Political factors influencing global investment decisions

It is important for companies engaging in global investment decisions to constantly ensure that there is a margin of security in their investment. They should also be aware that the market exists for them to exploit and not for it to exploit them. The main aim of global investment is to expand the market for the company’s products and services that will allow expansion in production thereby increasing profitability of the business. Unsuitable investment decisions usually lead to failures in business ventures and are detrimental to the survival of a multinational company. Before establishing investments in a foreign country, it is important to assess the status of its politics as well as its cultural orientation. This is because politics and culture of the host country are major determinants of the success of foreign investment in it. Ignoring political threats in global investment decisions puts the company at a high risk of failure (Cateora, Philip R. and John L. Graham, 1998 pp.23-25).

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In recent years, politics and the threats they pose to foreign investors determine the success of a company. They are the ones that actually determine the winner or looser. Investment policies of a country are normally formulated nationally through local policy plans. This could lead to uncalled for negative impacts on the global market. Political intervention on the market systems of many countries is rampant. This is happening in the developed and developing countries, necessitating caution while companies consider investing in foreign countries. The regulations of the global market are being changed time and again by politicians and can be disadvantageous to foreign companies especially those that invest heavily on fixed assets such as in the tourism industry where companies make huge capital outlay for assets such as buildings and infrastructure. The major threat caused by political interference is over-regulation thereby bringing in impediments to open capital flow which may adversely affect the global market (Mooij Marieke. 1998 pp. 38-41).

Political risks are the possibilities that may occur in the host country due to political decisions or actions that may have a negative impact on the business. In such cases, companies may end up loosing their money or fail to perform according to the expectations. They include confiscation of property due to local misunderstanding, changes in currency value, restrictions of business activities, politically instigated violence such as the one that was experienced in Rwanda in 1992, terrorist attacks such as the bombings that have been aimed at American establishments by organized terrorists, general insecurity caused by fighting between government forces and guerrilla movements especially in African countries as well as war such as the 2003 invasion of Iraq. All these destabilize the business environment and may at times have dire consequences on the establishment including all the assets owned by the company especially if it becomes a victim of bombing.

The suitability of government policies of the host country to the business should be considered while deciding on investment decisions. Foreign investors usually face difficulties when regimes formulate policies to control capital movements. These transfer risks are normally a major draw back for multinational companies who are rendered incapable of expanding. Politically controlled operations are also major threats to foreign investors. These controls mainly hamper the progress of companies that obtain their raw materials from the host country. Less developed nations especially in Africa usually present the greatest threats due to internal political conflicts. Tiomin which is a multinational company that deals with mining faced problems in Africa when it ventured in Titanium mining in the Kenyan Coast. Local politicians demanded that local residents be compensated due to the risks they were exposed to as well as inflated compensation for displacement. The company was forced to quit the mining venture (Eroglu Sevgin 1992 pp. 57-62).

The other potential risk to global investment is lack of security of tenure. Foreign investment is faced with the threat of confiscation of property by the host country’s government, especially when there happens to be a change of regime, whereby the new one feels that contracts or possessions were acquired illegally by the foreign company, or when it feels that the foreign companies are presenting unnecessary competition to local companies. The new regime may resort to discriminate taxation on the foreign companies.

Making private property public and expropriation of assets is a major threat to foreign investors in developing countries. In Zimbabwe, the property of British investors in agriculture was confiscated and shared out to the public in early 2000s. This served a major blow to the foreign investors following to the loss of property. It was an unexpected political move that caught the British investors unprepared thereby causing huge losses. The host government may also limit the employment of foreign nationals, thereby foreign investors being forced to employ inexperienced work force. In Vietnam, there is a limit on the number of foreign nationals that foreign investors should employ. This hampers the progress of the companies which are mainly multinational companies from the neighboring Asian States such as Japan, since the country lacks highly skilled human resources. Tourism companies are mainly affected because of their nature of investment. They usually target foreign nationals and therefore they have to employ a workforce with diversity of knowledge in world cultures and languages. Restriction in the number of foreign nationals is a major drawback to the companies since the locals do not have the appropriate training (Kimberly A. 2008 pp. 121-125).

