Analysing Risks of Foreign Direct Investment in Emerging Economies: A Case-Study of Saudi Arabia
18 Pages Posted: 7 Jan 2007
Date Written: January 2007
Globalization is ushering the era of low trade barriers and global competition. Companies can no more entirely depend upon its domestic markets. Besides, many of the developing countries have been opening up their economies to accelerate development and are striving hard to mobilize funds for developing infrastructure and industry through Foreign Direct Investment (FDI). A large number of Multinational companies and investment groups are seeking entry to seize the opportunities offered by the emerging economies offer immense opportunities in the areas of telecommunications, power, transport, roads, real estate, manufacturing, banking and insurance etc.
Besides, cultural, language barriers and variations in religious beliefs, the decision to go international must be made with care due to the potential risks and obstacles that emerge from the future economic and political developments of the host country.
The article presents a comprehensive framework to evaluate the risks of Foreign Direct Investment. The framework facilitates a systematic assessment of the risks faced by Foreign Direct Investment businesses due to the political, economic and social developments at the national (host country), regional and international levels.
The framework builds upon the popular PEST model used for strategic planning uses scenario planning method to identify and define the various random future events in the unique context of socio-economic-political-religious milieu of Saudi Arabia. The likely impact of the events considered was analyzed under Pessimistic (Unfavorable), Most likely (Status quo) and Optimistic (favorable) scenarios. Based on the analysis, the risk exposure of FDI businesses was classified into Capital Risk, Business Risk and Operating Risk. The risk factors were evaluated on two dimensions - magnitude (low, medium and high) and probability (low, medium and high). Finally, a Risk Assessment Matrix has been drawn to summarize the risk levels of the various random events considered.
Keywords: Globalisation, FDI, Events, Pessismistic, Most likely, Optimistic, Capital Risk, Business Risk, Operating Risks
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