About the Topic
Foreign direct investment (FDI) undertaken by multinational corporations (MNCs) is one of the major drivers of globalization. The past three decades marked an unprecedented increase in FDI flows and stock. According to the data published by UNCTAD, the world FDI stock increased phenomenally from US$ 698 billion in 1980 to US $ 23 trillion in 2012. The growth in FDI flows has indeed outpaced rate of growth in international trade. In 2014, services accounted for 64 per cent of global FDI stock, followed by manufacturing (27 per cent) and the primary sector (9 per cent). FDI flows had declined since the beginning of the global financial and economic crises in 2007. This was not surprising as the crisis has severely restricted economic growth and international private capital flows, urging outrageous government interventions. 2009 was the beginning of recovery period for global FDI flows; and in 2011 downward trend started again and continued by 2015. After a significant improvement in 2015, the trend has still been downward. Although flows are expected to remain well below their peak of 2007, UNCTAD expects a modest recovery for 2017. This is based on positive expectations for an upturn of economic growth in major regions and increasing corporate profits. Such a situation may boost business confidence, and consequently multinationals’ willingness to invest. However, UNCTAD (World Investment Report 2017: p.2) states that “elevated geopolitical risks and policy uncertainty for investors could have an impact on the scale and contours of the FDI recovery in 2017.”
MIGA, Multilateral Investment Guarantee Agency defines political risk as the probability of disruption of the operations of multinational corporations by political events or forces, whether they occur in host countries, home country, or result from changes in the international environment. In host countries, political risk is largely caused by uncertainty over the actions of governments and political institutions, but also of minority groups, such as separatist movements. In home countries, political risk may be due to political actions directly targeting host countries, such as sanctions, or from policies that restrict outward direct investments.
Within this context, two other concepts, namely regulatory risk and foreignness should also be mentioned. Regulatory risk is broadly defined as risk of having the license to operate withdrawn by a regulator, or having conditions applied that adversely impact the operations and consequently the value of a corporation. Regulatory risk could be faced in a host country as well as in a home country. However, with regard to multinational corporations’ operations, the issue will be more meaningful in terms of rather host country regulators. With this regard, foreignness will mean more. As is known, the multinational enterprise should have a number of firm specific ownership advantages to compete against the local rivals in the host country as there are various disadvantages caused by foreignness. In case, even though such firm specific ownership advantages are extremely significant and rare, the host countries government’s approach as well as the general political and social environmental conditions will be very important for the MNE’s operations in the host foreign location. That is why political risk is a major concern for multinational corporations or for any company that evaluates the option of a direct investment abroad. Naturally, many may assume that emerging markets or developing countries are the main host locations for such risks. The recent events, however, prove that even the industrialized countries could be very risky politically and hence it is not the right approach to restrict such concerns only with the developing world.