SCENARIO ANALYSIS AS A TOOL FOR COUNTRY RISK ASSESSMENT: A THEORETICAL EXPLORATION

Abstract

Purpose: This article is an exploration of the applicability of scenario analysis in country risk assessment executed by decision makers in small and medium sized enterprises when they engage in international business.

Approach: The exploration is realized through two assessment. In the fi rst assessment it is presented whether country risks can be classifi ed as highly complex and highly uncertain according to the forecasting methods classifi ed by Schoemaker (2009) and the argumentation whether country risks need to be classifi ed as risk or uncertainty. For the second assessment it is presented whether the assessment of country risks according to the method of scenario analysis assumes the use of judgmental heuristics and the occurrence of bias in accordance with the heuristics and biases approach described by Kahneman and Tversky and identifi ed in country risk assessment by Van den Berg (2013).

Findings: The fi rst conclusion of this exploration is that approaching country risk assessment with the support of scenario analysis supports decision makers in a fundamental manner and hence, contributes to the well-functioning of the company. The second conclusion is that, although the heuristics and biases that occur due to judgment and decision making under uncertainty are not supposed to occur anymore, a diff erent set of biases is to be expected.

Implications: Although scenario analysis seems to be a valid technique to be used in country risk assessment, further research is required to determine how it should be operationalized for small and medium sized enterprises.