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Over the past few decades, companies—both large and small—have increasingly become reliant on a dual-track global business model. In essence, many companies now depend on foreign sales to boost their bottom line, while simultaneously seeking to gain greater revenue through capital investments abroad. To accomplish this, companies often need to accept certain risks that such foreign activities can pose as the cost of doing business.
In particular, as companies make significant capital investments in foreign countries, they accept unavoidable political risks to the ongoing stability—or the occurrence of instability—in those countries. The political risks in a given country are usually inversely proportional to the strength of government institutions and the rule of law. Thus, in countries where government institutions and the rule of law are weak, the political risks are highest. These risks can manifest themselves in, for example, the nationalization of a company’s manufacturing facilities; the reneging by a foreign host country on agreements for access to necessary utilities, suvch as water rights; the damage or destruction of a company’s facilities in the course of civil unrest; and the imposition of local laws or regulations which undermine foreign investments in favor of domestic operations.
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