Going by their bullish outward investment plans, India’s leading globalizers seem less hurt by the global financial crisis than their counterparts in Brazil, Russia, China and the West. While they worry most about political risk, macroeconomic instability and corruption when investing in developing economies, many of them plan to step up investments in these markets over the next three years. Though the financial crisis has heightened their political risk fears, it has not significantly affected their perceptions of key emerging markets. Risk-hardened by the Indian operating environment, they feel they have globally competitive products that can make them leaders in these markets.
Illustration: Jayachandran / Mint
This is according to the Multilateral Investment Guarantee Agency’s (MIGA) World Investment and Political Risk 2009, a risk survey of at least 650 developed and developing country firms, which was released a few weeks ago. The survey examines the financial crisis’ impact on corporate overseas investment plans, political risk perceptions and mitigation strategies, and the international political risk insurance industry.
The survey finds that China, Brazil, Russia and South Africa will be key emerging market destinations for Indian globalizers, although they rate Russia, Pakistan and Iran as the world’s riskiest markets. Regionally, Asia will draw most of India’s emerging market investment, despite expanded outflows to Central/Eastern Europe and Latin America; manufacturing, telecom and natural resource firms will focus on Africa.
However, the Indian market will remain at strategic centre stage, for the simple reason that it is among the largest and fastest growing in the world. This is why some firms have begun to buy international brands to service India, or become “global” by dominating in India.
Indian firms desist from investing in Iran, and other countries unpopular with the West, for a practical reason. They fear that key Western investments will be punished. Also, most target developed markets have banking, insurance and equity listing rules that block firms with operations in countries on which sanctions have been imposed.
“Transfer and convertibility restrictions” is the political risk that most worries Indian globalizers, given the rise in crisis-induced defaults and currency repatriation freezes. “Adverse regulatory changes” are next, particularly sudden policy shifts that overturn a successful business model. Developed markets are, in this sense, now as risky as developing ones, they say, given rising protectionism.
In contrast, Russian and Brazilian counterparts most fear “breach of contract” and the “non-honouring of government guarantees”, since many of them are natural resource firms, vulnerable to the rise of resource nationalism. Contract and guarantee issues pose the greatest concern to Western firms, while Chinese firms worry most about war, civil disturbance and terrorism.
Largely, capital-intensive operations such as natural resource and manufacturing worry more about political risk than capital-light ones such as information technology.
Indian globalizers, like most global counterparts, rely on a variety of non-formal risk-mitigation methods. Joint ventures/alliances with local firms lead, followed by engagement with host country governments, use of third-party consultants, and political and economic risk analysis. Many rely on Indian embassies/chambers of commerce for preliminary risk assessment. An innovative, new strategy is to route investments in risky markets through European or US subsidiaries, since Europe and the US have more clout than India in protecting firms’ overseas investments.
In contrast, Russian firms rely most on government engagement; Chinese and Brazilian firms on political/economic risk analysis; and Western firms on both.
Most Indian globalizers are confident about their ability to assess political risk and implement existing mitigation strategies, but far less so about their capacity to anticipate new political risks, evaluate new mitigation strategies, and assign responsibilities for political risk management. Brazil, Russia, India and China (Bric) and Western firms feel similarly about their abilities.
Also mirroring global patterns, few Indian firms buy political risk protection for overseas investments. Reasons cited are that political risk in key markets is manageable; insurance offerings are not appropriate, or too narrowly defined to be of practical use; premiums are too high; and that they are unfamiliar with political risk insurance offerings. Equally, existing offerings fail to cover the risks most pertinent to Indian globalizers today: that is, sudden regulatory shifts and developments that are primarily “economic”, often in developed markets. Traditional political risks, like expropriation, are of little concern, given the warming climate for foreign direct investment (FDI).
Yet, two-thirds of Indian survey participants said they would consider political risk insurance going forward, and Chinese firms were even more enthusiastic, in contrast to the more muted response by Western firms. Survey results also suggest potential Bric interest in more robust political risk assessment and management tools.
This manifests the growing opportunity that Bric globalizers and the developing world present for the international political risk industry. FDI outflows from the developing world grew eightfold since 2003, to reach $198 billion in 2008, even as their share of total global FDI inflows grew to 45% in 2009. Bric economies dominated. To seize the moment, however, the political risk industry will need to revisit traditional definitions and business models to present these markets with more compelling offerings.
Premila Nazareth Satyanand conducted the India component of the MIGA survey. She has worked with the United Nations and the Economist Intelligence Unit, and consulted for the World Bank Group. Comment at email@example.com