These and other governments have demonstrated an increasing
propensity to renege on contracts, which international law gives
them the right to do, as long as compensation is fair, prompt,
and adequate. As the Spanish company Repsol learned earlier this
year, when its ownership stake in Argentine oil company YPF was
expropriated, a decade of profitable operation is no guarantee
of future success, and it can take years to reach an
accommodation on compensation. In the meantime, companies are
left to wonder when or if they will ever be paid, while bearing
the cost of expensive negotiations and laboring under the burden
of a cessation of revenue-generating activities.
If one or two
governments were taking such actions, they would be labeled
"rogue" and simply avoided in the future by investors. But the
rise in economic nationalism is occurring in tandem with the
institutionalization of "democratic" elections in many
developing countries, lending legitimacy to government actions.
Venezuela and Bolivia—both "democracies"—are perfect examples.
Presidents Hugo Chàvez and Evo Morales have enforced multiple
expropriatory actions of foreign-owned businesses in the natural
resource sector in the name of "the people."
The spread of
democracy over the past decade is also now coinciding with the
rise of extreme political movements on the left and right, with
particularly negative consequences for international businesses
in strategic sectors of a given economy. Companies operating in
mining, power, petrochemicals, telecoms, and high technology are
particularly prized by governments inclined toward expropriatory
activity for their perceived strategic value.
Impact of
Decentralization
This is occurring at the same time that
the "devolution" process is taking hold in an increasing number
of developing countries. As central governments grant greater
political and economic rights to provincial governments, the
rules under which contracts were originally negotiated may
change, leaving many businesses with little option but to
forcibly renegotiate or unilaterally accept the changes imposed
on them. This is being seen in the coal industry in Indonesia,
for example, with greater frequency. The quest for political
equality on a local level has thus come to transcend borders,
with national and international implications.
In some cases,
regional autonomy has increased to such a degree that would-be
investors must contemplate the possibility that they may
commence operation in one country today that may ultimately
become two countries later on. Some good examples are Nigeria,
which is threatened by ethnic and religious strife between its
northern and southern regions, and Iraq, which remains at risk
of breaking apart. The forces unleashed by the Arab Awakening
will continue to threaten the sanctity of existing borders in
the Middle East.
For foreign-owned businesses operating in
strategic sectors of developing economies, the implications are
clear. Economic nationalism, rising commodity prices, global
competition, extremist political movements, and the propensity
to expropriate foreign-owned assets all add up to the potential
for an even more challenging international investment climate in
the future. Yet, saturation in developed markets makes the
desire to invest abroad—even in risk-prone countries and
sectors—inevitable.
But, the risks associated with doing so
exist for companies headquartered in developed as well as
developing countries. With the rise of emerging market titans,
such as Petrobras, Arcelor-Mittal, and Cemex, international
companies of all sizes and degrees of sophistication must become
smarter about investing overseas, especially given the rise in
south/south and east/west investment. In some respects, emerging
market multinationals are better equipped to deal with the
multitude of challenges associated with operating in developing
countries, given their experience in maneuvering through complex
bureaucracies and addressing issues associated with corruption.
Their challenge is to understand that operating abroad will, by
definition, involve new and different norms and standards, with
different rules for achieving success.
Strategic Planning Is
Key
To maintain their footing, managers must place
renewed emphasis on strategic planning and forward-looking risk
management—at all phases of the trade and
investment process. Being "reactive" is no longer sufficient.
Corporate managers must consider how to reevaluate existing
activities and analyze new opportunities in light of the rapidly
changing global investment climate. The best way to address
these risks is to establish risk management procedures that ask
the right questions and establish effective methods for managing
risk—before it becomes an issue. The ability to conduct
realistic and effective scenario planning and stress testing are
essential for any international business.
Conclusion
Given that 2013 looks to be another challenging year for the
global economy, the propensity of natural resource-rich nations
to lash out at foreign investors is likely to grow. The world is
only going to become a riskier and more complex place in which
to do business in the medium- and long-term, and there is plenty
of scope for trouble. If your company does not have a risk
management program in place to deal with the realities of
international investing, now would be a good time to put one in
place.
*Dante Disparte
is managing director of partner solutions with Clements
Worldwide, based in Washington, DC.
Daniel Wagner is chief
executive officer of Country Risk Solutions, a cross-border risk
advisory firm based in Connecticut, director of global strategy
with the PRS Group, and author of the new book
Managing Country
Risk. Read his full
IRMI.com bio.