Direct overseas investment by large Maltese corporate entities and the associated risk

Abstract

The undertaking of outward direct investment projects can alternate the risk profile of an entity. This is because in doing so, over and above the elements of risk that are synonymous with the nature of the investment, multinational corporations also become exposed to risks that are particularly specific to the sphere of international investment. Purpose – The purpose of this study is to evaluate whether non-financial risk differs in between undertaking an investment project in the entities’ home country of Malta, versus undertaking that same project in a foreign country. Design – The objectives of this study were fulfilled through the carrying out of a series of interviews with executives from Malta based multinational corporations. They comprised of a number of in-depth risk assessments on domestic and foreign investment projects. ‘Non- financial risk’ was studied from a global (total) perspective, from a categorical point of view, and also at factor level. Findings – From this study it emerged that Malta based entities seek to invest in foreign countries for growth reasons. Moreover, the findings that emanate from this study show that, in comparison to domestic investment, total non-financial risk is only higher for cases of investment that are situated in countries that have a lower country rating than Malta. On the other hand, for investment projects that are situated in countries that have a better country rating than Malta, non-financial risk does not differ at all. In the case of projects situated in countries of investment that have the same country rating as Malta, total non-financial risk is the same, but the two alternatives of investment differ at factor level. Irrespective of the overall non-financial risk level of an investment, reputational risk factors are always the least risky. The most salient risk factors depend on the rating of the country of investment. All of the risk factors can trigger the occurrence of other events, and all of the risk factors can get triggered by the occurrence of other risk events. There exists an intense level of inter-categorical risk incitation in the case of the ‘Country Risk’ and ‘Operational Risk’ categories. Conclusions: For Malta based entities, undertaking an investment project outside Malta does not necessarily mean that they will face a higher level of non-financial risk. However, the risk will never be at a lower level than that experienced domestically. Up to a certain extent, the country rating of the investing country can explain the difference in non-financial risk. Not investing in one’s home country does not have an effect on non-financial risk. Value – This study provides a comprehensive framework for assessing the non-financial risk of domestic and foreign direct investment.