Managing Foreign Direct Investment Risks

摘要

The subject of this paper is the reduction of foreign direct investment risks in the power sectors of developing and transitioning economies. The object is to (1) elucidate the source and ramifications of contract and investment hazards-the so-called hidden risks of foreign direct investment (FDI), (2) illustrate the application of Transaction Cost Economics (TCE) as a powerful tool that explains, identifies, and mitigates contract and investment hazards, and (3) convey the important role that contract safeguards play in the attainment of credible policy commitments of government and counterparty. The rationale is that traditional risk management methodology only partially explains and treats the mitigation of risk and therefore must be broadened if sustainable improvements are desired at each of the several contractual interfaces that define and govern FDI transaction and financial performance.rnThere are two important dimensions to the contemporary practice of risk management: (1) the economic organization dimension which is often missing or glossed over and (2) the economic technological dimension, which is frequently over emphasized. Significant new insights are gained and different value adding trade-offs are identified when the two dimensions are integrated into project development. Economic organization analysis and treatment of FDI views the firm as a governance structure to better understand human organization of exchange. The economic technological dimension is the traditional view of received microeconomic theory that views the firm as a production function to understand the technological processes and economic efficiencies of transforming supplier inputs into firm outputs at competitive prices.