Political risk is sometimes defined as a country's willingness to maintain a hospitable climate for outside investments. Economic risk, on the other hand, is the ability of a country to pay its debts. The economic and political states of a country are codependent. If the economy of a country is strong but its political state is hostile -- or vice-versa -- it ceases to be appealing to foreign investors. The political decisions made in a country may result in its instability, causing the weakening of the economy and creating losses for both local and foreign investors.
Foreign companies pay dividends in their local currency. When buying or selling an investment abroad, you have to convert the money you get from the local currency into U.S. dollars. If the local currency weakens against the U.S. dollar, your investment returns are then reduced because they translate to fewer dollars.
Legal processes in the U.S. may not necessarily apply to the country in which your investment is based if you encounter a problem with an investment made abroad. Even if you sue successfully in a U.S. court, you may not be able to execute a U.S. judgment against a foreign company. In such cases you will be forced to rely on available legal remedies in the company's home country, which may prove tedious and expensive.
Acquiring up-to-date information about a foreign company can not only takes time and money, it also often difficult to come by. As a result, many foreign investors cannot make informed decisions about their investments of choice. Additionally, some companies may post their information in their local language and not in English. Foreign investors therefore have the added cost of translating this information to English in an attempt to get all the necessary fact about the investment.