Multinational Energy Firms in the Caspian Basin: A Bayesian Approach to Incorporate Political Risk in Corporate Strategy

Abstract

Multinational Firms that undertake project finance ventures in developing states are faced with a myriad of problems particularly: undeveloped state institutions; low levels of transparency in national policy formation; uncertain national preferences. The author outlines a strategy that multinational firms should utilize to ascertain more accurately initial counterpart (state) preferences. Moreover, this strategy should facilitate the refinement of the firm's perceptions of host state preferences that may be utilized to enhance corporate strategy.

In this paper the nexus between political risk and a multinational firm's cost of capital is illuminated. I illustrate how the use of Bayesian learning by firms in their interaction with states will lead to a better risk management strategy, a reduction in cost of capital for firms and an increase in the number of projects that firms will undertake in developing nations states.

Keywords: Strategy, Multinational, Political Risk

JEL Classification: G31, P16, M20