Why do firm operate in high-risk countries Give specific examples - Essay Example

The term high risk implies that a certain country’s economy has a higher inclination towards risk. This risk may exist because of some social and political problems that the country might face. Because of a social and political turmoil in the country, government policies regarding the foreign direct investment may not be very friendly and so may not be very attractive for the investors. Also there is likelihood that the security situations in such countries also may affect the foreign businesses.

For example many firms have suffered in countries like Pakistan and Afghanistan where the security situation does not permit a healthy business environment. The products of the firms that operate in high risk countries may not provide the value they once did, as Penn (2003) points out. Also according to Penn (2003), the overall productivity of the firms and companies might fall because the revenues earned would be less than those that were earned previously. As a consequence, the costs incurred by the investors might rise too.

The firms would be increasingly burdened in such situations with unnecessary costs and the benefits expected may also be dwindling. Also the interest rate in the high risk countries is generally less which means that the foreign direct inflows are also gravely affected. This is true for all the foreign direct investors that operate in high risk countries. However, it is interesting to note that recently there has been a trend of companies working in the high risk countries when they actually should have found exits.

Of course there might be some benefits in doing so, that encourages the investors to work in such situations. The paper discusses some of the advantages that a firm might have while investing in countries that are in state of recessions. Most of the economists like Rothgeb (1986) believe