Three times as many countries are affected by high or extreme levels of regulatory risk as they are by severe political violence, making it the most widespread political risk impacting global business today, reveals new research released by Verisk Maplecroft.
While terrorism and conflict dominate global headlines, Verisk Maplecroft believes it is the financial burden and uncertainty created by challenging regulatory regimes that poses a more significant threat to multinational companies.
The 2016 Regulatory Risk Index identifies 90 countries that pose a ‘high’ or ‘extreme risk’ to business, highlighting a lack of respect for property rights, burdensome regulation and inefficient bureaucracies, compared to 29 countries severely affected by political violence.
“From a business perspective, regulatory risks eclipse the challenges posed by terrorism and conflict at a global scale,” says Charlotte Ingham, Principal Analyst at Verisk Maplecroft. “Only a small proportion of countries are impacted by critical levels of political violence and, while this does threaten personnel, assets and supply chains, it is often only the most risk tolerant of companies that operate in these markets.”
Political violence risks, particularly terrorism, are also more likely to be localized, says the analysis. In contrast, the negative effects of a poor regulatory environment will typically be felt across an entire country.
Volatile natural resource hubs among highest risk countries
The Regulatory Risk Index, which forms one of the central components of Verisk Maplecroft’s Political Risk Dataset, features a number of major natural resource producers among the highest risk countries, including Venezuela (7th most at risk), DR Congo (10th), Myanmar (11th), Bolivia (14th), Nigeria (20th) and Angola (22nd).
The stability and predictability of the regulatory environment remains a key consideration for business, particularly those characterized by long investment life cycles, such as the oil and gas sector. Unforeseen and adverse regulatory changes, when firms have already invested significant resources, can have a profound impact on project performance.
The results also flag some of the world’s most prominent low-cost manufacturing hubs among the ‘high risk’ countries, including Bangladesh (13th), Cambodia (15th), Indonesia (24th), India (34th), Philippines (62nd), Kenya (70th) and Ethiopia (79th).
According to Verisk Maplecroft, ‘high risk’ countries present companies with a diverse combination of regulatory risks, from inadequate contract enforcement in Bangladesh to the risk of asset expropriation in Indonesia.
However, most are characterized by heavy layers of unevenly enforced regulation. This creates significant uncertainty around the scope of legislation and compliance requirements – as well as increasing the cost of doing business.
Authoritarianism and isolation prevent emergence of strong regulation
The regulatory environments of nine countries – some of which are among the world’s most longstanding pariah states – are categorized by Verisk Maplecroft as posing an ‘extreme risk’ to business. These are: North Korea, Somalia, Zimbabwe, Cuba, Central African Republic, Syria, Venezuela, Turkmenistan and Eritrea.
“Years of isolation and authoritarian rule create extremely difficult investment environments that are beset by corruption, government meddling and human rights abuses,” adds Ingham. “However, as some countries begin to make the journey back from international isolation towards a normalization of trade ties, as Myanmar is doing, we may see their regulatory systems improve incrementally over time.”
At the other end of the scale, 33 countries are rated as ‘low risk’ in the index, with Singapore, Norway, Denmark, New Zealand and Sweden setting the standard for sound regulation.