Risks in Foreign Direct Investment Projects

Despite the well-developed strategies, certain inherent risks are associated with a foreign direct investment which calls for additional caution when a company decides to invest in a host country. This report will attempt to assess social, environmental and political risk associated with foreign direct investment projects.Political and macro-economic stability is often regarded as the most significant pre-requisite for foreign investors. A stable, transparent and non-discriminatory legal and regulatory environment encourages multinational organizations since it promises an efficient and non-corrupt judicial system in case of conflict. Institutional rigidities and bureaucratic procedures are not intended as significant time is wasted in making strategies to fight with bureaucratic procedures and negotiations. Multinational organizations now require a free foreign exchange system with repatriation and a flexible labor market. An appropriate social and economic environment is also a prerequisite for the MNCs. A flourishing market, an efficient communication system, qualified labor, fiscal incentives and privatization programs are some of the ingredients that make a host country attractive to foreign investors (Michalet, 2000, pp7- 9).As mentioned earlier, foreign investors zero down on a specific country based on certain parameters. Earlier, organizations used to think the bureaucracy as a cost of getting entry into the domestic country. Nowadays the foreign investors consider these as a risk to their business. Apart from this, there can be certain political risks. Unfavourable political events and ambience of the host country can pose a potential risk for foreign investors. Changing relationships between the host and the home country as well as between the host and the third country is supposed to influence the economic well being of the multinationalcompanies in that host country.