“The Link between Elections and FDI Inflows” – by Metassebia Hailu – posted on Further Africa

While managing corporations through a Foreign Direct Investment (FDI) platform, there are different challenges. One of the main questions in FDI’s corporate management is how corporations can respond to environmental uncertainties.

Top management may analyze hard-to-predict situations like that of elections. This can be achieved by increasing the amount of information that a corporation can mobilize and the wide skill of situational analysis that the corporation is using.

Traditionally, corporate strategy mainly focused on numerous sources of environmental uncertainties such as economic crisis, public policy changes, as well as natural disasters. Starting from the 2008 financial crisis, inspired by corporate policy and legal discussions, corporate law strategists have begun to look at a particular type of uncertainty emanating from the political situations, which is then after called “political uncertainty”.

Usually, political environments are distinguished to be increasingly undefined due to contentious events such as election. Accordingly, corporate executives have uttered growing concerns about the position of political risks for the companies they are leading. Existing data shows that political uncertainty spoils a broad array of corporate policies incorporating but not restricted to investment decisions, disclosure policies, dividends, and foreign direct investments.

Recognizing the causal effect of political uncertainties on corporation’s outcomes has showed to be challenging due to the fact that political uncertainties associates with the appropriate business management conditions. It is, therefore, suggested to take advantage of deep and professional policy analysis in order to mitigate the challenge and to be unaffected by economic or business conditions.

Elections, even though they are – in theory – democratic, usually escalate political uncertainty and dictate policy decisions since different candidates who run for public office have different policy agendas and priorities.

Corporations shall have a serious outlook to the political uncertainties since voting results are often hard to predict. On the other way, it also affects international business relations since the time of elections is not correlated across countries of the world and corporations in the non-election countries could misunderstand the possible change and tension of the business of the corporation living in the election hosting country.

It is almost a usual experience that during election periods, companies experience a significant drop in investment activities. Therefore, country’s electoral system significantly dictates the consequences of election cycles on corporate businesses and investments. Political uncertainties may affect the business landscape.

More specifically and frankly speaking, multinationalism causes risk-diversification opportunities. Functioning in various countries lets corporate entities to have unsystematic risks like by holding back projects in states that become more doubtful and they divert investment opportunities elsewhere. Therefore, multinationalism may aggravate the chance to hedge against political risk.

Of course, multinationalism may not slash systemic risks, and that political vagueness is high and totally difficult to be diversified away. Nevertheless, running foreign direct investment in foreign countries exposes multinationals to different distinctive sources of political uncertainty. In line with this, the surge in political insecurity due to elections in a host country can destabilize the foreign direct investment and corporations in that country. Yet, it is expected that this effect could be lower and minimized if the host country adopts a peaceful system and a conducive business as well as investment atmosphere throughout the country.

Source: Further Africa

Link: https://furtherafrica.com/2021/07/01/the-link-between-elections-and-fdi-inflows/