Risk and Foreign Direct Investment - Index of

Risk and Risk-generating Events 35
across-situation consistency, and the degree to which there are group
norms, for example how far investors from one country share a common
risk appetite. Groups of decision makers in different countries
can see the same environment in a different way Hofstede 1991.
Uncertainty acceptance and uncertainty avoidance are one of the five
scales by which Hofstede identified cultural differences between societies,
indicating the significant degree to which risk tolerance differs
from country to country.
All decision makers are often assumed to be risk or loss averse,
having a limited appetite for risk. The proposition of diminishing
marginal utility of income provides the underpinning for the general
existence of such a risk aversion. The rate of diminution may differ
from individual to individual, and for decision makers from enterprise
to enterprise. There may also be stretches of income where
marginal utility does not decline, in particular there may be very
different attitudes to a loss and to a gain.
It is common to conceptualise this risk aversion as one reason for the
existence of a risk premium, to be added to the target return which is
expected of a particular project. The more risk averse the enterprise,
the greater the risk premium demanded. Such a sensitivity to risk can
vary over time and therefore imply a changing risk premium. For
example, there is evidence that decision makers became more risk
averse after the terror attacks of September 2001 (Fan 2004; White and
Fan 2004). Another source of a risk premium is the riskiness of the risk
environment, tempered by the degree of exposure of the relevant
enterprise. It is usually assumed that the more risky the environment,
the greater the risk premium demanded of a relevant project. The riskiness
of the environment and risk tolerance are implicitly linked. It is
not always possible to distinguish the influence of the two. Effective
risk management requires the taking of an explicit attitude to risk and
the careful consideration of the actual riskiness of possible outcomes.
The risk appetite reflects six main elements which differentiate the
attitude of key decision makers to risk.
• the personality and motivation of the strategists interacting in the
decision-making process. Some individuals are more risk averse than
others. By definition entrepreneurs have a greater appetite for risk
than the average. In reality, few decision makers can afford to be
deliberate risk takers. Even the most adventurous seek to control
risk. Some are stimulated by the challenge of overcoming risk but
always seek to control the level of risk to which they are exposed.