Foreign direct investments under political uncertainty : a case study of crop production in Ukraine

Sammanfattning: Intense competition among companies and luck or unavailability of certain resources in country of company’s origin force last to cross the borders, and start to hunt for new markets and cheaper inputs. However, by investing abroad the company is not only facing and dealing with cultural differences and new regulatory framework, but also becomes dependent on decisions and actions of different and to large extend unknown government. Moreover, the majority of the investments’ flows are directed to developing countries, where power and capabilities of state authorities are considered to be more extensive than in countries of developed economies. The aim of this study is to investigate whether the presence of the political uncertainty in the host country have an impact on final investment decision. The study also describes how by using the means of capital budgeting, the value of political risk could be integrated into financial evaluation of an investment project. Unlike previous studies that analyzed the macro-level data on correlation between Foreign Direct Investment flows and presence of political uncertainty, this study applies micro-level data. Empirically, the qualitative data for this study was collected from two agricultural companies involved in crop production in Ukraine, Grain Alliance AB and Alpcot Agro AB that are owned and operated by Swedish investing companies. Theoretical models were tested on the financial data from a third agricultural company, Agroton Agro AB, publicly traded Ukrainian agricultural producer. Theoretically, the paper starts with basic Net Present Value analysis that enables to reflect general profitability of the analyzed company and shows the most simplified method of political risk integration into the project evaluation process. Further, the analysis is extended by the modified version of Return on Investment analysis. Return on Investment analysis used for the purposes of this study additionally includes Net Present Value calculations to account for the time value of money and political risk costs. To present different possible scenarios and demonstrate the company’s sensitivity to various political uncertainties, the analyses include changing variables such as discount rate and various political risks. It is shown that the larger the amount of risks incorporated, the lower the value of the investment project is. Such tendency raises a question of whether it is necessary to account for country’s specific political risks. The results of this study show that in the case returns on investment are high, final investment decision in most cases is not influenced by the presence of political uncertainty in the host country.