Protecting our investments in emerging markets

Data from the statistical service of Norway, Sweden, Denmark, and Finland in the past years show that Emerging Market countries have become an interesting investment destination for Nordic companies.

Expanding operations include several strategic decisions

When executives of multinational enterprise (MNE) decides to expand the operations of their firms into foreign countries in emerging markets, they are faced with several important strategic decisions, including, which operation form to establish adapt i.e. start the operations from scratch (build of facilities) or through acquisitions (buy equity share in an existing foreign entity). They are also faced with whether to do it alone (to establish a wholly owned subsidiary) or to involve a local partner (to establish a subsidiary with shared ownership), in addition to financial, HR, and operations considerations.

As such, supposedly negative discussions are paid rudimentary attention. How would Nordic executives reach if years after expansion and operation in a country, the host government decide to increase taxes on profit by 100%? How would you react if the local authorities in a destination country decide to put a cap on l repatriation of profits? Or raise local requirements?

Collectively, these are called political and regulatory risks. That is, the probability that a host government/authorities will discretionary change laws, regulations, or contracts terms governing an investment or refuse to enforce them in a way that reduces a foreign investor’s returns on that investments. To most executives, these will obviously go against their legitimate expectations.

Emerging markets are characterized by underdeveloped institutions and frequent environmental shifts (Khanna and Palepu, 2014). This brings uncertainties to investments that can have a huge consequence for Nordic companies expanding into these places. Ex-post modifications of the legal framework in force at the time when the investment was made or interference with the investment in response to external pressures such as public opinion leading to (in)direct expropriation of assert from investors.

Risks change over time

The nature of these risk is not static – they change over time. For instance, a recent study by the Wharton School found that although outright expropriation of foreign assets by host countries in emerging markets have largely disappeared (Henisz and Zelner, 2014). As investors interest in developing countries/emerging markets grow, some host governments have learned, that more value can be extracted from foreign enterprises through the subtler instrument of regulatory control rather than outright seizures.

This new risk is the main concern of today’s investors. In this article, I would like to introduce our cherished Nordic clients how are to prepare their investment and maneuver these risks when expanding their businesses overseas.

The good news is that political and regulatory risks can be managed. Almost all (Nordic) governments have been very active in helping investors from managing these risk in emerging markets by signing various International Investments Protection Agreements (IIAs) with most emerging markets governments.

Today, there are 3,000 IIAs in existence around the world. Among the Nordic countries, Finland has the most investment agreements, with 67 agreements in force¹, followed by Sweden with 66 investment agreements in force², see Figure 1.

Figure 1

Below, I discuss some of the ways investor can mitigate against such risks and protect their investments in emerging markets.

Are you really making an investment?

"In order to qualify as an investment under this Agreement, an asset must have the characteristics of an investment, such as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk"
Norway's model Bilateral Investment Treaty (2007)

International investment Agreements protect investments. Research shows that most executives wrongly assume that once they are doing business in other countries, they are investors doing investments in that country. It is important to point out here that this may not necessarily be correct. Not all economic activities abroad qualify as investments.

As such, to be eligible for protection, you must make sure your activities qualify as "investments". What is an investment varies from between countries, for instance, between Denmark and Argentina, an investment is defined as: "... every kind of asset connected with economic activities...'' However, between Finland and Argentina, investment is defined as "...every kind of asset invested by an investor of one Contracting Party in the territory of the other …”

We will not go into the legal interpretations here in this article, however, the point I want us to arrive at is that what executives may consider an investment, may in reality not be investments since definitions vary.

Historically, investment disputes resolved by the International Center for the Settlement of Investment Disputes (ICSID), under the auspices of the World Bank, have adopted a “unified” definition of investments with four key elements: a contribution of money or assets, a certain duration, an element of risk and a contribution to the economic development of the host state. This is the so-called “Salini test”. It is only after it is determined that one is making an investment that the benefits ascribe under IIAs applies to you and your investments.

The mechanisms available to investors

Suppose you are involved in investment in emerging markets. How do you ensure that those investments are protected against volatile political and regulatory risks? Broadly speaking, there are four mechanisms available to investors:

  1. International Investment Agreements;
  2. National investment legislation;
  3. Investment contracts; and
  4. Oversees investment insurance

Let me explain how each of these mechanisms works.

Investment Agreements

International Investment Agreements (IIAs) are effective mechanisms for protecting Nordic investors’ investments against political and regulatory risk. International Investment Agreements are government-to-government treaties that provide legally binding, (usually privately) dispute settlement and enforceable rules regarding one country's treatment of investment from another country that is party to the agreement. Investment agreements usually come in three forms:

  1. Bilateral Investment Treaties (BITs) signed by two states;
  2. Regional Investment Treaties signed by groups of states within a single region;
  3. Chapters of integrated trade and investment agreements that can be signed at the bilateral or regional level.

Investments covered by such IIAs such as Bilateral Investment Treaties (BITs) enjoy protection against direct interferences such expropriations (direct or indirect), and unfair and discriminatory treatments³. Investors whose investments are covered by BITs in most cases have the privilege of investor-host state dispute settlement systems in case of authority’s actions are interference and against their legitimate expectation.

Investment treaties when signed between more than two countries are called Multilateral Investment Treaties (MITs), examples of MITs are the North American Free Trade Agreement (NAFTA) signed between the USA, Canada, and Mexico, or the Energy Charter Treaty (ECT) signed or acceded to by fifty-two countries including the all EU countries, Australia, Norway, and Russia.

Investors must be aware that National investment legislations are made voluntarily by national parliaments.

