FDI Risk Assessment: Toward best principle and best practice

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FDI Risk Assessment: Toward best principle and best practice

FDI Risk Assessment: Toward best principle and best practice

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  • 1. FDI Risk Assessment: Toward best principle and best practice Dr. Urs Cipolat, IBCOL assisted by Anselm Schneider, CCRS, University of Zurich Dr. Patrick Wegmann, AVANON IDRC Davos – May 31, 2010
  • 2. Content
    • Context
        • Relation IDRC – FDI risks
        • Principles governing FDI risks
        • Typical FDI risks
    • Strategy
        • Two complementary approaches
        • Reduce problem through risk management
        • Reduce vulnerability through continuity management
    • Recommendations
        • Risk assessment – „must do“
        • International standards – „must use“
        • Risk management tool – „must have“
  • 3. Context Strategy Recommendations
  • 4. Relation IDRC – FDI risks (1) International Disaster and Risk Conference Foreign Direct Investment Risks Investor perspective: FDI may be exposed to risks (e.g., fire) Recipient perspective: FDI may represent a risk (e.g., oil spill)
  • 5. Relation IDRC – FDI risks (2) Prominent Cases
    • 2010 BP / „Deepwater Horizon“ oil spill (environmental damage)
    • 2010 Novartis / Wage inequality, discrimination (labor law)
    • 2010 IBM, Fujitsu, Ford, GM, UBS, Barclays (apartheid SA)
    • 2008 CS / Soccer balls (child labor)
    • 2006-08 TATA (expropriation protests, Singur factory pullout)
    • 1990s NIKE / Apparel („sweat shops“, HR issues)
  • 6. Relation IDRC – FDI risks (3) „ Dig the well before you are thirsty. “ (Chinese proverb) => Investor and recipient should assess the risks associated with each particular investment project => Focus on prevention (risk management, Plan A) and emergency planning (crisis & continuity management, Plan B) Security Prevention Intervention Continuity Security Management Risk Management Crisis Management Continuity Management
  • 7. Relation IDRC – FDI risks (4) BCM resilience Goal: Emergency Planning Immediate action Goal: Protection Crisis management Goal: Get situation under control BCM disaster recovery Goal: Return to normality Zeit Risk management Goal: Prevention (FDI) risk
  • 8. Principles governing FDI risks (1) International Risk Management Standards
    • ISO 31000:2009
    • FDI relevant
    • focus on „HOW“ of risk assessment
    • process-oriented recommendations
    • voluntary implementation
    • no certification possible
    • Certifiable alternatives :
    • ONR 49000:2008
    • BS 25999:2010
  • 9. Principles governing FDI risks (2) International Risk Management Regulation
    • In general, corporations are but indirect subjects to international treaties (via national legislation of their „host“ countries)
    • To date, no int‘l treaty requieres that corporate risks be assessed systematically
    • To date, only certain types of industries and companies (e.g. banks, llcs) are required by national laws (e.g., US SOX, Swiss OR, German Kontra-G) to conduct periodic risk assessments
    • If national risk management regulation exists, it stipulates THAT risk assessments must be conducted, but not HOW it must be conducted (e.g. OR Art. 663 b 12)
  • 10. Principles governing FDI risks (3) International Corporate Responsibility Regulation
    • Focus on regulation of „risky“ corporate activities, e.g.
      • damage to environment
      • human rights violations
      • market distortions (corruption, antitrust)
    • No binding int‘l framework (yet), but a growing number of
      • international soft law frameworks ( OECD guidelines, 2000)
      • multi-stakeholder initiatives ( UN global compact, 2000)
      • self-regulatory frameworks (SA 8000, 1998)
      • national cross-border accountability mechanisms (US ATCA)
    • Slow trend toward int’l binding regulation ( Ruggie Framework, 2008)
  • 11. Typical FDI Risks (1) Threats to an Organization External Threats
