Global Costs of Opacity

This is an MIT Sloan Management Review article. Although large-scale risks such as war, terrorism, and natural disaster garner media attention, it is the everyday, small-scale risks associated with opacity--a lack of transparency in countries' legal, economic, regulatory, and governance structures--that can confound global investment and commerce. The authors offer new research that identifies the causes and measures the effects of this phenomenon across 48 countries. The research draws upon 65 objective variables from 41 sources, including the World Bank, the International Monetary Fund, the International Securities Services Association, the "International Country Risk Guide," and country regulators. The authors' methodology projects which aspects of a country's economy carry the greatest risk and then, by assessing and comparing the costs of those risks on a country-by-country basis, they create an overall Opacity Index. Next, they correlate the Opacity Index to a variety of other indicators, including a country's income level, economic development and foreign investment, entrepreneurship, and access to capital and lending and equity markets. The authors conclude that opacity strongly correlates overall with slower growth and less foreign direct investment in nearly all markets, and they suggest how information about opacity and its contributing factors can enhance both managerial and national policy decisions alike.

• Corporate strategy
• Risk management
• International business