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often perceived as risky by foreign investors, leading
to decreased investment
opportunities and economic growth. Therefore, managing external debt levels and
implementing stable currency exchange rate policies are crucial for attracting foreign
investors and promoting economic development. Foreign direct investment (FDI)
has become an increasingly important source of capital
for national economies
around the world. However, attracting foreign investors is not always easy, as
investment and currency risks can make potential investors hesitant to invest in a
country.
In this article, we will explore the impact of investment and currency risks
on attracting foreign direct investments to national economies.
Investment risk
refers to the possibility of losing money on an investment due
to a variety of factors,
such as market fluctuations, changes in government policies,
or unexpected events. Currency risk refers to the possibility of losing money due to
changes in exchange rates between currencies. These
risks can be particularly
concerning for foreign investors, who may not be familiar with the local market
conditions and regulations.
Foreign investment risk is the financial risk of swift and acute changes in the
value of investments due to external factors like changes in accounting, reporting and
auditing standards.
Nationalization. It refers to the transfer of private
assets to the government
often with no compensation e.g. Cuba expropriated all foreign-owned private
companies after the Cuban Revolution in 1959 and Japan nationalized the Tokyo
Electric Power Company after the Fukushima Daiichi nuclear disaster.
Economic conflict. These can be trade wars like the one we see between the
United States and China
Political or diplomatic changes. Certain political
parties in West Bengal have
been resisting foreign investment in the state. This puts even existing investments at
risk if they were to come in power.
Currency risk
or foreign exchange risk can happen when a company is having
a transaction with a foreign company where one currency is stronger than the other.
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The two types of currency risks are transaction and economic risks.