 

Measurement of political risk

In order to make the appropriate investment decisions, it is important for multinational companies to engage in a considerable risk analysis with the use of their own management teams as well as outside consultation with others who have engaged in similar economic venture. They can learn from the experience of others rather than waiting to learn from their own experience. Experts in quantitative methods for investment forecasting should be used to address the irregular characteristics of the target country as well as aspects of the business project. Surveys should be carried out on many multinational companies especially those that share the same objective due to the fact that political interferences affect different companies differently. For example the medical industry may not be affected in the same way as the tourism industry. Each company should identify the specific variables that affect its functioning. These include; the laws and regulations of the host country, administrative variables, operational environment interference, political influence on currency stability as well as the judicial system (Falbe, Cecilia M. and Dianne H. B. Welsh, 1998 pp. 71-73). There are various indicators that can be used to measure political stability. These include;

  • Longevity of the regime. It is usually not advisable to invest in a country in which the ruling political party is replaced every time there is an election. This could be an indicator of political instability.
  • The frequency of general elections, which in other terms is known as Election Density Ratio. This is usually a good indicator of political stability in a country. Investors should shun investing in countries where elections are held at a high frequency. It is characteristic of an unstable economy.
  • An influx of the number of political parties, mergers and break-ups indicates instability in the political system. Investors should carry out extensive research in the host country to know the trends in the political system.
  • The strength of a ruling party in terms of the number of seats that it has in parliament can also be used to measure political stability. The more the number of representatives the stronger and more influential the government is and the more stable a country is politically.
  • The spending on efforts to strengthen the military in a country is an important indicator of political stability in a country. The more the amount spent on military strengthening the more the country tends to be politically stable.

Cultural factors influencing global investment decisions

Culture is the overall multifaceted model of traditional human actions, societal forms and characters personified in thinking, verbal communication, deeds, and work of art. It is reliant upon the capability of humans to learn and transmit information, and structures of nonrepresentational ideas. It includes ways of life, principles, regulations, traditions, attitudes, religious conviction, fallacies, as well as art. There exists a strong relationship between culture and the success of foreign investments. Economic development comes as a result of a gradual change from the fixed traditional forms to principles which tend to be gradually more based on reason, open-minded, unquestioning, and involving everybody. The change from the traditional to the modern industrialized society produced intense transformations in the day after day practices of the people and existing views of the human race (Hofstede, Geert.1991 pp. 23-26).

The cultural history of communities around the world usually determines the course of development. It also depends on the organization of the labor market available locally. Most of the times, the significance of culture in making investment decisions is disregarded even though it has always had an impact on the outcome of the investment strategies. There is also a tendency for investment experts to overlook the significance of culture while implementing foreign investment plans. They usually view culture as a product of a certain region depending on its economic orientation and also as lacking autonomy in development. This notion makes planners to loose a chance of incorporating a significant feature in their investment plans. The influence the culture of a community in determining the success of an investment decision is significant and should not be ignored in any undertaking towards foreign investment.

The success of a multinational company within a particular region highly depends on the local culture which normally presents distinctive alternatives investment decisions that affect the local community and which are to be implemented locally. Understanding the local culture and the history of communities is important since it helps investment planners to know what went before within the community. This contributes to the present lifestyle and also determines what the community can contribute be it in form of labor or expansion space as well as the interests of those who live within it in the present. It assists in understanding the most appropriate measures to undertake in order to be successful in investment (Luo Yadong 1997 pp. 28-32). Measurement of culture is through pointers of personal principles and attitudes, for example reliance and respect to the law as well as private property. Establishing a company in an area with a culture of unruly people who do not respect private property is detrimental to the operations of the company.

The attitude of local people towards spending and labor is significant for the success of foreign investment. A Culture composed of people who are hard working, foreign investment is likely to be successful since production will be high due to the availability of labor. The willingness of the locals to consume the products from the foreign company provides a ready market for manufactured goods. Several cultures possess a relative advantage in creative activity that can be useful to the foreign investors through incorporation of new ideas in their investment decisions, inventions and commodities. Such cultures encourage external decisions in their system and therefore there is a possibility of working together with foreigners in order to improve on their skills and technology. In the process, foreign investors are able to learn from the locals thereby enhancing their production capacity. Foreign investors should consider the adeptness of particular cultures with their investment strategies and utilize that opportunity to establish a strong base for their company. For example it is important for investment planners in research reflect on establishing global research and development firms in nations with national cultures which encourage such activities in order for them to facilitate the achievement of goals.

To some extent, it is true that some cultures may hamper the success of foreign investment in a various ways. However, it is the duty of foreign investors and decision makers to ensure that they set investment strategies that are in harmony with the cultural principles of the locals in a foreign country so that these cultures can support their investment decisions. Failure to do this creates a feeling of intimidation in the local community, thereby causing resistance to any investment efforts that are considered to be imposed by foreigners. In order for any foreign investment plan to be successfully implemented, the local community should be adequately informed, and the impact of these activities to their cultural values assessed. The support of communities in implementing foreign investment decisions that affect them yields much success (Feinberg Phyllis, 2001 pp. 45-47)

The success of foreign investment highly relies on the capability to present a market mix which satisfies what the consumers from a variety of cultural backgrounds expect. Success of companies operating in a variety of cultural backgrounds depends on their approach towards approaching the consumers, bearing in mind that each culture is unique in its own way, and each has unique needs. Companies should be able to adapt to these cultures even if it means changing their products in order to suit the consumers. The influence of culture on foreign investment goes to the extent of compelling companies to change their organizational structures. Culture changes slowly over a long period of time and therefore it is hard for foreign companies to change the lifestyles of the people in the cultural settings of the locals in the host country (Fang Zao 2005 pp. 17-19).

