AJAFIN 6605-08

FOREIGN DIRECT INVESTMENT (FDI) &

POLITICAL AND COUNTRY RISK ANALYSES

FDI is the acquisition of fixed plants and

equipment abroad.

Outline:
✦ Market Imperfections that Lead to FDI:
→ Market failure or imperfections in general.
→ Product and factor markets.
→ Financial markets.
1
 FDI Theories:
Theory of Industrial Organization (IO)
 Provides insights into how firms behave in markets.
 It offers some explanations on the general
circumstances under which exporting, licensing, or
local production will be the preferred alternatives for
exploiting foreign markets.
The theory focuses on imperfect products and factor
markets.

2
 According to this theory, MNC’s have intangible
capital in the form of trademarks, patents, general
marketing skills, and other organizational abilities.

Exporting: will be preferred if MNCs' intangible

assets - trademarks, patents, marketing or
organizational abilities - can be embodied in the
form of "hard-to-copy" products or products without
adaptation.

3
 Licensing and Joint Ventures: will be preferred
where the technology can be unbundled, transmitted
objectively, and where the price is right. Also where
the market is segmented and legal intensity problems
can be overcome.

Foreign Direct Investment: will be preferred if the

technology is "inseparable" from the firm.
 Internalizing the market for an intangible asset by
setting up a FDI makes economic sense if the benefits
from circumventing market imperfections outweigh
the administrative and other costs of central (internal)
control.
4
 General Market Failures or Imperfections
 Market and firms are alternative instruments for
completing a related set of transactions.
 Execution takes place across markets (externalization)
or within a firm (internalization) depending on the
relative efficiency of each mode.
 Costs of writing/executing contracts across markets
depend on the human decision makers and the
objective properties of the market.
 Similar set of factors apply to transactions within the
firm.
5
 To understand why firms internalize, we must
examine environmental and human factors that
make writing/executing complex contingent
claims or contracts costly and hence why firms
turn to internalization.
 Why the Firm and not the Market?
The firm is an institution that hires factors of
production to produce goods and services.
 Markets are also institutions that can coordinate
economic decisions.
Why should some economic activities take place
in the one or the other? The answer is 'cost'.
6
 Firms internalize economic activities because of a
number of factors including: transaction costs,
economies of scale and economies of team production
(specialization).
 Transaction costs include: the costs of finding
someone with whom to do business, the costs of
reaching agreement on the exchange, and, the costs of
ensuring such agreements are fulfilled.
 Markets require that buyers and sellers find each
other, get together, and negotiate.
 They also usually require lawyers to draw up contracts.
Rather than
buying a good or service on a market, firms can
reduce such cost by internalizing their production.
7
The Factors:
Bounded Rationality:
The limited capacity of the human mind to formulate
and solve problems compared to the size of the
problems. Economic agents are limited in neuro-
physiological, language, technical, and legal senses
to identify future contingencies and specify, ex-ante,
appropriate responses.
With these limitations long-term contracts may be
supplanted by internal organization.
Opportunism:
Lack of candor or honesty in transactions, self-
interest seeking with guile.
8
Competitive - Monopoly - Monopsony Environments:
A competitive environment faces little risk of
opportunism, but competitive environments often
degenerate to monopoly/monopsony environments.
Many transactions that involve large number of qualified
bidders at the outset are transformed into small number
supply conditions at contract execution and renewal.
Opportunism comes in the form of cost-overruns, inflated
prices, substandard qualities, etc.

Asymmetric Information:
obtains when one party to an exchange is much better
informed than the other regarding the underlying
conditions.
The other party cannot achieve information
parity except at a great cost. 9
Advantages of Internal Organizations
 Parties to an internal exchange are less able to
appropriate/ capitalize on subgroup gains at the
expense of the whole firm.
Hence there exists a reduced incentive to behave
opportunistically.
→ Internal organization can be more effectively
monitored/audited.
→ Internal organizations are able to settle disputes
better/ faster.
→ Efficient codes are more apt to evolve and be
employed with confidence by parties in one
organization.
10
→ Internalorganization promotes convergent
expectations.
The existence of market failures alone may not be
sufficient to justify FDI.
MNCs can succeed abroad only if their proprietary
technology cannot be easily purchased or duplicated
by local competitors.

MNCs must continue to create/preserve effective

barriers to direct competition in product and factor
markets.

