Issues of sovereignty differing political philosophies and nationalism are manifest in a host of governmental actions that enhance the risks of global business. Risks can range from confiscation the harshest to many lesser but still significant government rules and regulations such as exchange controls import restrictions and price controls that directly affect the performance of business activities. Although not always officially blessed initially social or political activist groups can provoke governments into actions that prove harmful to business. Of all the political risks, the most costly are those actions that result in a transfer of equity from the company to the government, with or without adequate compensation.
Confiscation, Expropriation and Domestication
The most severe political risk is confiscation that is, seizing of a company’s assets without payment. The two most notable recent confiscation of US property occurred when Fidel Castro became the leader in Cuba and later when the Shah of Iran was over thrown. Confiscation was most prevalent in the 1950s and 1960s when many underdeveloped countries saw confiscation, albeit ineffective as a means of economic growth.
Less drastic, but still severe, is expropriation where the government seizes an investment but some reimbursement for the assets is made. Often the expropriated investment is nationalized that is, it becomes government run entity. A third type of risk is domestication. This occurs when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees by mandating local ownership and greater national involvement in a company’s, management. The ultimate goal of domestication is to force foreign investors to share more of the ownership, management and profits with nationals than was the case before domestication.
Rather than a quick answer to economic development expropriation and nationalism have often led to nationalized businesses that were inefficient technologically weak, and noncompetitive in world markets. Risks of confiscation and expropriation have lessened over the last two decades because experience has shown that few of the desired benefits materialize after government takeover. Today, countries often require prospective investors to agree to share ownership, use local content, enter into labor and management agreements, and share participation in export sales as a condition of entry in effect the company has to become domesticated as a condition for investment.
Countries not view foreign investment as a means of economic growth. As the world has become more economically interdependent it has become obvious that much of the economic success of countries such as South Korea, Singapore, and Taiwan is tied to foreign investments. Nations throughout the world only a few years ago restricted or forbade foreign investments are now courting investors as a much needed source of a capital and technology. Additionally, they have begun to privatize telecommunications broadcasting, airlines, banks, rail roads, and other nationally owned companies as a means of enhancing competition and attracting foreign capital.
The benefits of privatizing are many. In Mexico, for example, privatization of the national telephone company resulted in almost immediate benefits when the government received hundreds of millions of dollars of much needed capital from the sale immediate investment in new telecommunication systems. A similar scenario has played out in Brazil, Argentina, India, and many eastern European countries. Ironically many of the businesses that expropriated and nationalized in earlier periods are now being privatized.
Even though expropriation and confiscation are waning as risks of doing business abroad, international companies are still confronted with a variety of economic risks that can occur with little warning. Restraints on business activity may be imposed under the banner of national security to protect an infant industry to conserve foreign exchange, to raise revenue, or to retaliate against unfair trade practices, among a score of other real or imagined reasons. These economic risks are an important and recurring part of the political environment that few international companies can avoid. –