Concern over who will bear the exchange-rate risk or, alternatively, who will bear the costs of hedging that risk are an additional factor retarding international investment. Along with foreign exchange risk, political risk helps to drive a wedge between foreign and domestic perceptions of the expected risk-adjusted return to an asset.
The consequence of such dual expectations is a lower market clearing price for those assets and a lower level of foreign investment than would exist in the absence of such distortions. Aside from any direct or indirect barriers, people seem to prefer to invest in familiar local businesses even though currency and country risks do not exist.