11
 Products and Factor Market Imperfections
Proponents: Stephen Hymer (1960); Charles Kindleberger (1969)
and Richard Caves (1971)
 Market imperfections may occur naturally, but they are
usually attributed to policies of firms and governments. For
example:
 Firms in oligopolistic industries seek to create unique
competitive advantages through product differentiation.
 Governments create market imperfections through tariffs and
non-tariff barriers to trade, preferential purchasing policies, tax
incentives, capital market controls and similar policies.
Other
government created market imperfections include EU, ECOWAS,
European Free Trade Association (EFTA), OPEC, NAFTA, etc.
12
 Foreign firms operating in these markets must enjoy
some competitive advantages over local firms in order
to compensate for such inherent disadvantages as:

· Lack of knowledge about local customs.

· Differences in local tastes.
· Unfamiliar legal systems.
· Greater communication and control costs

13
 The most important competitive advantages enjoyed
by multinational corporations include:
 Advantages in the goods market:
Product differentiation
Unique marketing skills
Collusion in pricing

 Advantages in the factor market:

Techniques protected by patents
Special (superior) management skills
Financial strength and access to diversified
capital markets
14
Economies of Scale and or Scope:
Economies of scope exists whenever the same
investment can support multiple profitable activities
less expensively in combination than separately (as in
flexible manufacturing).
Internal and external
Horizontal and vertical
 Internal Economies of Scale: A firm’s per-unit cost of
production declines as its production increases
 External Economies of Scale: Firm’s average cost of
production declines as production within its industry
increases. Critical mass of firms exchanging ideas and
workers moving among firms (synergy)
15
Advantages From Government Policies:
→ Regulations limiting output
→ Regulations limiting entry into an industry
→ Taxation policies
→ Free trade agreements
→ Subsidies

16
Financial Market Imperfections
Is a competing (complementing) hypothesis for
explaining FDI.

Multinational corporations are able to use a network

of financial linkages to exploit wide variations in
national tax systems and significantly reduce costs
and barriers to international financial transfers.
 The ability to transfer funds and to reallocate
resources or profits internally present MNCs with
several types of arbitrage opportunities including:

17
 Tax Arbitrage
 Financial Market Arbitrage
 Regulatory System Arbitrage
 Use of internal financial transactions to confront
various financial market imperfections
 Tax Arbitrage: Ability to reduce tax burdens by shifting
profits from high-tax to low-tax subsidiaries.
 Financial Market Arbitrage: By transferring funds
among units, MNCs are able to circumvent exchange
controls, earn higher yield on excess funds, reduce cost of
borrowed funds and tap previously inaccessible financial
markets. 18
 Regulatory System Arbitrage: When unit profits
are impacted by government regulations or union
pressures, MNCs are able to exploit market
imperfections for negotiating advantages.
 MNCs can control the mode and timing of
internal financial transfers and thereby maximize
global profits.
– Mode of Transfer
◆ Transfer pricing

– Timing Flexibility
◆ Leading and lagging
19
 Notes:
 Extant literature on MNE and FDI focuses
mainly on advanced economies.
 Emerging literature explores multinationals from
developing economies
 New studies combine country characteristics and
social relations as determinants of FDI.


 Firm and country characteristics are combined

with institutional, political, economic, and cultural
connections between source and hosts countries of
FDI. 20
Theory of Developing Country MNEs:
 Vernon (1966) sees FDI as a natural stage in the life
cycle of a new product from its introduction to its
maturity and eventual decline.
 Dunning (1981) and Ozawa (1992) propose a more
general approach called “Investment Development
Cycle”.
It states that initial inward investment (stage 1) will be
low labor cost and raw materials, with almost no
outward investment.
In the second stage, firms will initiate outward
investment and seek low labor cost locations, while
inward FDI will be market seeking.
In the last stage, both inward and outward FDI will be
market oriented. 21
 In Wells (1983) and Lall (1986), Third World
MNEs are viewed as relatively passive recipients of
technology and skills at the mature stage of their life
cycles… and that third world MNEs will develop
smaller scale, labor intensive, multipurpose,
technologies that use locally available inputs and
allow them to compete on low price, rather than
product differentiation and innovation.

 But look at Tata Motors of India!

