dispute. However, it may be noted that these bilateral conventions only diminish political
risk but do not eliminate it completely.
- Management of Political Risk during Life of the Investment
If the enterprise anticipates an aggravation of the risk, it should try to adapt to this risk
and integrate it into its decision process. It may adopt the following approaches for the
purpose:
- Not to localize the whole of production process in the same country;
- To integrate local products;
- To have recourse to debt;
- Plough back the funds generated by the subsidiary rather than bringing new
capital from the parent company; - To increase the number of local employees;
- To have other local alternative sources of supplies;
- To establish a joint venture with a local enterprise.
These measures may reduce the flexibility of the company; this may be considered, in a
way, the cost to be paid to meet political risk.
Alternatively, a company may have recourse to external guarantees to protect itself.
There exist in many countries public and private insurances to cover these risks.
- Management of Political Risk after Nationalization
Nationalization of a foreign subsidiary causes the following problems:
- Determination of the amount of compensation;
- Modalities of payment of indemnities;
- Proceedings before courts or International Centre for Settlement of Investment
Disputes (ICID), the institution created in 1966, which is a part of the World
Bank.
- Foreign investment: theories
Investments in a foreign country are motivated by a number of considerations –
economic, financial, behavioral, strategic, and so on.
The process of foreign investment is slower, more costly and more complicated than that
of domestic investment as it entails additional risks in terms of political risk and
exchange risk.
The theory of Comparative Advantages theory provides raison d’etre better in respect of
international trade than foreign direct investments. The theory stipulates that each