You have been asked to do a quick analysis for your employer, the CEO of General Mechanics, a highly diversified manufacturing conglomerate. The CEO is an engineer, and her entire career in General Mechanics has been on the production side. Due to her acute intelligence and rapid learning ability, she has moved up steadily in the company, and took over the top job last November. She knows the company's business inside and out, but she has never had time to follow world political and economic events. The CEO does not suffer fools gladly, and her time is extremely precious.
The CEO was impressed by your memo on the importance of FDI in your economy, and she now wants to go a step further. She has called you into her office and instructed you verbally (as CEOs often do): "I've heard that foreign countries don't have the kind of rule of law we take for granted here, and they can be politically unstable. Look at what's happening in Syria right now, it seems terrible! Would an investment in your country be at risk? Write me a brief on this for Tuesday."
Although her instruction was casual, having worked with her in the past, you understand that she has very specific requirements. You must give her:
1. A brief, no more than one, single-spaced page in length, that classifies your country into one of three categories: A. political risk is among the lowest in the world, although there may be other economic risks; B. political risk is significant, but those risks can probably be managed; C. political risk is substantial, and the company should probably not consider an investment.
2. To get an evaluation that includes recent developments, go to the Economist Intelligence Unit portal (you will need to be logged in from campus or have your proxy server up and running). You can get to the portal by going to the UCSD library home page (libraries.ucsd.edu), clicking on "Research Tools," then on "Databases A-Z," then on "E," then on "Economist Intelligence Unit Portal." When you type in your country name, you will get a page that provides you with a variety of information, particularly under the Politics, Regulation and Reports buttons. You may wish to download the "Country Report" under the Report button.
3. To answer the main questions, you must identify serious or threatening political risks, but also consider the "hold up" problem and other types of regulatory risk:
A. Major and fundamental political risks.
a. Is there fundamental political instability in your country, in the form of civil war, major insurgency or ethnic violence?
b. Is there risk of fundamental regime change, such as a shift from authoritarianism to democracy or from democracy to authoritarianism?
c. Are there risks of labor militancy or strikes that could interrupt production?
B. The "hold up" problem: the possibility that tax rates or other regulatory rules might be changed after the firm enters.
a. Is the current government potentially hostile to foreign investment, or are there pending elections that might bring a party to power that
would be opposed to foreign investment?
b. Does the investment approval process look welcoming to you or is it complex and difficult (go to the Regulation button and click on Organizing an Investment)? To mitigate hold-up risks, countries may establish credible and transparent regulatory regimes: does your country seem to be making a reasonable effort to achieve this?