Regulatory investment varies from country to country, which provides different levels of investor confidence. During the past 20-years, governments around the globe have eased and then contracted foreign investment. It is challenging for many investors to find a country with an excellent regulatory environment that will provide confidence. One way to monitor this is to evaluate the OECD Foreign Direct Investment restrictiveness index.
The OECD generated a model that initially covered 60 developed and emerging countries and evaluated their regulatory environment for over 20 years. This project’s goal was to keep the information rolling so the Index would be updated and provide a restrictiveness index.
The United States and the United Kingdom are generally considered the most challenging investment regulatory environments. This scenario not only includes international trade but also has its accounting standards and reporting requirements.
Has the Pandemic Increased Investment Regulations?
The pandemic has not only restricted the movements of people around the globe; it has also curtailed investment and tightened regulations. Protectionist policies in countries worldwide are increasingly tightening foreign investment rules in most sectors based on their sovereignty.
As of the Q3 of 2020, The European Union, including member states Germany, France, Italy, and Spain, have tightened foreign investment rules. The United Kingdom, where a new foreign investment law was already advancing through Parliament, took emergency action against some foreign investments. The protectionist.
While many countries around the globe regulate companies, few have specific standards like the United States. In the U.S., financial statements are prepared using Generally Accepted Accounting Principles or GAAP, the rules that frame accounting judgments. A certified public accountant audits those statements to assure that the accounting rules have been followed.
However, in other countries, accountants do not use GAAP but prepare financial statements by somewhat different rules. Some of those differences relate significantly to asset valuations. Investors should be aware that they need to determine whether the reading statements were independently audited when reading financial statements.
Regulatory Risk is a Widespread Issue
High-risk regulatory environments exist around the globe. Countries present companies with diverse regulatory risks, from inadequate contract enforcement in Bangladesh to the risk of asset expropriation in Indonesia. Most are categorized by unevenly enforced regulation. This scenario creates significant uncertainty around compliance requirements and the cost of doing business.
The riskiest countries worldwide for investment include North Korea, Somalia, Zimbabwe, Cuba, Central African Republic, Syria, Venezuela, Turkmenistan, and Eritrea. The least risky countries include the United States, the United Kingdom, as well as, Singapore, Norway, Denmark, New Zealand, and Sweden, setting the standard for sound regulation.
Why is a Country Risky?
The regulatory environment can be considered risky for several reasons. Political violence risks, particularly terrorism, are also more likely to be localized. In contrast, a low regulatory environment’s adverse effects will typically be felt across an entire country. Surprisingly the attack on the U.S. capital that houses the lawmakers, the House of Representatives and the Senate, did not seem to alter theUnited States’ views. Riskier assets continue to rise despite the unbelievable pictures plastered throughout the globe of insurance occupying the capital.
The Bottom Line
The regulatory trading environment differs from country to country around the globe. Historically, the United States, the United Kingdom, Singapore, New Zealand, and Sweden have been considered the most strict. This scenario includes account standards and paperwork that must be registered for each broker and company that trades in the capital markets.
Weak regulatory environments are usually a function of country risk due to the lack of funds and the costs of creating strict regulation. During the COVID-19 pandemic, trade regulation tightened in many countries as concern that foreign investment would begin to generate an undue influence taking advantage of low prices during a temporary recession.
Why the Tightening of Trading Regulations
The goal was not only to make trading and to invest more nationalistic, but there was also a need to prevent foreigners from purchasing domestic assets as the market tanked. M&A bankers saw hundreds of calls from potential Chinese buyers interested in hunting for bargains in Europe, with businesses in Italy and Spain of particular interest. According to a Bloomberg News report, many of these Chinese companies are state-owned, which will likely add to government suspicion about Chinese intentions. Spain has put a temporary foreign investment review system in place, precisely in the wake of the COVID-19 pandemic.
In the U.S., ahead of the spread of the pandemic, there was an increasing alarm about foreign investment. As the virus spread worldwide, there was keen attention paid to supply chains and to ensure that the U.S. has the equipment it needs in any future crisis.
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