The danger/ risk that a government action or inaction will have a negative impact on the cash flows of a company operating in that government’s country. Examples include seizing property without compensating the owners (as is commonplace in the event of nationalization or expropriation), unexpectedly increasing taxes or imposing stricter regulations and environmental standards, placing restrictions on hiring and firing local employment, and suddenly revoking or repudiating licenses and contracts, manipulating currency convertibility, in addition to corruption, nepotism, inefficient legal or judicial systems, political unrest, ethnic disorders or tensions, etc.

Political risk constitutes part of a broader type of risk known as country risk.