics, Penguin Books, London 1968. Dalkey, N. C., The Delphi Method: An Experimental Study of Group Opbffon, Rand RM-5888-PR, Santa Monica, June 1969. Goldhamer, H. and Speier, H., 'Some observations on political gaming', World Politics, 1959, XXII, 71-83. Thorelli, H. B., Graves, R. L. and Howells, L. T., International Operations Simulation with Comments on Design and Use of Management Games, Free Press, New York, 1964. Ward, D. W. and Guetzkow, H., 'Towards integrated global models: from economic engineering to social science modelling', Journal of Policy Modelling, 1979, 3,445--464. Woodcock, A. and Davis, M., Catastrophe Theory, E. P. Dutton, New York, 1978.

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