Risk involving in Foreign investment

Foreign direct investment plays a vital role in the international business. It provides a new market and marketing facilities, production facilities in lesser cost, access to latest technology, new products. Foreign direct investment simply means a firm from one country making raw physical investment to build a factory (direct investment is the investment in buildings and equipments not in portfolio investment) in another country.

                In FDI there are so many risks ply with let us analyze one by one the first and foremost one is the country risk. All business dealings involve risk. When the business cross the national boundary then it faces additional risk beyond our control let us analyze one by one. These risks are of national differences in economic conditions, policies, socio political situations and the currency values. You may categorize them in to following six main headings.

                Economic Risk

               

                Transfer Risk

               

                Exchange Risk

               

                Location Risk

                Sovereign Risk

                and

               

                Political Risk.

               

                Economic Risk is the significant change in the economic conditions that can produce major change in the expected return of a foreign investment.

                Transfer risk simply means the risk arising from the decision of the foreign government to restrict capital flow. As the governments have the liberty to revise their policy at any time the transfer risk is also high.

                Exchange risk is an unexpected change in the exchange rate. As the currency hedging mechanisms is impractical over a long period, the exchange risk can be developed.

                Location risk is the risk which includes spillover effects caused by the problems of the particular region or the problems in the partner country.

                Sovereign risk procedures of a government’s capability to pay are similar to transfer risk measures. Sovereign risk has close association with transfer risk.

                Political Risk concerns risk of change in political climate, change in government, and change in society or any other non economic factor.

                 Hence every foreign company examines various methods to measure the risk of investing in a foreign country and the lay a strategy to minimize the risk.

                                                                                                                                          (to be continued)

Carbon Trading

After the Kyoto Summit, all the developed countries agreed to limit their emission level and if not they have to pay a price for their emission. Here the carbon trading comes to ply. The main idea behind carbon trading is to curtail the emission levels of each country and give monetary benefits to the countries with low emissions. As the developing countries can start with clean technologies they will get more monetary benefits from the developed countries.

          For example if a company in India cuts X tones of carbon, it can sell this much amount of points to a company which is emitting carbons in the developed country. The World Bank itself is the monitoring authority.

                Hence carbon trading allows carbon emitting industries in the developed countries to set of their emissions by investing in a large scale mass reforestation projects in the developing countries to nullify their emission. 100000 hectares of forest can eliminate one million tons of carbon in a year from the environment.

                The calculation is very simple. Half of the trees dry weight is carbon. The amount of carbon stored by the trees is calculated from their volume (the volume is calculated the height and the area of cultivation of forest).From the volume the dry wood is calculated and from this carbon proportion is estimated. These projects not only directly fetch money but also indirectly give social, economic and environmental benefits to the developing country.

                India is the second largest country after china. India has generated 30 million carbon credits and expecting 140 million credits in the long run. Around thousand carbon credit projects have already started and around two hundred new projects every year added every year.

                Presently, carbon credit from thermal projects gives 7 to 8$ in the international market. Now NCDEX  is to commenced carbon trading in Indian market. Carbon trading is one of the fast growing volatile market.