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Political risk and country risk are examples of the additional risks firms face with direct foreign...

Political risk and country risk are examples of the additional risks firms face with direct foreign investment (DFI). Evaluate the impact of these risks and explain why firms undertake DFI rather than simply export their products. (35marks)

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Answer #1

Political and country risk is faced by every business which seeks to expand its operations into another country. These are the risks of regime changes and policy changes.

DFI has the following advantages over exports :

  • local regulations in the foreign country may favor manufacturing in that country over imported products
  • tax benefits of DFI over exporting to that country
  • DFI has a benefit on the local domestic economy of the foreign country, namely employment and tax revenue. This creates a favorable policy benefit
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