¹Department of International Business, George Washington University, Washington DC, USA

Correspondence: Reid W Click, Department of International Business, George Washington University, 2023 G Street NW, Suite 230, Washington, DC 20052, USA. Tel: +1 202 994 0656; E-mail: rclick@gwu.edu

Received 22 August 2003; Revised 17 January 2005; Accepted 11 February 2005; Published online 7 July 2005.

Abstract

This paper examines the risk of US direct foreign investments over the period 1982–98 in 59 host countries. The first part of the analysis builds an empirical model to explain the time-series and cross-country patterns of return on capital. The estimation then uses the return on assets (ROA) as a measure of the return on capital, and investigates its determinants. There are four main findings. First, the ROA in a majority of countries does not simply track the worldwide ROA. Second, some cross-country differences are explained by financial risks. Third, unexplained country risk is qualitatively and quantitatively related to unobserved political risk. Fourth, unexplained country risk is also compensated with a higher ROA, enhancing its credibility as a measure of political risk. The unexplained country risk is thus used to calculate a new index of political risk ratings for 56 host countries that may be useful to managers, investors, policymakers, and academics.