Foreign Direct Investment: An Activity to Assess Country Risk

By Thomas, Rob | Teaching Business & Economics, Autumn 2006 | Go to article overview

Foreign Direct Investment: An Activity to Assess Country Risk


Thomas, Rob, Teaching Business & Economics


According to The Economist (24 February 2001), "foreign direct investment (FDI) is globafisation in its most potent form." The main concerns of companies involved in FDI are similar to those of companies investing in their home country. However, the uncertainties of setting up abroad can be much greater: there is less information and often less familiarity with the non-resident country. Assuming a company contemplating FDI is seeking to maximise the rate of return on the investment, it will need to assess the potential risks including those relating to "country risk". This requires making an assessment of the economic policies followed by the target country, as well as its political structure, stability (including the ability of the government to meet its external financial obligations) and some social dimensions.

This article presents an activity which can be used by students to assess country risk. The exercise is probably best suited to students near the end of an A2 course. It is multi-layered and multidimensional, and it can be used with students from different subject backgrounds (business studies or economics). It can be undertaken on an individual or group basis, and the data provided can be set to the level of the ability and knowledge of the students.

Selecting a country

It would be possible to require different groups or individuals to assess different countries, with the plenary discussion incorporating the comparisons. The assumption here, however, is that students all assess the same country.

You can choose a less developed, developing or developed country. Much will depend on the knowledge and preferences of the teacher. Less developed countries, particularly from sub-Saharan Africa, tend to display characteristics that indicate why they receive small amounts of FDI. For business students, both China and India are likely to be of interest because of the large amounts of FDI they receive. This introduction uses Nigeria as the example because it is relatively easy to see the main factors involved, though there is a hidden factor (namely oil) to be "teased out". However, you can select any country for which you have access to suitable data.

So, for the purposes of illustration, the data and supporting material presented below is designed to enable students to address this task.

You are a member of a consultancy that has been employed by a multinational company which is considering whether to invest in Nigeria. Your consultancy is to provide a critical assessment of the security of the investment in respect of the economic, international financial, political and social risks involved. Your research - and your report - should be based upon the provided data for Nigeria.

It should be noted that students are being asked to make a general assessment of the county. The precise nature of the investment does not need to be considered.

Economic, financial and social data

The guidance and data provided to help assess the political, financial and social dimensions of the country can be selected to suit the abilities of the students. It can be kept uncomplicated, and teachers could simply provide a small amount of data covering factors such as economic growth, inflation, balance of payments, the government's budget balance, total external debt and some social indicators like life expectancy.

Table I presents some data on Nigeria available from the World Bank. (See the end of this article for detailed notes on how to access data sources.)

The World Bank also provides snapshot and 10-year averages that are sufficient to give a historical context for the exercise. Table 2 presents some of this data for Nigeria. Teachers might invite students to think about what might have happened in the intervening years.

Exploring the World Bank website will provide plenty of other economic, financial and social data that could be included in the exercise. …

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