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.