Investments in foreign counties, and how counties respond to it.
Define expropriation, explain how it affects a county’s investments in foreign counties, and how counties respond to it.
Sprockets Unlimited, a United States corporation, is considering doing business in a foreign country that is known to have an unstable government and corrupt politicians; however, the market could be lucrative and greatly expand Sprockets Unlimited’s profits. What consideration should Sprockets Unlimited consider before doing so? Could the United States not allow Sprockets Unlimited to do business in this country?
Sample Solution
Investments in foreign counties, and how counties respond to it
Expropriation is the act of a government claiming privately owned property against the wishes of the owners, ostensibly to be used for the benefit of the overall public. In the United States, properties are often expropriated in order to build highways, railroads, airports, or other infrastructure projects. However, they must be given (owners) “just compensation” for their property. Although expropriations have become less frequent compared to the 1970s, the number of takings has risen since the mid-1990s. Foreign firms are more vulnerable to expropriation in resource-based sectors, particularly in mining and petroleum. The timing of expropriation coincides with fluctuations in mineral output price levels. When newly constructed foreign direct investment (FDI) stock estimates are used to compare the sectoral distribution of FDI of recent expropriating countries to that of non-expropriating countries, expropriation countries have a higher average share of aggregate FDI located in resources.
