ICRG International Country Risk Guide

The mainstream economic argument in favor of FDI is the existence of positive spillovers. It is argued that domestic companies benefit from the information and knowledge about advanced technology, marketing and management techniques that MNCs bring into the host country. Spillovers may occur through various channels, such as the movement of employees from MNCs to domestic companies and the technical support of MNCs to domestic suppliers.

As previously identified, there are also “non-legal/extra-governmental” political risks which could bring unexpected upheaval to foreign firms. Macro political risks such as the threat of violence, corruption, war or military coup, political instability and terrorism are all direct threats to foreign investors.

Political Risk- the unanticipated likelihood that a business’s foreign investment will be constrained by host government’s policy.

However, the investment was not without risks. There are four types of risks in international business called cross-culture risk, country risk, currency risk and commercial risk. Cross-cultural risk refers to a situation or event where a cultural miscommunication puts some human value at stake. Country risk describes the potentially adverse effects on company operations and profitability holes by developments in the political, legal, and economic environment in a foreign country. Currency risk is the risk of adverse unexpected fluctuations in exchange rates. Commercial risk refers to potential loss or failure from poorly developed or executed business strategies, tactics, or procedures (Boter & Wincent, 2010). Investment in Rulmenti Grei, Timken might face the salient risks of political and economic instability. Romania’s economic growth was slower, inflation was higher, and the labor force was more volatile. Furthermore, there might be a risk of re-nationalization. It is said that economic risk analysis tells corporate leaders the ability of a particular country to pay its debt while political risk analysis tells them whether that country will pay its debt. Political risk measures the stability of individual countries through the

5. What means can managers use to assess political risk? What do you think is there lative effectiveness of these different methods? At the time you are reading this,what countries or areas do you feel have political risk sufficient to discourage you from doing business there?

Ajami and BarNiv (1984) attempted to explain the variability of FDI across countries. They emphasized in following determinants of FDI in US: relative size of the US market, change in exports to the US, growth of GNP in the home and host countries, decline in value of the US dollar during the late 1970s, inflation rates in the home and host countries, attractiveness of the US capital markets and research and development and manufacturing as a percent of GNP.

POLITICAL AND BUSINESS RISKS Last Name 3between various countries may negatively impact on the global business operations. As such, afirm cannot effectively operate to achieve its full capacity and maximize its profits. Political risksalso include the legal legislations that a country imposes on the international businesses that openup their operations in these countries. The government may devise a policy that limits theoperations of the multinationals in the country. Such legislation by the government is a hindranceto the efficient operation of the international businesses.Business risk refers to the likelihood that a company will have lower profits thanexpected (Wild & Han, 2014). There are a number of factors which influence the risk; theyinclude the price of commodities, sales volume, competition, the economic conditions and thegovernment interventions. These factors negatively influence the global business operations.Therefore, as large

Dunning’s OLI paradigm (1976) is used to support firms to locate its production in countries that are financially beneficial for them. According to Dunning, “the paradigm offers a holistic framework to take in consideration all of the important factors that influence the decision of a MNE.” (Stefanović, 2008, p.241) FDI is determined through the composition of the three powerful advantages; ownership, location and internationalisation as shown in figure 1. The thesis is to assess, ‘why go multinational?’, ‘how to choose the best location?’ and ‘what actions have to be taken to enter a foreign market?’

ANSWER: Political risk increases the rate of return required to invest in foreign projects. Some foreign projects would have been feasible if there was no political risk, but will not be feasible because of political risk.

This dissertations presents concept of political risk in the context of Efficient Market Theory (Hypothesis) and State capitalism. The paper explores the link between the three ways of insuring political risk to economic theories. Using case study of a multinational firm the political regime and its effect has been explored on business situations and how it can be managed. Political risks are the threats arising for a business due to the actions of a host government. Multinational firms in particular face political risks due to expansion of their businesses to developing countries. Author has explained and examined how political risk management has been developed in the contemporary history. A comparative analysis of concepts that deal with political risk under the contexts of prevailing ideologies; political and economic constructs has been conducted.

"Political risk has many guises war, expropriation, currency devaluation but for companies doing business abroad, these risks don't begin to give a complete picture of potential threats to earnings" (Protests in Middle East, North Africa spur look at corporate risk disclosures globally, 2011, Westlaw Business). For companies in the Middle East, the recent Arab Spring and a series of regime changes are causes of concern because they "could lead to civil wars; regime changes resulting in governments that are hostile to the US and/or Israel" (Protests, 2011, Westlaw). Middle Eastern volatility can also cause unstable crude oil prices which, although significant for the entire world economy, would have a particularly negative impact on the region. In terms of securing investment capital, "capital market reassessment of risk" can make necessary funds scarcer to find (Protests, 2011, Westlaw). For companies wishing to build a base of customers in the area, economic and political instability can result in a sharp downturn in demand and can also threaten supplies of essential raw goods.

Foreign portfolio investment includes securities held by foreign investors and other financial assets. Investors can not directly own the financial assets of the enterprise, which is relative to the volatility of the market. It is completely different from the pattern of foreign direct investment in which an overseas company is operated by a domestic enterprise. Although foreign direct investment permits enterprises to manage companies abroad in a higher level of authority, it may face more difficult to sell the company 's premium in the future.

The growth of globalization has created a massive impact in businesses all over the world. Companies are competing against one another in order to find the most profitable way to conduct business. As the global competitions rise, companies must now consider new dimensions of conducting business to survive in the highly competitive world. In order to create a successful Foreign Direct Investment, companies must look into numerous factors in the target country. Some of these factors include cultural differences, political stability, exchange rate stability, tax policies, state of infrastructure, and corruption level.

Political environment is significant to do business in other countries. There are different factors of political environment. These factors can influence the government decision making and other activities. For foreign investors every country set some rules and regulations. Investor need to maintain these rules and regulation to do business on certain country. Political factors can influence the government to change these regulations. So investors need to know the regulations and get the proper knowledge about political environment.

for FDI in UNCTAD’s World Investment Prospects Survey in 2010. Macro and micro economic analysis uncovered that