Content area
Full Text
Managing risk is one of the primary objectives of firms operating internationally Ghoshal 1987!. Nevertheless, current treatments of risk and uncertainty in the international management literature vary in their use of these terms and tend to look at particular categories of risks to the exclusion of the risks mentioned elsewhere in management literature.
The strategic management field lacks a generally accepted definition of risk.(1) The major uses of the term are in reference to unanticipated variation or negative variation (i.e.,"downside risk") in business outcome variables such as revenues, costs, profit, market share, and so forth. Managers generally associate risk with negative outcomes March & Shapira 1987!. The concept of risk as performance variance is widely used in finance, economics, and strategic management. With either the variance or negative variation understandings, "risk" refers to variation in corporate outcomes or performance that cannot be forecast ex ante.
The label "risk" has also commonly been assigned to factors either external or internal to the firm that impact on the risk experienced by the firm. In this sense, "risk" actually refers to a source of risk. Some common examples of risk referring to risk sources are terms such as "political risk" and "competitive risk." Such terms link unpredictability in firm performance to specific uncertain environmental components.
The use of the term "risk" to refer to uncertain environmental variables that reduce performance predictability, as well as the lack of predictability in firm outcomes itself, can be confusing. Thus, this paper adopts the convention of using the label "risk" to refer exclusively to unpredictability in corporate outcome variables. This usage of risk is consistent with strategy researchers' use of variance (or standard deviation) of accounting-based performance variables such as return on equity and return on assets, stock returns volatility measures (beta and unsystematic risk), and measures of deviations from stock analysts' earnings forecasts as measures of corporate risk.(2)
The term "uncertainty" as used in strategic management and organization theory refers to the unpredictability of environmental or organizational variables that impact corporate performance Miles & Snow 1978; Pfeffer & Salancik 1978! or the inadequacy of information about these variables Duncan 1972; Galbraith 1977!. Uncertainty about environmental and organizational variables reduces the predictability of corporate performance, that is, increases risk. Uncertainty can arise...