Evaluation of Foreign Investment Proposal
Before evaluation, let's revise the basics and meaning of Foreign Investment.
- Investment is a thing, which is worth buying because it is profitable or useful in the near future.
- Proposal is an offer and / or invitation to do some business or trade.
- Statutory compliance are well-specified and documented obligations (duties and responsibilities) that are mandatory (compulsory by law) to be satisfied either by an individual or by an organisation that too in accordance (as per guidelines) with prevailing statutes (laws) and / or regulations of a governed jurisdiction (area, state, country, etc.).
- Host country is a country in whose economy foreign funds are invested.
- Foreign investment is that investment, which is made in any country other than the home or native country. In other words, investments which are made outside the jurisdiction of the home country are called foreign investments.
The currency used for foreign investment is the currency of the host country.
Before investing abroad, all the statutory compliance of the host country must be satisfied as they are mandatory by its inland laws.
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The main ISSUES that must be considered and pre-evaluated before making any foreign investment proposal to a host country is clarified and briefly explained as follows:-
1. Economic Stability
The economic stability of the project is very important as it is directly related to the financial support of the project.
The economic stability of the host country is very essential as it has a direct relationship with the foreign exchange earnings represented in the form of foreign inward and outward remittance (transfer or payment of money).
The economic stability of a host country can be further classified w.r.t:-
- Exchange Rate : The exchange rate of the host country is a very crucial factor for evaluating the foreign investment proposal. A highly fluctuating exchange rate of the host country is generally considered riskier because it may result in a huge financial loss to the project.
- Inflation : The host country with a higher inflation rate shall not be considered for foreign investment proposal. Inflation reduces the purchasing power of the money. Sometimes, inflation may also cause erosion of funds invested. Furthermore, inflation not only affects the capital invested but will also result in a reduction in the profit margin, which overall effects the growth and expansion of the foreign company.
2. Political Stability
When an organisation is doing business in overseas countries, then the political stability in those host countries is of apex importance.
Any uncertain twist to the political scenario or environment of a host country may bring sudden unexpected changes in the administrative strategies and setup of that country. Such changes may or may not be favourable to satisfy the motives of foreign investment. Hence, a pre-systematic evaluation and / or research in the context of host country's political history and its current political stability is equally important.
Normally, following are some common incidents, which have been reported as a result or due to impact of political instability in the host country.
- Issue of Circulars to discontinue the project that may lead to the seizure of property without paying an appropriate compensation.
- The other way of interferences in the business operations can be levied by exchange control regulations. This may block the flow of project's funds.
- Restrictions on employment of foreign managerial or technical personnel. This can hinder the quality and performance of the project.
- Restrictions on import or export of goods and services.
- Regulations requiring majority ownership vetting with the host country.
3. Taxation of Income
The host country levies taxes on income earned in their country by foreign organisations and / or companies.
The rates of taxes on income differ from one host country to another. In a majority of cases, the taxes levied on a domestic (indigenous or native) company of the host country is generally less than the taxes levied on a foreign company operating in that host country.
Foreign companies or organisations while deciding to expand themselves over new geographical areas or frontiers must consider and study some of the common policies adopted by various host countries.
Here, the important points to be considered are as follows:-
- Understand the definition of TAXABLE INCOME as it differs from one host country to another.
- Many host countries give priority to indirect taxes such as excise duty, custom duty, service tax, VAT or value-added tax, etc., over the income tax (direct tax). The increase in an indirect tax will result in an increase in cost of production.
- Some host countries allow tax exemptions for foreign investments made in the certain categories of the projects.
- Reference to Double Taxation Avoidance Agreement (DTAA) is a must. DTAA are taxation treaties entered into with different host countries.
- Tax haven countries levy low taxes or sometimes zero corporate tax to attract foreign investments in mainland and boost their economy.
Conclusion on Foreign Investment
Foreign investments give better growth, profit and liquidity for the funds invested. Therefore, these investments need to be evaluated carefully. If the foreign investment proposal is evaluated properly in accordance with the parameters (issues) discussed above, then it will not only enhance the profitability of the project but will also eliminate the unexpected financial risk associated with the project.
Furthermore, these are just important minimal (here, common) parameters required to be considered in any type of foreign investment proposal.