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.
“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 localised, says the analysis, published in Verisk Maplecroft’s 2016 Regulatory Risk Index. In contrast, the negative effects of a poor regulatory environment will typically be felt across an entire country.
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 characterised 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 characterised 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.
The regulatory environments of nine countries – some of which are among the world’s most longstanding pariah states – are categorised 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.
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.