Some are of the opinion that establishing businesses in the third world is risky. What factors may account for this opinion?

Thank you for your invite. I found a very informative article submitted in Harvard Business review. I am providing the link below hope it will give answer to your question.

https://hbr.org/2010/04/the-hidden-risks-in-emerging-markets

Speculation on the outcomes of these and other scenarios appears in numerous publications, but corporations debating operational or infrastructure investments abroad need more objective, rigorous assessments than those found in the op-ed pages. Companies can either buy political risk services from consultants or, like Shell and AIG, develop the capacity in-house. Either way, a complete and accurate picture of any country’s risk requires analysts with strong reportorial skills; timely, accurate data on a variety of social and political trends; and a framework for evaluating the impact of individual risks on stability.

The Analysts.

Politics never stops moving, and risk analysts must be able to follow a nation’s story as it develops. Usually, that means being on the ground in that country. And in the case of a particularly opaque regime, it can mean being there a very long time. Some information is published in official reports or in the media, but analysts will gather most of their intelligence from primary sources: well-connected journalists in the local and foreign press, current and former midlevel officials, and think tank specialists.

Companies should bear in mind that political analysis is more subjective and consequently more vulnerable to bias than its economic counterpart. One danger is that analysts with their own political opinions may view their research through a particular philosophical scrim. In addition, political analysts will probably have subject-matter—as well as nation-specific—expertise that can color their reports. A Taiwan analyst with a background in security, for example, may overemphasize such risk variables as cross-strait tensions and the growing imbalance of military power between Taiwan and China. An Eastern Europe analyst studying social unrest may insist that demonstrations by pensioners have the largest political impact on the government. As decision makers peruse analysts’ reports, they should be alert for any potential bias and correct for it.

The Data.

Because of their very nature, political risk variables are more difficult to measure than economic variables (although in some countries, such as China and Saudi Arabia, even the reliability of government-produced economic data is open to question). Politics, after all, is influenced by human behavior and the sudden confluence of events, for which no direct calibrations exist. How do you assign numbers to such concepts as the rule of law?

To accurately quantify political risk, then, analysts need proxies for their variables. Instead of trying to measure the independence of a nation’s judiciary, for example, analysts can determine whether judges in a particular country are paid a living wage, whether funded programs exist to inform them about new legislation, and whether—and how often—they are targeted for assassination. Political risk analysts also study the percentage of children who regularly attend school, how police and military salaries compare with criminal opportunities, and how much access to medical care is available in towns with populations of10,000 to50,000 people. They look at such statistics as the unemployment rate for people between the ages of18 and29 and determine how many of them are in prison. And, of course, they add economic variables to the mix: per capita income, balance of payments, and national debt.

Taken together, this often anecdotal information reveals much about a country’s underlying sources of strength or vulnerability. Comparing data from neighboring countries provides a good sense of where shocks from unstable nations might rumble into stable ones. Comparing a single nation’s data points over time tells the analyst whether that nation is becoming more stable or less so, and how quickly.

The Framework.

Different companies and consultancies will have different methods for measuring and presenting stability data. We at Eurasia Group have developed a tool that incorporates20 composite indicators of risk in emerging markets. Distributed as part of a strategic relationship with Deutsche Bank, the Deutsche Bank Eurasia Group Stability Index (DESIX) scores risk variables according to both their structural and temporal components. Structural scores highlight long-term underlying conditions that affect stability. They then serve as a baseline for temporal scores, which reflect the impact of policies, events, and developments that occur each month.

The indicators are organized into four equally weighted subcategories: government, society, security, and the economy. Ratings for all four subcategories are aggregated into a single composite stability rating, which is expressed as a number on a scale of zero to100—from a failed state to a fully institutionalized, stable democracy. (See the exhibits “Political Risk at a Glance” and “Anatomy of India’s Political Risk.”)