Political Risk Insurance: A New Firm-level Data Set

• Author: Vincent Arel-Bundock,Amy Pond,Clint Peinhardt
• Published date: 01 May 2020
• Date: 01 May 2020
• DOI: 10.1177/0022002719875754
• Subject Matter: Data Set Feature

Data Set Feature

Political Risk Insurance:

A New Firm-level

Data Set

Vincent Arel-Bundock

1

, Clint Peinhardt

2

,

and Amy Pond

3

Abstract

When do governments impose costs on foreign firms?Many studies of foreign direct

investment focus on incentives for government expropriation, but scholars are often

forcedto rely on indirect measuresof expropriation to conductempirical analyses.This

article introduces a data set which includes information on over 5,000 political risk

insurance contracts issued by the US Overseas PrivateInvestment Corporation since

1961, and on all the claims filed by investors under these contracts. These detailed

insurance data allow us to study the determinants of foreign investors’ losses from a

variety of sources, including expropriation, inconvertibility, and violent conflict. To

illustrate the benefits of these data for hypothesis testing, we adopt a comprehensive

empirical approach and exploreboth shared and distinct causesacross risk categories.

Keywords

expropriation, foreign direct investment, inconvertibility, insurance, multinationals,

political risk.

Private firms often suffer losses due to government action. Regulations can reduce

profits as firms bring themselves into compliance; restrictions on currency convert-

ibility can undermine the profitability of an investment for foreign shareholders;

1

Department of Political Science, Universite

´de Montre

´al, Que

´bec, Canada

2

Economic, Political and Policy Sciences, University of Texas at Dallas, TX, USA

3

Department of Political Science, Texas A&M University, College Station, TX, USA

Corresponding Author:

Vincent Arel-Bundock, Department of Political Science, Universite

´de Montre

´al, 3150 Jean Brillant,

Montre

´al, Que

´bec, Canada H3T 1N8.

Email: vincent.arel-bundock@umontreal.ca

Journal of Conflict Resolution

2020, Vol. 64(5) 987-1006

ªThe Author(s) 2019

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sagepub.com/journals-permissions

DOI: 10.1177/0022002719875754

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political conflict can spill onto the streets, preventing employees from going to work

and delaying production. In the extreme, outright expropriation can undermine a

firm’s ownership of its assets and the associated profits.

The possibility that government actions will reduce firm profits is one of the

leading explanations for underinvestment in countries with weak property rights

protection (Lucas 1990; Li and Resnick 2003; Jensen 2003). Unfortunately, docu-

menting firm losses in a systematic fashion has proven difficult for political econ-

omists, because information about such events is not always made public. As a

result, we know surprisingly little about the conditions that lead host governments

to take actions that hurt foreign investors.

To fill that gap, we introduce a direct measure of firms’ overseas losses. Our new

data set includes information on over 5,000 political risk insurance (PRI) contracts

issued by the US Overseas Private Investment Corporation (OPIC), along with

matching information on all the claims filed by investors under these contracts. In

addition to insurance contracts and claims, the data set includes information on over

1,500 financing projects entered into by OPIC. These detailed firm-level data—

which cover 162 host countries over the 1961 to 2017 period—allow us to study

the determinants of foreign investors’ losses in a wide variety of political

and economic settings, while holding constant the risk-mitigation strategies of

those firms.

In the following, we briefly review prior works on the concept of political risk,

and we outline the main measurement strategies used in this field. We discuss the

market for PRI and the benefits of firm-level insurance data for the study of political

risk. We describe a new data set documenting OPIC financing projects, insurance

contracts, and insurance claims. Finally, we estimate several regression models

drawing on extant theories about political risk. Our goal is not to produce precise

estimates of causal effects. Rather, we treat this statistical exercise as a test of

construct validity, which reinforces our belief that insurance data hold much poten-

tial for the study of foreign direct investment (FDI).

Political Risk

Foreign investment flows have the potential to increase growth and efficiency in

poor countries and to equalize factor returns around the world. Nevertheless, large

disparities in factor returns remain, and political risk helps explain their persistence.

Even if the returns to investment are high, foreign investors may not enter a market if

they cannot be sure that their property rights will be protected (Lucas 1990; Caselli

and Feyrer 2007).

The property rights of foreign investors are central to the literatures on interna-

tional investment agreements, domestic institutions, and cross-border supply chains.

International investment agreements often codify the rights of foreign investors and

specify dispute resolution mechanisms that superse de domestic courts, in which

foreign investors may not get a fair hearing (Elkins, Guzman, and Simmons 2006;

988 Journal of Conflict Resolution 64(5)