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Reputation and country risk

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“For hapless foreign investors, the web of Suharto's patronage held the key to success in Indonesia. The list of those who succeeded is a who's who of international business including BP, PowerGen, British Gas, Mitsui, Itochu, General Electric, Edison International and Siemens. Now, just ten days into the post-Suharto era, those links have become a curse.”

Source: Financial Times, June 1998.

“It takes twenty years to build up a reputation and five minutes to ruin it.”

Source: Warren Buffett.

The Financial Times report about the fall of President Suharto in Indonesia captures the paradoxes inherent in most major companies' approach to country risk in developing countries. The more you try to minimise your risk by getting close to the current regime, the more the new regime will want to undermine you. The more you compensate yourself for your risk by negotiating higher returns or fixing the returns in hard currency, the more you'll be seen as a blood-sucking profiteer when the political climate changes. The more you surround yourself with bodyguards and fences, the more the local community will hate you. Your attempts to decrease your short-term risk end up increasing it in the long term, and all of these paradoxes combine to create the greatest risk of all—that you will be described as ‘hapless’ in the Financial Times.
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Keywords: country; reputation; risk

Document Type: Research Article

Publication date: 10 November 2006

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