Protecting Against Political Risk in Overseas Ventures

In recent years international companies have experienced expropriations, cancellations of operating licenses, and contract frustration, as the result of actions of host governments. However, it’s difficult to objectively discern any particular targeting of U.S. companies. Heightened awareness of political risk among U.S. executives likely derives from the fact that there is more U.S. investment to be impacted. More than half of foreign direct investment from the so-called “rich world club” came from the United States in the last quarter of 2013. 

Without taking risk no business could generate impressive value, but the absence of coordinated political risk strategies across all levels of international business reflects an implicit assumption that no practical measures can be taken to control these perils. Not true.

Most companies that demonstrate good corporate governance have built assessment of country risk into their investment process. At best they develop a phased risk assessment and due diligence process that maps the investment life cycle. Few organizations, however, systematically build an analysis of local factors into the evaluation of their political risk exposure. The exposure of one company is often different from that of another in the same industry or the same country.

Insurance is useful, but it indemnifies only against financial loss, not brand damage, loss of shareholder value and wasted time. The author outlines a practical mitigation strategy and observes that having such a strategy in place is useful when negotiating premiums with an insurer.