Introduction: The link between politics and big business is as old as time. Over 200 years ago, The East India Company led the British acquisition of India. In the early years of the last millennium, the US was busy colonizing the farm produce of Central and South American nations. In the 1960s, The Shah of Iran was a friend of USA. More recently, the currency crash of the Asian Tigers in 1997 exposed the systemic rot of crony capitalism, which resulted in the change of government in at least two nations, Indonesia and Thailand. And just a few years ago, in the US, certain firms had advance knowledge of the imminent assault on Iraq and were busy preparing rebuilding plans for Baghdad even before the first missiles of Gulf War II were fired.

Closer to home, a favourite topic of debate in the cocktail circuits is the involvement of politicians in big business. One hears stories of Chief Ministers in distress announcing economic development projects to shore up their political fortunes. However as we have seen of late, the best laid plaques and foundation stones are routinely ravaged by the changed political climate that follows. Even so, the private sector is known to participate in these situations with their eyes wide open. Yet, some good occasionally comes out of the political-private industry “nexus”. In certain parts of India, the real-estate boom has often been the result of a working relationship between political gain and private initiative. In this article we shall examine the consequences of the nexus between politics and the corporate world and assess the comparative importance of political insight. While I am not going to delve in to the ethics of where economic opportunities and political motives comfortably intersect, we shall examine how a business strategist can assess and assign political risk.

The Basis of Corporate Strategy: The core intent of business strategy is to create competitive advantage. Thus, when a company works closely with a political situation it is seeking an advantage which will give it a huge lead over its competitors. However, political insight is only half the battle. Competitive advantage is garnered through a symbiotic relationship between resources, organizational skills and business expertise.

To achieve competitive advantage, each arm of this triangle has to be strong enough to support the triangle uniformly. The company must be in a position to leverage this triangle of strengths to bring about competitive advantage. The point is, when these three arms of the triangle do not match up, any political advantage that the company has eventually falls away. So, political advantage is not necessarily a winning card.

Some examples of the same: HFCL’s outlandish bid of Rs. 80,000 crores for the Delhi telecom circle license in the mid 1990s, MS Shoes’ bid for a hotel in Andrews Ganj, Delhi. In both cases it was clear that while the companies mentioned had the political wherewithal, they did not have what it took to close the deal and walk away as winners. Such failures usually put immense pressure on both the political system and the company and such events are thereafter known as scams. Therefore it is clear that a business strategist has to factor in political risks even more closely.

Understanding Business Risk: There are three elements to business risk: economic, political and geographic risk. To put the matter in proper perspective it is safe to assume that each of the three risk categories constitute 33% of all risks. For the purposes of this article, we shall not be concerned with geographic risk, which calculates the grim probability of a devastating hurricane ripping through the eastern seaboard of the US or the big quake decimating Tokyo city. Our focus is Political risk analysis. Here is what business writer Ian Bremmer has to say: “Economic risk analysis can tell corporate leaders whether a particular country can pay its debt. Political risk analysis tells them whether that country will pay its debt”.

Economic risk analysis is more of an objective exercise as various established indices are examined. In the case of political risk however, the process is more subjective. Figure 2 below suggests that Brazil, Russia, China and India fare similarly on several economic indicators. So how does a business strategist assess political risk of investments in these nations?

Assessing pure political risk: While various quantitative and qualitative benchmarks addressing the economic situation may be debated, my view on assessing political risk is based on the following four parameters:

The recent elections in Iran have thrown up a president, Mahmoud Ahmadinejad, who is not well known outside his country. The business community, particularly in the oil and gas sector is worried. The mood among the Indian companies doing business with Iran is at best, quiet and certainly not upbeat. It remains to be seen how the dust settles and whether companies such as Indian Oil and the Hinduja Group are able to continue with their business plans in Iran as usual.

The Three Strategic options: If a company is given the opportunity of super profits due to political insight, how should it approach the situation? The first step would be to keep in mind that competitive advantage is borne out of the three arms of Resources, Business acumen and Organizational capabilities locking strongly as shown in Figure 1. Beyond that an impartial assessment of political risk as per the four parameters listed above, will lead the company to three choices: