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Political Risk Issues for Permanent Equity Investments
Companies with existing or pending long-term investments in overseas emerging markets are vulnerable to various types of political risks, whether the investment is made in a wholly-owned subsidiary, a joint venture, or an affiliated company. These risks may occur without warning, and can originate from a variety of sources and in a number of different forms.
Although governments of emerging markets are not as likely to directly penalize western corporate investors as they were in the past, there are other types of political risk that can result from changes in national policy such as the following:
- changes in the ruling political party of the foreign government, leading to more stringent policies for foreign direct investors.
- rise in nationalism and anti-Western sentiments, leading to physical damage of the investment.
- change in foreign policy of the corporation's home country towards the host country.
However, there have been areas where governments have specifically targeted foreign investors through arbitrary government acts:
- nationalization of the equity investment owned by the western investor without compensation.
- new legislation with discriminatory acts against a specific western company or all western companies in the local country.
- trade embargoes, trade sanctions, or boycotts enacted by either the host or home government.
The effects of political risk events can range from negligible to severe, with consequences isolated just to the overseas entity or with repercussions for company headquarters if the investment at risk presents a significant role in the continuation of the business.
Political Risk insurance can help to minimize the risk presented by some of the unanticipated events identified above or others. The Political Risk Practice has been placing political risk coverage for decades, and has market-leading expertise in matching the most suitable insurance cover with our client's risk concerns.
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