Abstract

This paper introduces a novel country classification system that rates the political economy risks of countries for the purpose of conducting international business. It is intended to provide investors, multinational companies, and business researchers a quick and efficient way of gauging the extent of political, economic, and legal risks associated with doing business in different countries. The study covers over 170 countries and identifies 24 country types. At the extremes are Type 1 countries (least risky) and Type 24 countries (most risky). Overall, the new classification system suggests that political economy risks associated with doing international business are relatively mild in Type 1, Type 3, and Type 4 countries. However, international businesses should temper their investment decisions with caution in Type 19, Type 20, Type 22, Type 23, and Type 24 countries due to high political, economic, and legal risks, especially Types 23 and 24 where these risks are excessive. At the same time, international businesses may want to refocus their attention to Type 11 countries who are now havens for international investments due to drastic reduction in political, economic, and legal risks associated with doing business. The twenty-four country types identified in this new classification system are time-invariant. Thus, countries may move up or down due to improvements or deteriorations in certain aspects of their political economy.

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