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)