The suitability of East Asian countries for foreign investment is due to the adeptness of their culture. The favorable environment for investment in Japan is attributed to the culture of Japanese. They are known to have a culture that drives them towards pursuing goals that are aimed at acquiring material wealth. This makes them continuously work hard in order to achieve the desired goals. This may explain the reason why they are very hard working. They are also known to tend towards saving for the future. They believe that the future will depend on what they save for it today. This ensures self reliance since there can never be a shortage in their stocks. They highly invest in education, sharing a common believe that it is through education that they can achieve technical advancement to assist in economic development (Collins Johnson. 2008 pp.57-63). They believe in community customs and values. These have played a major role in achieving the success within the society. This creates a favorable investment environment due to the availability of hard working and highly trained work force.

China is ranked as the best for foreign investment. An influx of multinational companies in China began in 2003. More and more companies are joining the market introducing modern technology as well as engaging in the service market. Volkswagen Asia Pacific Ltd is one of the companies that has established in China and intends to invest more on modern technology amounting to more than six hundred million euro in the Shaghai based company. LG Electronics and Panasonic China are companies that have also found china to present a favorable environment for investment. The companies are intending to expand their production capacity as well as their market in Tianjin and the Chinese mainland respectively. Foreign companies have been introducing state of the art technologies in China since 2003. The American company Hewlett Packard produces more than half of its products in China. Many multinational companies in the service sector are also investing in China (Feinberg Phyllis, 2001 pp. 13-16). Carrefour and Wal-Mart are large retail enterprises dealing with distribution of goods. The two have also established in the country. Leading global manufacturers such as Motorola, IBM, General Motors and General Electric usually buy secondary products for their production processes in China. Multinational financial institutions have also established in China. These include JP Morgan Chase & Co, KBC Bank, and HSBC. These institutions have found China to be favorable for investment.

China’s system of “guanxi” allows business to be transacted in an excellent manner through highly structured networks of dealings rather than according to the net worth. This is a major encouragement for foreign investors in China. This system has had a positive impact on foreign investment through improvement of their market performance and funds utilization. Foreign investors can use structure similar to the network system of “guanxi” to effectively compete in the market. The Chinese human resources tend to work harder, while providing cheap labor, thereby enhancing production. Investors are usually attracted by this kind of labor force, making it an appropriate place for investment. Chinese policies concerning foreign investors are encouraging. Importation of equipment is cheap in China and this allows bulk importation of industrial equipment and spares parts that are used in manufacturing by multinational companies. The government of China offers incentives to investors in order to encourage foreign investment in the country. These incentives are given to companies in order to decentralize industrialization. For example the government offers tax reduction to companies which invest in the West and Central China. These companies also enjoy reduced trade restrictions (Caney, S. 2006 pp. 71-74)

More over, the government promotes the shares owned by the foreign companies established in the two areas of interest. The government also encourages multinational investors in power production as well as infrastructure development through a reduction in taxation to 15 percent. The Chinese government has set policies that encourage multinational companies to invest in environment, water, and agriculture as well as energy conservation. Multinational companies that are interested in investing in research and development are also favored by these policies. The government offers funding to these projects. It protects the foreign companies through transferring business rights, presenting interests on equity and corporation mergers and restructuring. Increased foreign investment in China has led to movement of multinationals from neighboring countries such as Taiwan in order to benefit from the favorable policies presented by China. They are also moving to China in order to find market for their products (Gasper, D. 2004 pp.81-86).

India also presents favorable opportunities for foreign investment. It is ranked as the second best after China. The country has entered several bilateral agreements with many other countries in order to promote foreign investment. This came after liberalization of the foreign policy thereby opening up its market for foreign investors. India has a favorable culture for investment with people who are hard working and offer cheap labor. Politically, India is a democratic country that promotes freedom of the media. This has assisted the government to eradicate corruption within the economic system. Corruption is a factor in the culture of many developing countries that discourages foreign investors. Its absence in the country makes it an appropriate destiny for foreign investors. Nike is one multinational firm that found India a safe market for its products. India has a reputation of protection of property rights thereby encouraging many foreign investors (Charlie C. 2007 pp. 47-54).

