Risk and Cost of Potential Kidnapping
Response to the following problem:
In 2004 during the war in Iraq, some MNCs capitalized on opportunities to rebuild Iraq. However, in April 2004, some employees were kidnapped by local militant groups. How should an MNC account for this potential risk when it considers direct foreign investment (DFI) in any particular country? Should it avoid DFI in any country in which such an event could occur? If so, how would it screen the countries to determine which are acceptable?
For whatever countries that it is willing to consider, should it adjust its feasibility analysis to account for the possibility of kidnapping? Should it attach a cost to re?ect this possibility or increase the discount rate when estimating the net present value? Explain.