What does political risk in international business refer to?

Political risk in international business specifically refers to the likelihood of losses that a company may incur due to changes in the political environment or instability in a country where it operates. Such risks can originate from events like government shifts, political unrest, changes in laws, expropriation of assets, or changes in trade policies. Companies operating internationally must evaluate these risks as they can significantly affect their profitability and overall operations.

Understanding political risk is crucial for businesses as it impacts decision-making regarding investments, market entry strategies, and ongoing operations in a foreign country. Companies often employ strategies such as political risk analysis and mitigation techniques, which can include diversifying investments or purchasing political risk insurance, to protect themselves against potential losses arising from adverse political changes.