Business Operations Risk

Outline of the model
At the heart of the Economist Intelligence Unit's RiskWire service is the business operations risk model. The model is designed to provide a standard framework to quantify the risks to business profitability in each of the 60 countries covered in RiskWire.

A wide range of risk factors associated with the overall operating environment of a particular country are incorporated into the model. This combines the Economist Intelligence Unit's renowned political and economic analysis with additional material covering real local conditions. In these assessments we take into account present conditions and our expectations for the coming two years.

Calculating the ratings
The business operations risk model considers risk criteria grouped under the ten general categories of security, political stability, government effectiveness, the legal and regulatory environment, macroeconomic risks, foreign trade and payments issues, labour markets, financial risks, tax policy, and the standard of local infrastructure. In considering each of these criteria we examine a number of indicators. The total number of indicators is 66, but the number of risk indicators in each criterion ranges from four (tax policy) to 10 (legal and regulatory). The Economist Intelligence Unit assesses each of the 66 indicators over a forecast horizon of two-calendar years.

We assess the ten criteria on a scale of 0-100, with 0 indicating very little risk to business profitability and 100 indicating very high risk. Each of the 66 indicators within the main criteria is scored on a scale from 0 (very little risk) to 4 (very high risk). Each indicator is given the same weight within its criterion. The overall assessment is a simple average of the scores for the ten criteria; thus the criteria are all equally weighted. None of the 60 countries assessed earns a score of 0 or 100. This reflects the fact that risks are present even in the least risky countries and that even at the other end of the scale the risks could yet increase.

As the product looks forward and as we forecast future risk rather than simply extrapolate present trends into the future, qualitative indicators (eg the risk that capital controls will be applied in time of crisis), rather than quantitative, dominate the model. Even so, about one-third of the indicators is based on quantitative data (eg crime statistics), and is mostly drawn from recognised national and international statistical sources. The comparability of the qualitative assessments is made more rigorous by the extensive guidance provided to analysts on each indicator, the ability of analysts constantly to view the scoring for other countries and oversight by the RiskWire editorial team.

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