Money, Banking, and International Financeoperates as a cartel that imposes production quotas on its members. Production quotas reduce
the petroleum supplies, boosting petroleum prices and profits.
Condition 4: A government requires the foreign companies to form joint ventures with the
government or state-owned firms. Western firms bring investment, technology, and efficient
management practices while the government retains control over the business activities. Joint
venture is common in national defense, agriculture, banking, or the minerals industries, and
governments in post-Soviet states, Japan, Mexico, China, India, and South Korea use it or have
used joint ventures.
Although political risk can be difficult to predict, a country could exhibit characteristics that
endangers investment. Characteristics include:
Characteristic 1: A country often experiences changes in government leadership or a
country has too many political parties. Unfortunately, government policies and laws quickly
change. For example, many South American countries alternate between pro-business and
socialist governments. During the pro-business phase, government relaxes taxes and regulations,
and subsequently, the governments change their positions during its socialistic phase as they
begin punishing businesses. Moreover, political leaders with a strong nationalistic leaning may
view foreign investment unfavorably.
Characteristic 2: International investors and business people can collect information about
a foreign country's political leaders or a country's economic environment. Political leaders who
believe in free markets and limited government are likely to pass favorable government laws
and regulations to foreign investment. Some organizations such as the Heritage Foundation
collect statistics on countries and attempt to measure the level of economic freedom.
Consequently, economic freedom corresponds directly to business freedom and the level of
interference by government.
Characteristic 3: Some countries are composed of fractious and contentious ethnic groups
or plagued with religious fanaticism. These countries are poor choices for international
investment. For example, Bosnia and Herzegovina has three ethnic groups: Bosnians, Croats,
and Serbs. Each ethnic group occupies a specific region in Bosnia, and they do dislike each
other. Furthermore, the Bosnians are Muslims; the Croats are Catholics while the Serbs are
Orthodox Christians, and they fought the fierce Bosnian War during the early 1990s after
Yugoslavia had broken up into several countries.
Characteristic 4: Enterprises relocate to countries with uneven income gaps. Enterprises
take advantage of the cheap labor force. Furthermore, enterprises hire the highly educated
workers who become the high-income group, widening the income gap. However, foreign
investors avoid investing in a country with deteriorating economic conditions. A country
plagued with high levels of poverty and massive unemployment breed protests, riots, and
revolutions. Protestors could associate the foreign investors with the government leaders, whom
the protestors want to overthrow. Subsequently, the protestors and rioters could damage the
foreign investors' assets. In extreme cases, the rioters and protestors could murder foreigners and
tourists. As tourists and foreigners flee, a government would see its revenue plummet.
Investors could face country risk that extends beyond political risk when they invest in a
foreign country. We also call it macro risk. Government could impose rules, laws, and