Measures Taken for Salvaging Adverse BOP in the form of Restrictions on outgoing
capital, Restrictions on imports and Measures Aiming at a Certain Degree of Control on
Foreign Investments will act as constrains on international business.
- Political Risk Management
Risk management by a multinational enterprise is required at three stages:
- Before an investment is made in a foreign country;
- During the life of the investment, once made;
- While negotiating for indemnity (compensation) in case there has been an attack
on the investment through nationalization, etc.,
- Management of Political Risk before the Investment
In view of significant bearing of political risk on the success of international project(s), it
is imperative that the investor assesses the nature and extent of political risk.
While studying investment risk in foreign countries, it has been observed that the
following approaches are adopted:
Dichotomy decisions. To invest or not to invest aboard (go-no-go approach). Some
countries are considered rightly or wrongly to be risky a priori, and a firm would not
invest there.
Assigning a risk premium. Since risk is difficult to quantify, it is necessary to be taken
into account. Therefore, there is a practice relatively widespread in multinational
enterprises to assign risk premium to foreign investments.
Sensitivity analysis. This analysis brings to fore the major factors influencing cash
flows (inflows as well as outflows) of the project.
In order to avoid litigation, to the maximum extent possible, as well as to safeguard their
interest, investing companies try to incorporate a number of points in contracts (as far as
possible favourable to them) regarding conditions concerning access to local capital
market, taxation applicable to the company, right to import raw material and semi-
finished products, and right to export to other foreign countries, right of capital transfer,
interest, dividends, rents, conditions of local participation, insurance and guarantees.
Besides, multinational enterprise should try to ascertain if there are any bilateral
agreements or conventions for protecting investments between the country of the parent
company and the host country. These conventions carry very useful clauses for the
investor, for instance, commitment of the state to pay compensation in the case of
nationalization, guarantee of transfer, recourse to an impartial arbitrator in the case of