Political Risk
& Its Influence on Foreign
Direct Investment (FDI)
Presented by
(Group 4)
Hiba Belhaj
Malak Skik
Salma Tourch
Khadija El-Kaissi
Amr Gamal
Nacer Tazi
Outline
01. Introduction to Political Risk and FDI
02. Types of Political Risks Affecting FDI
03. How Political Risk Influences FDI Decisions
04. Case Studies
05. Strategies Companies Use to Manage Political Risk
06. Conclusion and Recommendations
1 Introduction to Political Risk and FDI
What is political risk?
Political risk refers to the uncertainty and potential financial loss investors face due to political instability
or government actions in a foreign country. It is a key factor in international business decisions,
especially when entering volatile regions.
Types of political risks:
Government Changes:
Shifts in political leadership or regime that may result in new policies affecting foreign businesses.
Expropriation:
When a government seizes foreign assets or investments, often without fair compensation.
Corruption:
Unethical practices such as bribery or favoritism that create uncertainty and increase operating costs.
Civil Unrest:
Social or political instability, including protests, riots, or strikes that disrupt business operations.
What is FDI & Why Does
It Matter?
Foreign direct investment (FDI) is when a company or
individual invests in a business in another country, typically
by acquiring assets, establishing operations, or forming joint
ventures. It reflects a long-term interest and significant
control over the foreign enterprise, and it matters because;
Economic growth for Job creation & skills Strategic market
host countries: transfer expansion for investors:
Brings in capital, technology, and Provides employment opportunities Enables companies to access new
infrastructure development, and introduces advanced practices customers, diversify markets, and
boosting productivity and GDP. and managerial skills. reduce production costs.
Why political risk affects FDI?
Political risk can significantly impact the flow of Foreign Direct Investment (FDI) by creating an unstable and
unpredictable business environment. When governments are unstable or frequently change regulations, foreign
investors become hesitant to commit resources. High political risk increases the chances of legal obstacles, financial
losses, or even expropriation, making investors reconsider or delay their decisions. On the other hand, politically
stable countries with clear and reliable policies tend to attract higher levels of FDI due to lower perceived risks.
Alters Investment Affects Profitability Influences Entry
Decisions and Timing: and Asset Security: Strategy
Investors may delay or cancel Risk of sudden tax hikes, Firms may prefer joint ventures or
projects if the political climate is nationalization, or currency local partnerships to minimize
uncertain. restrictions can reduce returns. exposure in risky environments.
2 Types of Political
Risks Affecting FDI
Macro-Level Risks Micro-Level Risks
Affect the entire business environment. Specific to certain sectors or companies.
Examples: War, coups, terrorism, national political Examples: Contract breaches, expropriation,
instability. unfair treatment of foreign firms.
Impact: Disruption of economic activity, Impact: Targeted policy shifts harming
infrastructure damage, threats to investor security. particular investors.
Example: War or civil conflict causes multinational Example: A government cancels an
firms to delay or exit investments. investment agreement, causing major losses.
2 Types of Political
Risks Affecting FDI
Regulatory Risks Social Risks
Arise from sudden changes in laws or regulations. Driven by societal tensions affecting political
Examples: Increased taxes, restrictions on profit stability.
repatriation, biased regulations. Examples: Protests, strikes, civil unrest, anti-
Impact: Reduces predictability, erodes investor foreign sentiment.
confidence. Impact: Disruption of operations, policy shifts
under public pressure.
Example: Social unrest forces a government to
alter foreign investment laws.
3 How Political Risk Influences FDI
Decisions
Political Risk & FDI Decisions:
Political risk affects FDI decisions (location, valuation, ownership).
Unstable governments, policy shifts, and violence create uncertainty.
Stable countries attract FDI, while unstable ones lose it.
Impact of Political Risk on FDI:
Location Choice: Instability (e.g., Venezuela) deters FDI; stability (e.g., Singapore) attracts it.
Project Valuation: High-risk countries need higher returns (15-20%).
Ownership Structures: Joint ventures in unstable regions; wholly-owned in stable regions.
Example: China/India shifted from JV to wholly-owned as stability increased.
FDI Examples from Political Risks:
Attracting FDI:
Rwanda: Governance reforms, reduced corruption, and political stability.
Vietnam: Consistent political environment and economic reforms.
Losing FDI:
Myanmar: Military coup and sanctions after 2021 led to FDI decline.
Russia: Corporate divestment after the 2022 invasion of Ukraine.
Case Studies
Political Stability and Foreign
Direct Investment (FDI)
Singapore – Political Stability Boosts FDI
Background:
Singapore, a small city-state with no natural resources, transformed
itself from a developing nation in the 1960s into a global financial
and business hub. A key factor in this success was its political
stability.
