Expropriation and Other Political Risk

Finally expropriation risk merits consideration in foreign investment decisions as investment in a foreign country entails   political  isl. Political risk can range from mild interference to complete  confiscation cf all assets (referred to as outright expropriation).  included in interference are the  laws warranting the employment of ‘nationals at various positions, investment in environmental  ND  social projects and restriction on the, convertibility of currencies”, Political risk can also arise from other reasons, For   stance, an incoming foreign government might not honor the previous government’s agreement to permit convertibility or the   foreign government might impose discriminatory  higher taxes, higher utility charges and so on.l?  In view of the fact that political  isl has a serious influence

on the overall risk of a foreign  investment project, it merits realistic assessment The  Internationale firms should try to   ascertain, inter alias, the stability of the government in power, prevailing’ political wind in  ache of   the change of power the likely attitude of a new government towards foreign investment, economic stability of the   country, fairness and equability of the courts/judiciary Answers to these questions should provide considerable insight into the   political risk involved in the foreign  investment. Based on these parameters,

some companies categories countries according to  heir political risk: they avoid investment in countries classified in the undesirable category. irrespective of the potentials (,f   arming higher rates of return. 1 I Since political risk has a profound influence on foreign investment projects, MI”;Cs/international  firms evidently prefer investment in countries with stable governments, having stable economic policies and the least political   isl of expropriation, Being so important, it should be incorporated in determining NPV, Shapiro has suggested three methods for   his purpose. These are (j) shortening the minimum payback period, OJ) raising the required rate of return of the investment and   adjusting flows (numerator) to reflect the specific impact of a given risk.’? The third
method’ can be appropriately used for evaluating foreign investment projects.

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