*Columbia FDI Perspectives*

Perspectives on topical foreign direct investment issues

No. 268   December 30, 2019
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])

Managing Editor: Alexa Busser ([log in to unmask])

*Political risk: Not just the investor’s affair****


Xavier M. Forneris**

Political risk[1] is one of the most important risks that investors face in
their transnational investments. There is abundant literature showing how
political risk affects FDI by increasing the uncertainty faced by firms in
a foreign location. Political risk consultancies are thriving, and tools to
assess risks abound in the marketplace.

Assessing political risk is a necessary but not sufficient step. The key
question is: how to manage and minimize risks. One sometimes hears the view
that political risk is a matter for investors only: if MNEs want to invest
abroad, they have to get proper advice on the legal structure of their
projects and, if they view the risks as excessive, they can either not
invest or buy political risk insurance (PRI). Due diligence is imperative,
and insurance can help—although it has a non-negligible cost, covers only
certain risks, caps recovery (and often limits recovery to “book value”
rather than market value), and is not always economical to smaller

More importantly, host country governments are not disinterested parties.
Stating that this is not their concern is analogous to claiming that
governments have no role in combatting the risk of fire, and that people
should just buy an insurance policy. Governments can and should take many
actions (e.g., sound forest management, firefighting capabilities, zoning,
building regulations).

Similarly, addressing political risk should be a shared responsibility.
Countries that want more FDI should make minimizing political risks an
integral part of their strategy. What can they do?

A good starting point is trying to understand investors’ concerns over
political risk. Investor surveys are useful tools to translate a rather
abstract concept into specific concerns. Surveys also show that, while some
political risks are difficult for host country governments to foresee or
control (war, terrorism, political strife), others result from government
actions (adverse regulatory changes, breach of contract, expropriation,
current transfer restrictions).[2]

This finding points to a first possible course of action: if host country
governments can take these actions, they can also refrain from taking them,
or at least be more careful about certain actions. For instance, when
governments need to expropriate investors, they should ensure that the four
criteria for lawful expropriations are met (public interest, due process,
absence of discrimination, fair compensation), paying special attention to
how compensation is assessed. When changing laws or regulations that affect
investors, governments should pay attention to the process: give proper
notice to the business community, solicit comments, take comments into
account, etc. Changing how host country governments behave toward investors
and exercise their regulatory powers can be a first element in their

Second, countries can strengthen the legal framework that protects
investors and its enforcement, including by:

·      Concluding international investment agreements with strong investor

·      Signing major international conventions that foreign investors view

·      Strengthening the domestic judicial system, realizing that
arbitration is not a panacea and that functioning judicial systems are
indispensable attributes of the rule of law.

While some of the above actions specifically target FDI, strengthening the
judicial system can benefit all investors, foreign and domestic, and should
not be overlooked.

Third, states can implement an “Investor Grievance Management” mechanism to
detect investor grievances at an early stage and resolve them proactively
by empowering a lead agency within the government, using a range of
techniques (including connecting the agency causing the grievance and the
investor to facilitate a solution).[4] A best-practice example of such a
mechanism is the Office of the Foreign Investor Ombudsman in the Republic
of Korea. A well implemented Investor Grievance Management mechanism can
prevent grievances from turning into full-fledged disputes between states
and investors.[5] As disputes almost inevitably lead to the departure of
investors,[6] this can help retain FDI long-term, which will help generate
the most FDI benefits for host economies. The World Bank Group’s advisory
work supports developing economies to, at the same time, strengthen their
investor protection framework and implement Investor Grievance Management

*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Xavier M. Forneris, ‘Political risk: Not just
the investor’s affair,’ Columbia FDI Perspectives, No. 268, December 30,
2019. Reprinted with permission from the Columbia Center on
Sustainable **Investment
(*** <>*).” A copy should
kindly be sent to the Columbia Center on Sustainable Investment at *
*[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Alexa Busser, [log in to unmask]

The Columbia Center on Sustainable Investment (CCSI), a joint center of
Columbia Law School and the Earth Institute at Columbia University, is a
leading applied research center and forum dedicated to the study, practice
and discussion of sustainable international investment. Our mission is to
develop and disseminate practical approaches and solutions, as well as to
analyze topical policy-oriented issues, in order to maximize the impact of
international investment for sustainable development. The Center undertakes
its mission through interdisciplinary research, advisory projects,
multi-stakeholder dialogue, educational programs, and the development of
resources and tools. For more information, visit us at

*Most recent Columbia FDI Perspectives*

·       No. 267, Maria Laura Marceddu, ‘Another brick in the wall: the
EU-India investment-facilitation mechanism,’ December 16, 2019

·       No. 266, George A. Bermann and John P. Gaffney, ‘Intra-EU
investment protection in a post-Achmea world,’ December 2, 2019

·       No. 265, Karl P. Sauvant and Clémence Boullanger, ‘An international
framework to discipline outward FDI incentives,’ November 18, 2019

·       No. 264, Yun Zheng, ‘China’s new Foreign Investment Law: deeper
reform and more trust are needed,’ November 4, 2019

·       No. 263, Fabio Morosini, Nicolás M. Perrone and Michelle R.
Sanchez-Badin, ‘Strengthening multi-stakeholder cooperation in the
international investment regime: The Brazilian model,’ October 21, 2019

*All previous FDI Perspectives are available at


* *The Columbia FDI Perspectives are a forum for public debate. The views
expressed by the author(s) do not reflect the opinions of CCSI or Columbia
University or our partners and supporters. Columbia FDI Perspectives (ISSN
2158-3579) is a peer-reviewed series.*

** Xavier Forneris ([log in to unmask]) is an international lawyer serving
as the World Bank Group’s (WBG’s) Investment Policy and Promotion (IPP)
Coordinator for East Asia and West Africa and global workstream leader for
Investor Protection. The author wishes to thank WBG colleagues Roberto
Echandi and Ivan Nimac for their comments on an earlier draft, as well as
Mark Kantor, Henry Loewendahl, and Theodore Moran for their peer reviews.

[1] A broad definition of political risk views such risk as the probability
that MNE operations will be disrupted by political forces or events. A
narrower definition (used by the political risk-insurance industry) focuses
on specific “insurable risks”, e.g., currency convertibility, transfer
restrictions and expropriation. Our team and this note use the latter

[2] These findings emerged from two WBG surveys: the MIGA-EIU surveys
(2009-2013) and the Global Investment Competitiveness (GIC) survey, 2017.
PRI cover is narrow; for instance, adverse regulatory changes are usually
not covered, unless changes amount to expropriation or transfer

[3] Such as the MIGA, New York and ICSID Conventions.

[4] A forthcoming WBG publication will address how this can help minimize
risks and retain investment.

[5] The IGM can complement, and even be part of, the general aftercare
programs that many investment promotion agencies offer.

[6] Often, the mechanism will focus on more serious grievances (e.g.,
government conduct that could be interpreted as violating core investor
guarantees), precisely because the risk of disputes is higher, with more
severe consequences than other grievances or investment-climate issues.

*Karl P. Sauvant, PhD*

*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
| p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
| w: | t: @CCSI_Columbia

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