Question

In not more than 350 words Outline the advantages and disadvantages of the US Political factors interms of foreign direct investment.

Answer 1

Basically, the more political instability there is the less attractive and more costly it becomes to invest in those particular countries. It doesn't mean there won't be any FDI, it just means firms will require a higher return to compensate for the increased risk involved.

There is clear evidence that the political climate affects investors’ views of the economy and the stock market, and also impacts their investment behaviour. Specifically, the returns of individual investors improve when the political regime favours their political party, and vice versa.

Followings are the advantages and disadvantages :

Advantages:

foreign investors and their subsidiary companies are “treated at least as well as their domestic counterparts,”

The phrase “most favored nation” refers to the obligation of the country receiving the investment to give that investment the same treatment as it gives to investments from its “most favored” trading partner.

Standards of treatment of foreign affiliates, compared to “nationals” of the host country.

The degree of protection of investor’s rights.

When the government or political factors are in favour, they tend to increase exposure to systematic risk and thus earn higher returns. And they tend to use more passive strategies, reducing costs.

The wisdom of government policies restricting capital outflows, particularly of short-term portfolio investments, is still a matter of widespread debate among economists and public officials as well as individual investors, for the liquidity of funds and capital are important issues.

Countries may impose these kinds of measures with the intention of protecting domestic industries from international competition and promoting their economic development, but this usually leads to misallocation of resources away from the natural economic capabilities of nations.
     
Disadvantages:

When the opposite party is in power, their perceived uncertainty levels increase, and investors exhibit stronger behavioural biases, leading to poor investment decisions.

However, it’s also possible that investors’ political values are influencing their perceptions of risk and return if they expect firms whose businesses are inconsistent with their values to be less profitable or riskier.

“Political Climate, Optimism, and Investment Decisions,” showed that people’s optimism toward both the financial markets and the economy is dynamically influenced by their political affiliation and the existing political climate.

Trade policy and privatization policy.

Limitation sometimes imposed on foreign investors is “domestic content requirements.” These require foreign investors to purchase a certain percentage of intermediate goods from the host country.

Domestic content requirements are perhaps the most common form of interventions by governments on foreign investment, and many economists believe they are the most harmful to economic development.

The seizure of foreign assets by governments has historically been a major concern for international investors. provisions on expropriation both in U.S. law and in bilateral and regional agreements, as well as in customary international law seek to ensure that any losses by investors must be fairly compensated without delay.