Direct Investment Political Risk Essay

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Direct investment / Political risk

A distinction between the project and parent perspectives when capital budgeting in a global situation

There are two different viewpoints in capital budgeting known as project and parent. The project is a locally addressed perspective that is child to the parent. The parent is the main organization in which the projects financial and operating cash flows will be directed. The project perspective is very useful in local purposes. However, it is subordinated to the evaluation from the parent's viewpoints (Moffett, Stonehill & Eitemen, 2012). A project evaluation will guarantee cash returns based on the host-governments bonds. In case a project were to fail in receiving cash equal to the bond yield, a parent firm should buy host government bonds instead of investing in a risky project or investing somewhere else. Multinational firms should invest only if they can earn a risk-adjusted return greater than locally-based competitors can earn on the same project (Hough & Neuland, 2008). In case this is not possible, stockholders will invest their shares in local firms and letting those companies carry out the local projects.

Although project firms are systematically part of the parent firm, parent firms hold more responsibilities as they are the owners to project organizations. Parent firms will give results that are typically closer to the traditional meaning of the net present value in capital budgeting (Moffett, Stonehill & Eitemen, 2012).

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Necessarily a parent firm will take care of any standardized actions that a project firm was unable to complete. Meanwhile, project firms will provide estimates closer to the effects on consolidated earnings per share, which may become a major issue for managers.

2. A contrast of different courses of political risk

Political risks are typically faced by corporations, governments, and investors. These risks can be managed with reasonable foresight and investment. There are two levels of political risks, which are known as the macro-level political risk and micro-level political risk. Macro-level political risk will focus on non-project explicit risks at local, national, and regional sector (Moffett, Stonehill & Eitemen, 2012). However, this is a common misconception that macro-level political risks will only look towards the host country's specific political risk level. Many of the macro-level political risks will deal with national security will pose risks on how a foreign government will run the current affairs. This level of political risks also poses threats to corporations that operate in foreign regions. The political risks will be more or less like a confiscation of business culture causing the seizing of the business property.

Nevertheless, micro-level political risks will look at non-project distinct risk to….....

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