When the going gets tough.

A cardinal rule of investing overseas is: Don't put your assets in if you can't get them out.

Investing in emerging countries often yields attractive rates of return, but higher returns are almost always accompanied by higher levels of risk. In fact, the investment climate in many emerging markets can take on the characteristics of an El Nino storm - relentless and devastating, with an unpredictable outcome. Many factors weigh in the decision to establish operations in a specific country. Possible benefits include the ability to realize and retain profits, advantageous labor costs, access to a lucrative or potentially lucrative market, proximity to raw materials and the ability to capitalize on favorable currency exchange rates or tax situations. But the down side can hold environmental risks, regulatory and bureaucratic constraints that can interfere with construction and production schedules, lack of available electrical power, exposure to natural hazards and corruption.

One of the most volatile and potentially devastating risk factors is local politics. War in Kuwait, the eruption of years of ethnic tension in Yugoslavia, civil war in Liberia, Angola and other African countries and civil unrest in southern Mexico are but a few examples of political instability that forced companies to evacuate personnel and abandon all or some of their assets. When companies originally invested in these regions, they doubtless thought the political landscape to be navigable.

The time to think about protecting your company's assets isn't when your country manager and other key personnel are racing to the airport. You need advance planning.

COVER YOUR ASSETS

How can companies mitigate political risks? For starters, look into purchasing political risk insurance. Investors in developing countries are turning to political risk insurance to protect their operations from government expropriation, forced abandonment and damage to assets resulting from political violence.

Expropriation insurance, often the foundation for other coverages, protects against actions of the host government that expressly and permanently deprive an investor of ownership rights or control or possession of assets, or restrict operations in a way that causes a complete shutdown of activities.

An extension of expropriation coverage includes forced abandonment (an investor's complete and necessary abandonment of the foreign operation and its assets as a result of its own government issuing an advisory to that effect). Abandonment usually must continue for a minimum time period (typically six months or more), after which the coverage indemnifies the investor/policyholder for its lost investment or financial value (equity, retained earnings, loans, loan guarantees and net intercompany receivables).

You can protect corporate assets, too, be they fixed or mobile, against direct physical damage as a result of political violence (war, civil war, insurrection, revolution, etc.); complete cessation of activities is not a coverage prerequisite. This coverage is meant to supplement a company's property insurance program.

It's also possible to insure against the need to evacuate key personnel. Indemnifiable expenses include evacuation, maintenance in a safe location, salary continuation and the cost to return.

Key markets providing these coverages are Lloyd's of London, AIG, Zurich-American and Sovereign Risk Ltd. For U.S. companies, there's also the Overseas Private Investment Company (OPIC), an independent government agency. Other developed countries offer similar programs, and the World Bank provides political risk insurance through its Multilateral Investment Guarantee Agency (MIGA).

Some companies believe purchasing political risk insurance from OPIC or MIGA has an added element of prevention. Because OPIC and MIGA insurance are public knowledge, the host government is always cognizant of their existence and few foreign governments want to incur the wrath of the U.S. or the World Bank.

You can structure programs for a specific investment or to encompass multiple investments. The latter provides a discounted premium and priority access to capacity. It also eliminates another risk - picking the wrong country to insure.

KEEP YOUR EYES OPEN

In evaluating an overseas location, study the political, legal and environmental landscapes from a national level down to the grassroots, either internally or with outside consultants. It's important that this be a continuous process, not something you do just when you decide to set up shop.

Operations may start small and grow over time, increasing their importance to the enterprise. In some cases, an operation in an emerging or higher risk country can grow to become critical. From an operational perspective, then, managers should continually assess the relative importance to the overall organization of output - or potential revenues - from operations in countries with significant risk profiles. They must update contingency plans regularly.

To support critical decisions, leadership must understand how international operations contribute to revenue and production streams. This may be a moving target as products change, operations expand and the importance of local revenues and enterprise support increases.

As they enter emerging countries or expand operations, businesses must decide how much to invest in their facilities. For many years, U.S.-based companies with international operations have had to choose whether to build their own facilities to internationally recognized fire protection and construction standards or to buy existing facilities. The latter may not offer levels of protection compatible with the company's risk management and control strategies, resulting in adverse exposures that could jeopardize revenue streams.

The bottom line is that CFOs and treasury staff should involve risk management, operations and facilities staff to help decide how foreign locations will be constructed and protected. Cost and time factors may make buying more attractive than building, so weigh these decisions carefully.

In some cases, an adverse risk profile may be unavoidable, or balanced by favorable facility purchase provisions. When this happens, operational solutions may reduce overall risk to acceptable levels.

One approach is to establish a contingency plan to replace foreign output, focusing on reestablishing production within your maximum acceptable downtime. This timeframe varies by company and is based on three factors: an assessment of the firm's critical operations; its ability to continue to fulfill customer orders; and management's tolerance for potential financial and market share losses associated with the firm's inability to produce or deliver its product or service. Acceptable downtimes in manufacturing industries are shrinking as businesses adopt Just-in-Time inventory systems, eliminate redundant operations and forgo maintaining adequate alternative capability and capacity that could otherwise facilitate timely shifts in operations.

Effective contingency planning must involve a complete review of the entire chain of distribution. Businesses adopting virtual operating strategies must establish contingencies to safeguard against the potential that key outsourced suppliers may have to shut down or abandon vital operations.

Where supply chain exposures are critical, you can ask suppliers to provide evidence of business continuation plans and other blueprints for active contingency management that will ensure the continuous flow of goods and services. Approach this process as a partnership; both parties actively share information on how to maximize the surety of the supply chain. With international partners, three things - cultural considerations, differing views on risk control strategies and lack of influence on the supplier's business continuity planning process - reduce the certainty that a supplier will be able to address your business priorities in a crisis.

GETTING YOUR FEET WET

A company may begin an international operation by establishing a supplier base and shipping components back home for assembly, testing and distribution. Decisions to expand to include a greater percentage of overseas production and assembly processes may be a logical progression, but increase your risk if you face a quick exit. To begin to address these issues, establish a clear set of criteria focusing on maintaining steady levels of customer fulfillment and product quality.

When companies invest in developing countries, they need to adopt long-term strategies for both risk management and financial management. Today's calm is no guarantee for the future. Expect change and expect it frequently.

Kenneth G. Horne and Craig A. Holmes are senior vice presidents at J&H Marsh & McLennan.