Introduction

Multinational firms face grave uncertainties today with respect to their investment strategies that involve other countries. In particular, there has been an increasing awareness by international managers of the difficulty of predicting the future political and economic climate likely to exist in a foreign country. One only has to look at the following headlines from The Economist during the first few months of 1981 to see graphically the types of uncertainties that exist in different parts of the world:

These illustrative examples of the unstable world situation coupled with the continuing interest by multinational firms in investing abroad have motivated two broad questions that this chapter addresses: (1) How do multinational firms and insurers deal with the problems of international risk in making their decisions as to what investments to undertake in foreign countries? (2) What role can analytic approaches, including insurance mechanisms, play in better managing risk and uncertainty in international transactions?