Country Risk Assessment: The Role of Social Trust

Research in international business recognizes social trust as one of the driving forces behind a country’s economic growth, and current research in behavioral science further demonstrates that the decision to trust can largely explain the perception of risk and risk-taking behavior. To date, a possible connection between social trust and risk conditions at the country level still remains to be explored. This study aims to fill this research gap by examining the existence of a relationship between social trust and country risk, focusing particularly on financial uncertainty across countries. Using a panel data set consisting of both developing and developed countries over the period 1980-2014, the study conducts a series of empirical tests, and finds that social trust and country financial risk are indeed related: developing countries with a higher level of social trust appear to carry a greater degree of financial uncertainty, as measured by the risk of foreign debt, the risk of currency fluctuation, and the risk of current account deficit, respectively. However, this relationship does not seem to exist among developed countries. The findings offer managerial implications for international business regarding country risk assessments and foreign market entry strategies.