The Determinants of the Adoption of a PRA Function in Czech International Firms:a Theoretical Framework

John Anchor and Hana Benešová, University of Huddersfield

Liberecké ekonomické fórum 2013, 16th September

Presentation Outline

• Introduction• Research context and motivation

• Political Risk Assessment (PRA)

• Theoretical concept

• Empirical evidence

• PRA in Czech international firms

• Further Research Proposal

• Determinants of PRA adoption

Research Context and Motivation

Motivation Political risk brings major uncertainty

for international firms (Kobrin, 1981; Lucas, 1990; Haksoon, 2010)

Political risk is assessable and its assessment can decrease potential material losses (e.g. Rice and Mahmoud, 1990; Stapenhurst, 1992; Burmester, 2000; Hood and Nawaz, 2004)

Very little evidence about PRA function in CEE firms

International context of CEE countries increases potential political risks (Djankov and Murrell, 2002; Makhija, 2004)

Risk Management

International

Business

Political Environme

nt

General Aim and Objectives

General Aim

Research Objectives

An analysis of political risk behaviour of Czech firms with special reference to the assessment and management of political risk in international business and institutionalisation of PRA function

Analysis of political risks identified by managers of Czech international firms

Comparison of managerial concerns in Czech firms with different geographical contexts

Analyse the exposure to and mediation of political risk in Czech firms

Analysis of PRA function in Czech firms by home-host country relationship and firm-specific factors

Theoretical Concept and Previous Studies

PRA is a process of analysing and evaluating political risk while undertaking international business activities

Geographical Context

Empirical Evidence

Political Risk Assessment

Focus on firms based in developed countries

Low standard of PRA identified across literature

Need for PRA as a routine function

Performed either in-house or externally

Made more systematic by institutionalisation i.e. formally assigned responsibility

Informal

Unsystematic

ReactiveInadequate

Subjective

Determinants of PRA Adoption

Hashmi and Baker (1988), Hashmi and Guvenli (1992), Al Khattab et

al. (2008).Hashmi and Baker (1988), Stapenhurst (1992), Kettis

(2004), Al Khattab et al. (2008).

Stapenhurst (1992), Wyper (1995), Pahud De Mortanges and Allers (1996), Jenney (2001), Kettis (2004), Al Khattab et al.

(2008).

Al Khattab et al. (2008).

Internationalisation

Size

Industry

Ownership

New Determinants of PRA Adoption

Methodology

Determinants of PRA Adoption in Czech Firms

Questionnaire survey

Secondary data via Albertina database

In firms where PRA function has been adopted

Internationalisation, size, industry, ownership – widely used in PRA

studies

New variables based on PRA being part of company risk management

Enterprise Risk Management literature reviewed to identify factors

influencing ERM adoption decision

Theoretical Justification of New Determinants

Theoretical Background PR already included in risk management, and even more likely to

be implemented in enterprise risk management (ERM).

ERM suggest that the following theories can be used to determine factors of ERM adoption (Lai and Samad, 2001; Liebenberg and Hoyt, 2003; Altunas et al., 2011; Golshan and Rasid, 2012; Yazid et al., 2012):

Risk aversion Value maximization

Reducing expected costs of financial distress Reducing risk premiums payable to various

partners Increasing investment possibilities Reducing expected tax payments

Additional Determinants

Firm’s Complexity Number of business segments (Gordon et al., 2009; Pagach and Warr,

2011; Golshan and Rasid, 2012).

Location of Subsidiaries Subsidiaries in UK, US, Canada, Australia, New Zealand (Liebenberg and

Hoyt, 2003; Beasley et al., 2005; Golshan and Rasid, 2012).

Leverage Likelihood of PRA adoption should increase with leverage (Brown and

Toft, 2002; Heaney and Winanta, 2005; Ephraim and Amrit, 2008).

Investment Opportunities Expenditures on R&D as a proxy (Nance et al., 1993; Bishop, 1996;

Khediri and Folus, 2010).Auditor Type Presence of ‘Big Four’ auditor (DiPiazza and Bremmer, 2006; MIGA 2009)

Hypotheses Overview

Conclusion and Contribution

International Business

Political Risk

Risk Management

Political Risk Assessment

Theoretical & Empirical Context CEE countries as a part of

international business arena

Managerial perception of home and host country political risk

Exposure of CEE companies to political risk in host-countries

Political risk assessment as a risk management function in CEE firms

Strategies of CEE managers for dealing with political risk

Thank you for listening…

Liberecké ekonomické fórum 201316th September, 2013