The unrest in Egypt* has highlighted the risks associated with foreign investments and doing business abroad. Investing abroad offers undeniable benefits, including access to key markets and clients, cost-effective production facilities and new partnerships. However, the political risk associated with such investments cannot be ignored.
Political risk is measured by a country's ability to honour its obligations to foreign stakeholders. This is a special type of risk, because only Canadian companies that do business abroad are exposed to it, while those who operate exclusively in Canada are not affected.
Foreign investment can take two forms:
The possibility of the country's government intervening in the operations of the issuing company constitutes a political risk for investors. It might involve the government taking control of the company, forcing renegotiation of contract terms, dictating the number of local supervisors or imposing restrictions on the distribution of capital.
One possible solution is to take out an insurance policy. Export Development Canada (EDC) offers various insurance products that cover up to 90% of losses in the event of expropriation, currency inconvertibility, political violence and other political risks. This insurance gives investors the confidence they need to support the company's expansion plans.
In certain markets, EDC supports direct foreign investment by offering Canadian companies accounts receivable insurance that covers the receivables of their wholly owned subsidiaries abroad.
*This article was originally published in 2011.
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