New MIGA Report Examines Investment and Political Risk in Emerging Markets
Research also sheds light on investors’ political risk perceptions in conflict-affected and fragile economies
December 09, 2010—The fragile and modest recovery economic recovery now under way is being led by developing countries, which are expected to remain attractive destinations for foreign direct investment (FDI), says a new MIGA report that examines FDI and risk perception trends. The report, World Investment and Political Risk 2010, says that foreign direct investment flows (FDI) into developing countries are projected to increase by 17 percent in 2010.
Political risk remains the top preoccupation for foreign investors operating in the developing world over the next three years, and the revival of FDI to these destinations calls for continued risk mitigation, including political risk insurance.
World Investment and Political Risk 2010 also examines FDI flows into conflict-affected and fragile (CAF) economies, underlining that these economies struggle to attract private capital. These are precisely the populations that need FDI the most, as economic development is an essential component of stability.
The report’s main findings include:
Political risk remains a top obstacle to FDI in developing countries over the medium term.
In the short term, concerns over the fallout from the financial crisis appear to dominate investors’ preoccupations. Yet, FDI projections and surveys conducted for this report suggest that investors are cautiously optimistic about prospects for a global economic recovery led by the developing world.
Both the composition and role of FDI in conflict-affected economies differ from those observed in other developing countries. The report’s analytical framework, confirmed in part by econometric analysis and investor surveys, helps explain how.
Investors are primarily concerned about adverse government intervention rather than political violence, even in CAF states. “Changes in regulations” not only ranks first among investors’ concerns in CAF countries, but also is most frequently responsible for losses in these investment destinations.
Multilateral political risk insurance providers like MIGA have a key role to play not only in directly covering FDI in CAF countries, but also in mobilizing additional insurance in the market. Because of their ownership structure and development mandates, multilateral political risk insurance providers can encourage investment into difficult environments, to offer deterrence against adverse government intervention, and to mediate disputes before they turn into losses. They are also well placed to encourage coinsurance and reinsurance in investment destinations that other insurers may not have otherwise considered.
Access the report here.