Understand the investment host country environment
In the investment host country we recommend to move beyond mere financial or economic risks analysis in general, or feasibility studies that often ignore political risk as it is incomprehensible, complex, difficult to predict or pertaining to the lack of experience in political risk assessment by economic analysts. In light of political impact on economy, attention should be extended to include political, administrative and economic risks alike, and based on criteria set by the risk analysts, described below:
Operational capacities of the investments host country government
Whether the investor has started investing for a long time or considering investing in a particular country, they should at least be briefed on capabilities of executive government in the host country, in terms of:
- The government’s ability to respond to popular demands and their acceptance by the local population and whether it has the capacity to deliver basic services and has the major infrastructure.
- How far does the investment host country entitled with security, and does it have the capacity to extend internal security?
- Assessment of the capacity of the civil criminal justice system and law enforcement.
- How governmental decisions are made and whether professional experts are used in the process of making decisions, especially those that concern foreign investment, or they merely biased decisions based on temper.
- The history of the state in terms of decisions of confiscation, expropriation, debts repudiation, or nationalization of foreign companies.
- The impact of organized crime groups on security and government.
- The amount of foreign aid to the government and how long the government depends on running the country because you are an investor, it has caused economic stagnation and possibly demonstrations and riots.
- Religious or ethnic resentment among the host population for investment or military discontent with government or political system as a whole, as this may portend a high probability of military coups that may produce chaos and looting that may affect foreign investment.
- Popular demonstrations, rebellions, and riots are at the center of investment risks, especially if separatist movements or rebels are demanding to separate themselves from the parent State.
- In recent years, the phenomenon of terrorism and militant organizations, which are often looking for sources of funding for their operations through the control of the land and the local population and the attempt to recruit or force them to loot against foreign investments, has spread. To demand ransom, this requires a deep understanding by the foreign investor of the background of the local population surrounding the investment environment, where it was noted that some local people have a hostile view of foreign investment or support the militants and this is very dangerous.
- The acceptability of foreign investment by local population surrounding the investment.
- Mass sensitivity of foreign investment, especially in sectors that affect sovereignty and politics.
- Threat from neighboring countries surrounding the host country to invest.
- History and nature of relations between neighboring countries or from other countries and the extent of its impact on investment projects.
- Border disputes between neighboring countries and whether they live up to the threat.
- The existence of rogue states with missiles capable of creating regional crises
Economic factors of the country have the most significant importance in the decision of foreign investment because it will be closely intertwined with investments, especially if:
- Weak local economy.
- Government intervention in markets.
- Government history of debt forgiveness and expropriation.
- Adoption of the national product protection policy at the expense of foreign producers.
- Increased unemployment and inflation rates.
- Income inequalities between the local population.
- Loss of capital and reduced external income.
- Reduce the trade relations of the host country or reduce its openness to foreign investment
Environment and Health
The environmental aspect is vital in the growth of foreign investments, and large investors often put this in their accounts, especially:
- In the event of environmental degradation, widening to form a life-threatening phenomenon.
- Lack of energy sources that threaten the continuation of work.
- Weak government capacity to respond to natural disasters, including drainage or repair of infrastructure.
The Sudden Circumstances
There are also risks of sudden circumstances such as changes in food and energy prices, a major change in government, intention to overthrow the government, or sudden death of an influential political leader.