Why Investors Chose Singapore:
Strong Rule of Law & Low Corruption
The government enforces strict anti-corruption measures, ensuring a transparent business
environment.
Policy Consistency
Long-term economic planning under the People’s Action Party (PAP) has ensured continuity in
business-friendly policies.
Infrastructure & Ease of Doing Business
Reliable legal frameworks, efficient bureaucracy, and world-class infrastructure reduce
operational risks.
Neutral & Safe Geopolitical Position:
Singapore avoids conflicts, maintaining good relations with both Western and Eastern powers.
Venezuela – Political Instability Scares Away FDI
Background:
Venezuela, once one of Latin America’s wealthiest nations (due to oil reserves), has
suffered hyperinflation, economic collapse, and mass emigration due to political
instability.
Why Investors Fled Venezuela:
Authoritarian Rule & Policy Volatility
Under Hugo Chávez and Nicolás Maduro, the government nationalized industries,
expropriated foreign assets, and imposed erratic economic policies.
Corruption & Weak Institutions
Rampant corruption and lack of judicial independence eroded trust.
Economic Mismanagement
Price controls, currency devaluation, and debt defaults destroyed business confidence.
Social Unrest & Violence
Frequent protests, crime, and political crackdowns increased risks for foreign firms.
Key findings
Political stability, transparency, and pro-business policies create
investor confidence, leading to sustained economic growth.
eanwhile, Political instability, expropriation risks, and economic
mismanagement can lead to capital flight and long-term economic
decline.
5 Strategies Used To
Manage Political Risk
Political Risk Insurance Diversification of Investments Joint Ventures and Local
Protects international businesses from losses This strategy reduces reliance on any Partnerships
due to political events like expropriation, single nation's stability, ensuring that Help reduce political risk by leveraging local
violence, or currency issues. It helps local political disruptions have a limited knowledge, ensuring compliance, and
companies stay secure and continue operating impact on the company's global providing early insight into potential
in unstable regions. operations. changes.
Due Diligence and Building Relationships with Legal and Contractual
Continuous Political Local Governments and Protections
Monitoring Stakeholders
Companies use legal protections in
Helps companies anticipate changes. Provides early warnings about potential
contracts and international investment
Consulting political experts provides political risks and foster goodwill that
agreements (IIAs) to guard against unfair
insight into local nuances and policy may protect investments during political
treatment, expropriation, and contract
shifts. turmoil.
breaches, with enforcement through
dispute settlement mechanisms.
5 Strategies Used To
Manage Political Risk
Developing Contingency Active Political Risk Management Utilizing Government and
and Exit Plans Approaches Multilateral Support
Preparing contingency plans for political This includes scenario planning, In some cases, companies leverage
disruptions, including strategies for scaling lobbying efforts, and engaging in support from home country governments or
down operations or exiting the market if corporate diplomacy to influence the multilateral institutions that provide political
necessary, helps companies respond quickly political environment favorably. risk mitigation tools, including guarantees
to adverse political events. and diplomatic backing.
These strategies collectively help companies reduce their vulnerability to
political risks associated with FDI, enabling them to protect their investments,
maintain operations, and capitalize on opportunities in politically uncertain
environments. The choice and combination of strategies depend on the
specific risks, country context, and company capabilities.
6 Conclusion
Risk Drives
01. Decisions 02. Stability Wins
Political environments directly impact Wars, corruption, expropriation, and
where, how, and whether investors erratic regulation drive investors
commit capital. Factors like stability, away. In contrast, countries with
governance, and predictability stable political systems and
influence confidence and long-term transparent policies become
viability. magnets for sustained FDI.
03. Shared Responsibility 04. Manage or Lose
Attracting and sustaining FDI requires Mitigation tools—insurance, joint
action from both sides: governments ventures, diversification, and
must build trust through reforms and international legal protections—are
transparency, while investors must now core to investment planning in
assess risks realistically and engage to politically volatile regions.
create mutually beneficial outcomes.
Recommendations
For Governments For Investors
Ensure transparent and stable Integrate political risk analysis across
regulations investment lifecycle
Avoid abrupt policy shifts; build trust Diversify geographically and build
through consistency local partnerships
Strengthen institutions (judiciary, Use international protections
anti-corruption) (treaties, arbitration)
Engage with investors and honor Stay proactive with early warning
rule-of-law commitments systems and exit plans.
Thank You
For Your Attention
Presented by
(Group 4)
Hiba Belhaj
Malak Skik
Salma Tourch
Khadija El-Kaissi
Amr Gamal
Nacer Tazi