  • 12. Typical FDI Risks (2) FDI Risk Catalogue (Model 1) Note: „One size fits all“ FDI risk catalogue does not exist => Catalogues must be established case by case => Various models available (IBCOL, 2010) Category Internal threats (e.g.) External threats (e.g.) Social Wage inequality, excessive working hours Culture clash, civil war Technical Product liability issues, lack of innovation Rapid technology change, side effects Economic Bribery, project failure (economic loss) Financial crisis, sluggish demand Ecologic Toxic emissions, violation of legal standards Natural disasters, global warming Political HR violations, complicity Expropriation, freezing of assets
  • 13. Typical FDI Risks (3) FDI Risk Catalogue (Model 2) (ETH Zurich, 2010)
  • 14. Typical FDI Risks (4) FDI Risk Catalogue (Model 3) (WEF, 2009)
  • 15. Context Strategy Recommendations
  • 16. Two Complementary Approaches Reduce Problem vs. Reduce Vulnerability Organization-owned risks: REDUCE PROBLEM External or collective risks: REDUCE VULNERABILIY Category Internal threats (e.g.) External threats (e.g.) Social Wage inequality, excessive working hours Culture clash, civil war Technical Product liability issues, lack of innovation Rapid technology change, side effects Economic Bribery, project failure (economic loss) Financial crisis, sluggish demand Ecologic Toxic emissions, violation of legal standards Natural disasters, global warming Political HR violations, complicity Expropriation, freezing of assets
  • 17. Reduce Problem Risk Management (Plan A) Important steps 1 : Risk assessment 2 : Risk treatment a) avoid b) reduce c) share d) retain (=> Plan B)
  • 18. Reduce Vulnerability Continuity Management (Plan B) Important steps 1 : Risk assessment 2 : Impact analysis 3 : Emergency plans (BCI GPG, 2010)
  • 19. Context Strategy Recommendations
  • 20. Risk Assessment – „Must Do“ (1)
    • Foundation for an effective risk, crisis and continuity management
    • Compass for both strategic and operative decisions
    • Continuous process leading to improved risk culture
    • Legal requirement in growing number of countries (private & public context)
    • - Proof of „due diligence“
  • 21. Risk Assessment – „Must Do“ (2)
  • 22. International Standards – „Must Use“ (1)
    • Helpful guidelines
    • Assurance for compliance / „due diligence“
    • Protection / Strengthening of reputation
    • Better self-policed than regulated (soft vs. hard law debate)
    • Risk management: ISO 31000
    • Continuity management: BS 25999
  • 23. International Standards – „Must Use“ (2) FDI Risks and compliance: Pay attention to - Hard law : Any int‘l conventions ratified by recipient country (legally binding) - Soft law : Policy standards (legally non-binding, yet of reputational relevance) - Environmental Management & Audit Scheme (EMAS) - Equator Principles (project finance guidelines) - Fair Labor Association standards - International Finance Corporation (IFC) environmental & social standards - ISO 14000, ISO 26000 - OECD Guidelines for Multinational Enterprises - OHSAS 18000 - Social Accountability (SA) 8000 - UN Global Compact
  • 24. Risk Management Tool – „Must Have“ (1)
    • Coping with increasing complexity, growing dimensions
    • Organisation-wide risk assessment and risk treatment
    • Time and ressource efficient
    • Uniform approach guaranteed („unité de doctrine“)
    • Web-based tool preferable (greater flexibility)
  • 25. Risk Management Tool – „Must Have“ (2) Action Plan Owner Task Responsible Identify the risk and define the measure to mitigate the risk Assignment of activities Scenario Risk Map Action Plan Planned activities Pending list of open activities Accept and start Individual activity Confirm completion Performance Monitoring Validate completion and monitor OK Risk-Manager
  • 26. IBCOL – Your Risk Assessment Partner
    • Holistic approach to risk/ business continuity management
    • Customized solutions
    • Independence
    • Expert knowledge
    • Top quality and customer service
    • Competitive pricing
    • Highest discretion
    • Excellent references
    • Please call us – we are happy to serve you!
    • +41 (0)44 396 2000 (8-18h) / [email_address]