Question

In: Finance

When Fidel Castro came to power, huge investment projects made by U.S. businesses were repatriated, simply...

When Fidel Castro came to power, huge investment projects made by U.S. businesses were repatriated, simply taken over by the Cuban government without offer of payment. Short of going to war, little could be done to stop this action. Though the world is different today, many forward-thinking businesses are ready to invest again, this time in the Middle East and Africa. Is the potential of governmental seizure of investment another risk of international capital budgeting? How do you quantify this risk in an analysis?

Solutions

Expert Solution

The term “Confiscation” refers to the seizure of assets of the foreign investors by the government. It is done without any compensation. In 1959, the cuban government confiscated the properties of U.S. businessmen. Following this act of the Cuban government, the U.S. government passed Helms - Burton law in 1959. The law entitles the U.S. companies to sue companies from the country that sue the U.S. companies. Later this law was repealed in order to maintain the relationship with the foriegn countries.

The major impacts of confiscation on firms are:

  1. Loss of assets: The investors lose their assets for no compensation. Investments for profits turn out to be a complete loss.
  2. Loss of future profits: The profits that are assessed to be incurred in the future are lost to the investors. Sometimes this estimated profits may be huge for the investors.

In the long run, confiscation reduces the income of the host economy.

Similar is the situation of investing in western Africa and the Middle east.

These events put forth the major risk faced by foreign investors - political risk. In this globalised economy, the actions of various governments have a vital role. It will decide the scope of foreign investment.

Confiscation will affect an investor’s financing abilities and supply chain management. Quantification of political risk is a major task for the management. Geopolitical Risk (GPR) index developed by Dario Caldara and Matteo Iacoviello is a method to measure political risk. Another method is to insure the risk.

Measurement of political risk differs with person. It depends on the situations prevailing in the economy. It is based on probability and analysis of events. There are specialised multilateral and national credit rating agencies functioning for the purpose. These agencies provide information regarding the profitability of investing in a region.International Monetary Fund (IMF) and World Bank also releases data regarding the political risk. Quantification of political risk is done by firms based on the data released by these trustworthy agencies. As mentioned earlier, quantification depends from person to person.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Compare the Greek arts to the Roman arts. When the Romans came to power, their art...
Compare the Greek arts to the Roman arts. When the Romans came to power, their art was heavily influenced by the Greeks, but with some changes. In what ways did the Romans change the Classics of the Greek artistic legacy? Include examples of how the Romans transformed Greek philosophy, architecture, theater, and sculpture and reinterpreted it into their own unique Roman style.   
At one time most products purchased in the U.S. were made in the U.S. Now many...
At one time most products purchased in the U.S. were made in the U.S. Now many products you can purchase in the U.S. seem to be made in other countries. 1. State one way that increased sales of goods made in other countries in the U.S. has helped U.S. companies and/or workers and/or consumers? 2. State one way that increased sales of goods made in other countries in the U.S. has hurt U.S. companies and/or workers and/or consumers? 3. On...
Egypt and the IMF closing case When President Abdel Fatah al-Sissi came to power in a...
Egypt and the IMF closing case When President Abdel Fatah al-Sissi came to power in a 2013 military coup, he promised to fix Egypt’s mounting economic problems. Three years later, those problems had only intensified. The country was struggling with low economic growth; 13 percent unemployment; a 12 percent inflation rate; a large trade deficit, amounting to 7 percent of GDP; a persistent budget deficit of around 12 percent of GDP; and public debt, which by 2016 stood at 92...
Egypt and the IMF closing case When President Abdel Fatah al-Sissi came to power in a...
Egypt and the IMF closing case When President Abdel Fatah al-Sissi came to power in a 2013 military coup, he promised to fix Egypt’s mounting economic problems. Three years later, those problems had only intensified. The country was struggling with low economic growth; 13 percent unemployment; a 12 percent inflation rate; a large trade deficit, amounting to 7 percent of GDP; a persistent budget deficit of around 12 percent of GDP; and public debt, which by 2016 stood at 92...
Egypt and the IMF closing case When President Abdel Fatah al-Sissi came to power in a...
Egypt and the IMF closing case When President Abdel Fatah al-Sissi came to power in a 2013 military coup, he promised to fix Egypt’s mounting economic problems. Three years later, those problems had only intensified. The country was struggling with low economic growth; 13 percent unemployment; a 12 percent inflation rate; a large trade deficit, amounting to 7 percent of GDP; a persistent budget deficit of around 12 percent of GDP; and public debt, which by 2016 stood at 92...
When sales are made on credit, businesses typically will incur some amount of bad debt when...
When sales are made on credit, businesses typically will incur some amount of bad debt when not all customers pay their debt owed. These losses become operating expenses. Under accrual accounting, the expense is recorded in the same period as the sale but how do companies do this when the actual amount of uncollected accounts is not known until later? *** Can you explain this to me in a way a non accounting person can understand. Thank you**
When conducting a ROR analysis, why can you not compare two projects simply based on ROR?
When conducting a ROR analysis, why can you not compare two projects simply based on ROR?
You were ecstatic when you heard the news that your cousins Archie came into a large...
You were ecstatic when you heard the news that your cousins Archie came into a large inheritance last year and invested the entire amount in the common stock of commonwealth Brewery, a large manufacturing of liquid drinking products. Subsequently he has been very interested in the company and watches it closely. Recently, the Nassau Guardian carried a story about major strategic changes at the company including massive layoffs and business realignments. Archie was devastated and was dumb-founded. He does not...
When you made an offer on a home you were buying, you thought you were getting...
When you made an offer on a home you were buying, you thought you were getting a General Warranty deed. It turns out that the owner can only give you a Quitclaim deed. How might this impact the market value of the property and your ability to get mortgage financing?
What are the opportunities for FDI (Foreign Direct Investment) when businesses plans to expand operations internationally...
What are the opportunities for FDI (Foreign Direct Investment) when businesses plans to expand operations internationally in the USA?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT