International trade can seem tricky even in the most developed economies, so foreign investors need to be vigilant when investing in global markets where political risks are difficult to discern. With the rise of trade between emerging markets and developed markets such as Canada, the challenge of political risks has become more pronounced in the past few years. Though traders can’t avoid political risks in the global marketplace, some of these risks are rewarding. For example, these emerging markets have over time become a consumption hub that creates a lot of opportunities for foreign investors. The following are the common types of political risks that have an impact on the success of any business.
Conversion and Transfer
Central banks and foreign governments can prevent the transfer of their hard currency or decide to prohibit or restrict the conversion of their money to a foreign currency. For example, a company that produces oil can use its banking system to bar its importers from obtaining foreign currencies to raise the price of its oil products and consequently increase its foreign exchange reserves. The move will make it hard for a local oil manufacturer to pay foreign suppliers in time.
Government Interference or Expropriation
A foreign government has the power to confiscate, seize, or expropriate the investment of a company with no justification or for no apparent reason. A foreign government can even decide to adopt specific measures to confiscate the assets of a foreign investor. Either way, an enterprise can lose its assets or foreign investment. For example, an attempt to overthrow the government can result in the closure of any company thought to be behind the effort. It could be through the imposition of unrealistic regulatory requirements to try to kick a domestic firm out of the market. Foreign markets such as Canada might need to add due diligence to any of such companies to determine its relationship with its local authorities.
Political violence such as civil strife, war, and terrorism can destroy and damage the assets of a company. Political violence can even make it hard for a firm to undertake its essential functions. For example, violence can erupt in a market when an ethnic group demonstrates against political injustices and government discrimination. The county may even be forced to declare a state of emergency due to the confrontation between protesters and law enforcers. The investment and assets of a foreign firm are likely to be demolished if protesters perceive it as receiving favoritism from the local authorities. However, foreign firms can address this issue by not only partnering with the state but also the local communities.
The impact of any of these political risks on a foreign investor is short-lived or isolated, and it can ripple across the entire firm and aggravate other risks. As a result, foreign investors should be prepared for any unexpected or sudden political gamble that may hit them. However, the fundamental elements of a strategy of any emerging market are political risk analysis, ongoing research, and due diligence. As such, an investor might consider diversifying their overseas investments to ensure that their risks aren't concentrated in a few emerging markets. You might also need to have a political risk mitigation strategy depending on the possible risks in an overseas market. Foreign investors also need to have a plan to respond to any political uncertainties that may arise. Alternatively, a company can involve its stakeholders in the formulation of its risk mitigation measures. An investor might need to brief agents, suppliers, and customers on their contingency plans for handling any political risk and coordinate with their risk response team. Preparing for even unexpected political risks can make it quicker to recover from adverse political violence and enable an enterprise to coordinate its response team with its key stakeholders.