When the going gets tough.

• Author: Horne, Kenneth G.
• Position: Risk management in foreign investments

A cardinal rule of investing overseas is: Don't put your assets in if you can't get them out.

Investing in emerging countries often yields attractive rates of return, but higher returns are almost always accompanied by higher levels of risk. In fact, the investment climate in many emerging markets can take on the characteristics of an El Nino storm - relentless and devastating, with an unpredictable outcome. Many factors weigh in the decision to establish operations in a specific country. Possible benefits include the ability to realize and retain profits, advantageous labor costs, access to a lucrative or potentially lucrative market, proximity to raw materials and the ability to capitalize on favorable currency exchange rates or tax situations. But the down side can hold environmental risks, regulatory and bureaucratic constraints that can interfere with construction and production schedules, lack of available electrical power, exposure to natural hazards and corruption.

One of the most volatile and potentially devastating risk factors is local politics. War in Kuwait, the eruption of years of ethnic tension in Yugoslavia, civil war in Liberia, Angola and other African countries and civil unrest in southern Mexico are but a few examples of political instability that forced companies to evacuate personnel and abandon all or some of their assets. When companies originally invested in these regions, they doubtless thought the political landscape to be navigable.

The time to think about protecting your company's assets isn't when your country manager and other key personnel are racing to the airport. You need advance planning.

COVER YOUR ASSETS

How can companies mitigate political risks? For starters, look into purchasing political risk insurance. Investors in developing countries are turning to political risk insurance to protect their operations from government expropriation, forced abandonment and damage to assets resulting from political violence.

Expropriation insurance, often the foundation for other coverages, protects against actions of the host government that expressly and permanently deprive an investor of ownership rights or control or possession of assets, or restrict operations in a way that causes a complete shutdown of activities.

An extension of expropriation coverage includes forced abandonment (an investor's complete and necessary abandonment of the foreign operation and its assets as a result of its own government issuing...