Will You Be Writing Off Your Investments in Egypt?
How returns on foreign investment might change in a shift from autocracy to democracy.
Vinod K. Aggarwal and Simon J. Evenett
With political upheaval roiling the streets of Cairo, the first concern of top management in many multinationals is to get their employees and their families out of Egypt safely. Once that need has been met, a new challenge will come to the fore: can they also get their investments out unscathed? Certainly the money at stake is substantial. For decades multinational corporations have poured hundreds of billions of dollars of foreign investments into emerging markets, sometimes preferring the investment climate of “stable” authoritarian regimes over “messy” democracies. Not all these have proven to be as stable as investors might have liked, with riots, coups, military takeovers, and surprise election results introducing uncertainty. Tunisia and Egypt are cases in point.
In both places, we know the instability will worsen macroeconomic performance in the short term. Disruption to supply chains will mean reduced output and shortages will send prices soaring. Foreign subsidiaries can expect local sales to fall and distribution channels to come to a halt, with depressing consequences for the bottom line.
But in both places, the upheaval may usher in a new era of democracy. Corporate strategists must consider whether the replacement of autocracy with democracy is likely to bolster economic growth. If that is the case, and the faster growth generates higher profits for them over the long term, that might well compensate for any short-term losses from the disruption.
Read the full post on the Harvard Business Review