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Factors That Make a Country Risky

Essay by   •  March 11, 2012  •  Research Paper  •  527 Words (3 Pages)  •  1,054 Views

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With any investment, there is always a risk/reward ratio to be aware of, and this applies to foreign direct investments as well. A country becomes a risky investment for a company if there are uncertainties in its political, social, economic, or environmental factors. As we have discussed with political factors, this can occur when political institutions are changed, overthrown, or altered due to a shift in government control, social fabrics, or non-economic factors (Gale). For instance, terrorism would add substantial political risk to a country for a foreign investor. There could also be things such as a coup which threatens to overthrow and change a government completely. Social risk factors could be dealing with anything involving the people of the country. Corruption would be a great example of what we can consider to be a social risk factor (World Bank). Another social factor which can affect a country' risk would be if the citizens feel oppressed or lack their inherent human rights. These social factors are the seeds which grow into other risks, such as political, which in turn become economic. Any risk dealing with a countries market, trade, or currency will become economic risk (Galasyuk). Whether or not countries participate in an open market or free-trade would substantially add risk to its evaluation. If a country uses a non-convertible currency or does not keep their currency regulated it can make it difficult for any foreign company to set up operations. Besides these internal factors, there are also external factors which cannot be controlled, but do need to be considered. We call these environmental factors. This could be anything involving climate, weather, geography, or other forces of nature (Krechowicz, 2010). Take North Korea for example, it can be described as a totalitarian Stalinist dictatorship (The Economist, 2008). The people are oppressed and denied their basic human rights. They have no free trade or open market and are adverse to any kind of foreign direct investment. Likewise, Somalia is a country under Socialist rule located in the Horn of Africa. It is plagued with civil war and a lack of centralized government. Characterized as a "failed state" and is one of the poorest and most violent countries in the world (Blair, 18 N). There is also Myanmar, which is currently experiencing civil war from the myriad of ethnic groups that reside in the country. Although resource rich, it is one of the least developed economies in the world. The EU, United States, and Canada among others have imposed economic sanctions on the country (BBC News, 2009). They currently have one of the worst health care systems in the entire world, and are an active violator of human rights, with high levels of child labor, human trafficking, and a lack of freedom of speech.

Works Cited

BBC News. (2009, December 18). Overview of burma sanctions.

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