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The Asian crisis served as a reminder to businessmen how fragile the world economic and political scene can be and how dangerous it was to base foreign direct investment decisions on optimistic perceptions of unending economic boom. Perceptions, whether or not they reflect actual realities in the business environment, play a very important role in the investment decisions of many corporations. This study examines the perceptions of decision-makers of Singapore companies operating in ASEAN. What are the sorts of factors that shape their perceptions and help them form a "gut feeling" about the quality of their investments? In particular this study looks at non-quantitative, non-market aspects of investment decisions, generally defined as political risk. Political risk is measured by an assessment of how managers perceive the sociopolitical conditions in the host country and the likely effect on the business climate.
Thus, we have attempted to reveal the relative importance of various factors associated with socio-political risk assessment for sample firms operating in ASEAN and the significance of particular risk factors. Likewise, we examined the risk assessment methods and risk management strategies used by Singapore-based companies.
Keywords: Globalization, Foreign direct investment, Political risk, Risk assessment
JEL Classification: F23
I. Introduction
The Asian crisis forced many businesses to rethink the risks of their international investments as many regional and global players suffered unexpected losses. It also compelled governments and academics to question the benefits of globalization. A globally integrated economy increased the risk of contagion amongst countries as one after another Asian economy collapsed from the crisis. Political chaos came hand in hand with economic chaos as several Asian leaders were toppled. In Indonesia, foreign operations suffered even more hazards as a result of the escalating violence that followed the economic crisis.
The Asian crisis highlighted how fragile the world economy is and how unpredictable the foreign investment environment can be. Businesses and governments have to deliberate carefully before jumping on the globalization bandwagon. Firms investing in foreign countries cannot just depend on quantitative analysis of the risks and returns of their investments. They have to take into account qualitative factors as well, such as political and social dynamics. It is too easy for a business to invest in a country based on herd instincts and...