American companies may be some of the most innovative and profitable around, with the likes of Exxon Mobil, Wal-Mart and Microsoft sporting market capitalizations rivaling the GDPs of the largest economies in the world, but a quick glance at the world's fastest growing economies shows that opportunities abound around the world.

Taking Care in International Markets

Ready to plunk down cash for international equities? Not so fast. Just because you've read that Nigeria is awash with oil or heard that China's growing middle class can't get enough luxury goods doesn't mean that you know how companies there operate. After all, you are probably pretty sure what to expect when you deal with a company based in the United States, but what about a country on the other side of the world? Unless you ha connections or have already done business there, you are going to be dealing with a level of uncertainty that could wind up spelling the difference between a profitable venture and a disaster. For the minority investor - the investor who doesn't have a controlling share of a company's stock - the world can be a scary place.

World Bank Ratings

How can you determine which countries are risky and which ones aren't, when it comes to investor protection? The World Bank's "Doing Business" report is a good place to start. The report examines investor protection laws in 183 economies, specifically focusing on publicly traded manufacturing companies. The rankings are based on a review of three primary types of regulations:

  • The extent of disclosure: how do companies report related-party transactions?
  • The extent of director liability: can executives be held liable for what they do with corporate assets?
  • The ease of shareholder suits: can investors get a hold of the company documents they need if they want to sue?

The rankings are based on a 10-point scale, with a score of zero meaning that investors have the least amount of protection.

The countries where investors have the most protection:

Country Protection Ranking
New Zealand 9.7
Singapore 9.3
Hong Kong 9.0
Malaysia 8.7
Canada 8.3
Colombia 8.3
Ireland 8.3
Israel 8.3
United States 8.3
United Kingdom 8.0

You probably didn't find these rankings all that surprising. Six of the countries are part of the OECD, most are widely considered to be economically and politically stable and only one, Malaysia, is considered an emerging economy. With the exception of New Zealand, all are considered by the IMF to be part of the fifty largest economies.

The countries where investors have the least protection:

Country Protection Ranking
The Gambia 2.7
Guinea 2.7
Kosovo 2.7
Federated States of Micronesia 2.7
Palau 2.7
Djibouti 2.3
Venezuela 2.3
Suriname 2.0
Laos 1.7
Afghanistan 1.0

You may not have been overly surprised by this list either. It's marked by countries that have experienced war or coups within the last two decades - not something that makes the development of solid regulations all that easy. Most are also fairly small economies, though Venezuela is the exception; its GDP is greater than five of the economies in the "most protected" list and is considered to be middle income. It graces this list because its institutions have been severely weakened by the central government in recent years.

Consumer Protection

What's the point of laws that protect minority investors? After all, why would the leadership in Switzerland or Swaziland care about what protections American investors, or any foreign investors for that matter, with minority stakes get? Money. Without regulations creating investor protections, companies would have a harder time raising funds because investors would shy away from equities. This leaves the debt market as the primary source of funding and companies in risky countries are more likely to face steep rates. When countries create strong investor protection laws they are sending a signal: we want you to trust our companies, so trust that we're not going to fleece you.

The Bottom Line

Strong investor protections come from transparency. Investors want to know that their money is being used to make companies grow, not to line the pockets of insiders. Those with controlling interest should be held accountable for what they do with company funds, and if investors think that their only way out is through a lawsuit, then they should have access to the documents that will allow them to take their case to court.

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