World Investment and Political Risk 2010

World Bank Group

Multilateral Investment

Guarantee Agency

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Cover art: Stock.XCHNG

Photo credit: p.10, Gettyimages, Lionel Healing, AFP; p.28, Gettyimages, Chris Hondros;

                    p.52, Michael Foley, World Bank Group

Design, cover, and document: Suzanne Pelland, MIGA/World Bank Group

ISBN:       978-0-8213-8478-7

e-ISBN:    978-0-8213-8479-4

DOI:        10.1596/978-0-8213-8478-7

2010

WORLD INVESTMENT

AND POLITICAL RISK

WORLD INVESTMENT TRENDS

AND CORPORATE PERSPECTIVES

INVESTMENT AND POLITICAL RISK

IN CONFLICT-AFFECTED AND

FRAGILE ECONOMIES

THE POLITICAL RISK INSURANCE INDUSTRY

TABLE OF CONTENTS

Errata for print edition of 2010 World Investment and Political Risk

The following errors appear in printed copies of the 2010 World Investment and Political Risk, but have been corrected in the online version. Any additional errors found will be noted here:

Page 16: Figure 1.6 Changes in foreign investment plans by sector, Remain the same and Increase should be inverted.

FOREWORD

The mission of the Multilateral Investment Guarantee Agency (MIGA) is to promote foreign direct investment (FDI) into developing countries to support economic growth, reduce poverty, and improve people’s lives. As part of this mandate, the agency seeks to foster a better understanding of investors’ perceptions of political risk as they relate to FDI, as well as the role of the political risk insurance (PRI) industry in mitigating these risks.

The global economy is emerging from a severe recession that slowed down growth and curtailed capital flows to developing countries. FDI was not spared. Having declined sharply in 2009, FDI flows to developing countries are expected to recover in 2010—but in an uneven fashion. Yet, developing countries are projected to grow nearly twice as fast as industrialized countries, enhancing their appeal to multinational enterprises that seek new markets. Corporate views on investment prospects presented in this report not only confirm this appeal, but also highlight persistent investor concerns about a spectrum of political risks.

FDI continues to be concentrated in a handful of countries. Faced with a vicious cycle of conflict and poverty, many of the world’s poorest countries are not able to attract sizeable volumes of such investment, putting their prospects for stability and growth into an even more precarious position. Conflict-affected and fragile economies suffer from cycles of political violence that are hard to break and from a high probability of relapse into conflict. Steady economic growth and rising incomes following conflict can lead to a substantial reduction in the risk of relapse. FDI is an important element in helping to break that vicious cycle by supporting economic growth and development through the transfer of tangible and intangible assets, such as capital, skills, technological innovation, and managerial expertise.

This report focuses on the role that political risk perceptions play in influencing cross-border investment decisions into conflict-affected and fragile economies. Specifically, the report examines (i) the overall trends in FDI and corporate perspectives regarding political risk in the aftermath of the global financial crisis; (ii) the influence that conflict and fragility have on investor political risk perceptions and investment decisions; and (iii) an overview of the PRI industry in the aftermath of the crisis, and how investment insurance providers, especially multilateral organizations, can act as catalysts to help drive FDI into this group of countries.

The global economy is still in flux, but the outlook for FDI is slowly improving. We hope that this report helps shed additional light on how investors perceive and mitigate political risks in conflict-affected and fragile economies, as well as the role that investment insurance providers, including MIGA, can play in fostering such investment.

Izumi Kobayashi

Executive Vice President

ACKNOWLEDGMENTS

This