Certified Management Accountant Practice Exam

Expropriation risks refer to the potential for a host country to seize foreign-owned assets or investments, typically without fair compensation. One of the most significant factors contributing to these risks is the instability of the foreign political system. When a country experiences political turmoil—such as government changes, civil unrest, or social upheaval—there is often an increased likelihood that the government may resort to expropriation as a means to consolidate power, redistribute wealth, or respond to popular pressures. Unstable political environments can lead to uncertainty for foreign investors, and governments may take extreme measures, including confiscation of assets, to address domestic issues.

In contrast, strong regulatory frameworks, high levels of foreign investment, and stable domestic policies generally create a more favorable environment for investment. A strong regulatory framework tends to protect the rights of investors, while high levels of foreign investment signal confidence in the market. Stable domestic policies further enhance predictability and security for investors, thereby reducing the perceived risk of expropriation.