However, in spite of the favorable environment for foreign investment in India, there exist political uncertainties in the country. These are a major drawback to the country’s efforts of encouraging foreign investment. Government operations are normally bureaucratic, slowing the movement of business. Despite the fact that Indian government has formulated important policies that protect property rights, the process of their implementation takes a time that is too long for foreign investors. Power shortage, poor communication network and degraded infrastructure are some of the issues that keep China ahead in terms of presenting a favorable environment for investment. On the other hand, China has experience from an earlier economic downturn and therefore has a greater capacity for evaluating the impact of certain economic actions. Another factor that has kept China ahead is the presence of multiple industries that makes it self sufficient for all the requirements of the industries in the economy. Indian foreign investment mainly deals with technology and service industries (Collins, J. 2008 pp. 171-175).

Vietnam is currently classified amongst the fastest growing economies worldwide. Its major growth was recorded in 1997 when it hit a remarkable 9.1%. This happened at a time when the Asian countries had been hit by a financial crisis. Foreign investors view Vietnam as having a high potential for investment. However, the government is not famed for encouraging foreign investors. There exists strong government control in the market. The human resource of Vietnam is characterized by reliable and active workers, with a tradition of respect for learning and authority. The culture of respect and hard work is a great asset for investors in the country. They provide cheap labor that is necessary especially when a business is just beginning to establish. Vietnam human resources are composed of about 40 million workers; the annual recruitment rate is relatively high, with more than 1.5 million people joining the labor force each year (Frederic S. Mishkin, 2005, pp. 22-25).

Many foreign investors prefer investing in Vietnam due to the huge labor force that is relatively cheap. Human resources in Vietnam solve Labor issues internally within their enterprise before the issues can be taken to the provincial council. This culture of problem solution is interesting for many foreign investors because workplace problems can hamper progress if not approached in the right manner. There is a provincial people’s court which determines the decision to strike. Workers in the most significant sectors of the economy are normally not allowed to strike. Sectors such as national security and the electricity company can not go on strike. This is an important government policy which ensures that the most critical sectors are not affected by workplace problems. It is therefore encourages investors to know that they are protected from any occurrence that may involve strikes. The country is politically stable and therefore does not present high potential risks to foreign investment. Where as the potential for industrial human resources in Vietnam is high, there exists a looming danger due to the deficiency for skilled labor force. There is a great shortage of the desired technicians and managers for industries. This presents a problem for the companies that require highly skilled personnel. Investors are finding it costly to invest in Vietnam and then hire expensive foreign technicians and managers. With this trend, multinational companies will tend to establish their businesses in other countries where skilled and less costly labor is available. An international financial group -Manulife Financial- has found Vietnam to be favorable for investment since its establishment in 1999. since then it has expanded and has gained popularity in the country (Raghuram G. Rajan, 2005, pp. 11-13).

South Africa is also a major focus for foreign investment. This was established through a survey by the World Bank in collaboration with the country’s Ministry of Trade. The country was found to be relatively favorable for investment compared to other countries in Africa as well as other similar economies in the world. The government has formulated policies aimed at protection of property rights. Taxes are also reasonable as well as minimal government and political intervention in business. The country has a culture of working hard amongst the labor force, with minimal corruption. As stated earlier, foreign investors tend to shy away from corrupt cultures. This is because corruption is known to collapse well established organizations. The judicial system is usually swift in its verdict towards violation of property rights which encourages investors to establish in the country confidently. The government has maintained international standards in power provision. Access to finances is not a major problem in the country. All these factors contribute to the favorable investment environment in South Africa. Mitsubishi Corporation, Morgan Stanley & Co International Ltd and many other multinational companies have found the country favorable for investment (Donnelly J. 1999 pp.608-632).

Conclusion

Global investment decisions are important in the modern economies since they have promoted economic development in many economies through financial globalization. When multinational organizations invest in developing countries, they promote economic development. They tend to introduce competition in the existing market system, compelling the domestic industry to become more effective in production in order to be competitive in the market. They help in alleviation of monopolies within an economy, which may not be effective enough to satisfy the local demand. With this competition, industries tend to be innovative in order to keep their products a head of the other competitors, which eventually leads to production of high quality goods in the developing economy.

Global investment brings in market’s best practices in to the host economy. This comes in form of technology transfer, due to the fact that foreign investors tend to be innovative and possess high levels of experience from various developed economies where they have invested in the past. Domestic managers and supervisors learn from the foreign investors, some management practices such as techniques for risk management as well as production supervisory techniques. The domestic industries benefit from the information gathered by foreign investors who have access to plenty of information concerning production and marketing through their foreign subsidiaries. They are therefore able to make the necessary reforms in order to cope with the changing marketing environment.

References

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