Rigorous research will boost cross-border investment

Subject

Measuring political risk

Significance

Research into measuring and forecasting political risk is becoming more sophisticated, revealing that assessment of expropriation risk dominates political risk considerations ahead of foreign direct investment (FDI) decisions. Sovereign bond spreads, which are typically used to measure political risk, often instead overstate risks, as they incorporate many other factors.

Impacts

• More sophisticated political risk calculations by multinational corporations (MNCs) from emerging markets will increase FDI flows.
• When countries consider FDI, they incorporate the risks present in their own countries as well as those in the destination.
• Expropriation risks loom largest; if these can be better measured, a larger and more geographically diverse set of FDI flows is possible.