National investment legislations

In addition to International investment agreements (IIAs) such as Bilateral Investment Treaties (BITs) and MITs, many emerging market countries, in their attempt to attract foreign investments have enacted legislation to guarantee protection for foreign investors. The content of such legislation varies from country to country. However, generally, they contain guarantee or exemption from taxation regimes or provide a specific fiscal regime for investors in a particular industry or service sector.

Just like BITs, these unilateral actions are binding4. However, investors must be aware that National investment legislations are made voluntarily by national parliaments, as such any protections contained in such legislation may be subject to revocation by a subsequent government. As such, relying solely on investment agreements might not be the best kind of protection for a long-term investment.

Investment contracts 

Nordic companies can also enter into an investment contract with a host government of a country they would like to invest. Host governments in emerging market countries are willing to sign investment contract particularly when investments projects are considered critical for the nation, such as in-frastructure projects. These contracts will specify the legal rights and obligations between the investor and the host government.

The advantage of investment contracts is that it is binding on subsequent governments. However, a contract with a local government will in most cases be subjected to laws of that country. This means that any dispute arising out of the contract will be resolved through the local court system. Do not enter into an investment contract with a country authorities if you do not trust the legal system in that country.

Insurance to mitigate risks

Many governments and private insurance companies offer offers foreign investments protection insurance and other insurance products to protect investors against losses on overseas investments resulting from political and regulatory actions by host governments.

In Norway for example, the Garantiinstituttet for eksportkreditt (GIEK), under the Ministry of Trade, Industry and Fisheries issues guarantee on behalf of the Norwegian State to private firms to cover political and regulatory risk, in addition to credit enhancement guarantees to protect investors assets against non-commercial risks at a fee. Other private organizations such as the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group offer insurance for private investors.

As one might recognize, the above options are not mutually exclusive, executives can combine several mechanisms to ensure that their investments are fully protected against political and regulatory risk, as the optimal mechanism depends on your situation as an investor.

For instance, it will be prudent to rely on IIA if there exists an investment treaty between your home country and the destination country for your investment. Insurance or an investment contract will be your choice if no IIAs exist between your destination country and your home country.

Figure 2

In figure 2 I present a summary "option card" for executives depending on whether there is an IIAs between your home country and your host country, and whether your activities are considered "investments" or not.

Succeeding in these markets is learning to manage risks

The above is only a suggestion, as such, there may be a better alternative depending on one's situation. But, whatever the case, make sure your investments are protected. Investing in emerging markets may be risky, however, they may be the most effective means of diversifying your portfolio in the long term.

Succeeding in these markets is learning to manage risks. We hope that this article provides you with some of the options available to you as a Nordic investor interested in emerging markets on how to ensure that your investments are protected against political and regulatory risks in your chosen countries.

Article by

Gilbert Kofi Adarkwah


1 As of January 2018, Finland has investment agreements in force with: Albania, Algeria, Argentina, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Chile, China, Croatia, Czech Republic, Dominican Republic, Egypt, Salvador, Estonia, Ethiopia, Georgia, Guatemala, Hong Kong, China, Hungary, India, Indonesia, Iran, Jordan, Kazakhstan, Kenya, Korea, Kuwait, Kyrgyzstan, Latvia, Lebanon, Lithuania, Macedonia, Malaysia, Mauritius, Mexico, Moldova, Mongolia, Montenegro, Morocco, Mozambique, Namibia, Nepal, Nigeria, Oman, Panama, Peru,

Philippines, Poland, Qatar, Romania, Russian, Serbia, Slovakia, Slovenia, South Africa, Sri Lanka, Tanzania, Thailand, Tunisia, Turkey, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, and Vietnam. There were six agreements signed but not in force yet. These were with Brazil, Costa Rica, Cuba, Kazakhstan, Nicaragua, and Zambia.

2  Sweden active investment agreements are with the following countries: Albania, Algeria, Argentina, Armenia, Belarus, Bosnia and Herzegovina, Bulgaria, Chile, China, Côte d'Ivoire, Croatia, Czech Republic, Ecuador, Egypt, Estonia, Ethiopia, Georgia, Guatemala, Hong Kong, Hungary, India, Indonesia, Iran, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Lao, Latvia, Lebanon, Lithuania, Macedonia, Madagascar, Malaysia, Malta, Mauritius, Mexico, Mongolia, Morocco, Mozambique, Nigeria, Oman, Pakistan, Panama, Peru, Poland, Romania, Russia, Saudi Arabia, Senegal, Serbia, Slovakia, Slovenia, South Africa, Sri Lanka, Tanzania, Thailand, Tunisia, Turkey, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Venezuela, Bolivia , Vietnam, Yemen.

3 Through provisions such as the Fair and Equitable treatment (FET), most-favored-nation (MFN) treatment, as well as National treatment. Meaning that these firms or investment must be afforded the treatment that is equal to the best any other investment or firm in their industry can enjoy.

4  See ICJ judgement in Australia v. France.


Henisz, W., & Zelner, B. (2014). The hidden risks in emerging markets. IEEE Engineering Management Review, 42(2), 27-34. emr.2014.6823807

Khanna, T. and Palepu, K. (2014). Winning in Emerging Markets. Boston: Harvard Business Review Press. (2018). Norway Common Model Agreement for future investments 2007. [online] Available at:
https://www. pdf [Accessed 1 Feb. 2018].

UNCTAD - Bilateral Investment Treaties. (2018). Retrieved 25 January 2018, from Grabowski, Alex (2014) "The Definition of Investment under the ICSID Convention: A Defense of Salini," Chicago Journal of International Law: Vol. 15: No. 1, Article 13.
Available at: http://chicagounbound. iss1/13