22
 Other FDI Theories:
FDI decisions result from a complex process
motivated by strategic, behavioral, and economic
considerations.
 Strategic Considerations for FDI fall into in
several classifications (not mutually exclusive):
- Market seekers
- Raw material seekers
- Production efficiency seekers
- Knowledge seekers
- Political safety seekers 23
 Behavioral Motives for FDI:
Contend that FDI is often motivated by a
strong stimulus from the external environment or
from within the organization on the basis of personal
biases, needs, and commitments of individuals or
groups.
The investigation process is very crucial.

 Economic Rationale for FDI:

Based on the theory of imperfections
in individual national markets for products, factors of
production, and financial assets.

24
 Defensive FDI: May be motivated by:
- Follow the leader behavior/strategy
- Desire to establish credibility with local customers
- Grow-to-survive philosophy
- A desire to gain knowledge by acquiring firms with
valuable expertise
- A need to follow the customer (service firms)

25
 The Theory of Internalization:
 Holds that firms having competitive advantages because
of their ability to generate valuable proprietary
information can only capture the full benefit of innovation
through FDI.
 In a desire to control the use of proprietary information
MNCs are reluctant to unbundle their services to host
countries in the form of management contracts and
licensing agreements. They thus internalize
 Desire to deny rivals access to competitive resources is
referred to as appropriability theory.

26
 Control through internal handling of operations
rather than through contracts with other
companies is often called internalization

 Compare Theory of Externalization

 Complementarity of Trade and FDI

• FDI usually not a substitute for trade.
• About one third of world trade is intra-firm.
• Many exports from parent to subsidiary would not
occur if FDI does not exist.
27
 The Product Cycle Hypothesis

 The Eclectic Theory

 Portfolio Theory (Risk Diversification Hypothesis)

 Oligopoly Model - (Exploiting Quasi-monopoly Advantages)
(imitative behavior by rival firms in an oligopolistic industry)

 Disclosure Paradox and Team Organizations

 Political Safety/Appeasement Motives

 Bandwagon Syndrome
28
Strategies of MNCs
Some MNCs rely on product innovation, others on
product differentiation, yet others on cartels and
collusion to protect themselves from competitive
threats.

Innovation Reliant MNCs

These MNCs create barriers to entry by continually
introducing new products and differentiating existing
ones - large R&D budgets; large pool of technical
personnel as opposed to factory personnel; behavior
closely resembles that described by the product life
cycle.
29
 "Matured" MNCs:
Feature product differentiation; high advertising
expenditures; highly developed marketing skills;
economies of scale/scope.
"Aging" MNCs:
Their strategy includes entering new markets
where market imperfections still exist, e.g.,
Developing countries.
✦ Forming cartels
✦ Market sharing
✦ Using global scanning capacity to seek lower-cost
production sites 30
Political and Country Risk Analysis: An Outline:
 Problems of Definition
Government Action Vs. Environmental Changes
 Operational Definition
"Discontinuities in the business environment
occasioned by political developments"
 Distinction Between Political and Economic Risks
Actors responsible for each condition

31
 Macro Approach Vs. Micro Approach
Macro-measurement:
Aggregate subjective assessments - expert opinion- generated,
e.g., BERI, BIIER or BI, also Nikkei BI.
Others employ quantified indicators of economic, social, and
political factors, e.g., PSSI and Ecological Models.
Micro-measurement:
Companies differ in their susceptibility to political risks:
Therefore extractive industries, utilities, financial services,
manufacturing (heavy industries), service multinationals face
different levels of risk.
 Managing Political Risk
✦ Pre-investment Planning
✦ Operating Policies
✦ Post Expropriation Policies 32
 Country Risk Analysis
Banks tend to address external environmental issues in
terms of country risk.
Political risk is treated as a subset of country risk.
Definitions: Political Risk, Country Risk
 Country Risk Indicators
✦ Political factors: market oriented or statist policies
✦ Economic factors: capital flight, fiscal irresponsibility
monetary instability, exchange rate instability,
✦ Subjective factors: attitude towards private
enterprise, attitude towards multinationals.
✦ Indexes of political risk: BERI, PSSI, POR, CI, etc
33
Bank Assessment of Country Risk.
Management of country risk:
Avoidance; Adaptation; Dependency; Hedging;
· Proactive Strategies -(Operational)
- Control of vital technology,
- Develop local allies,
- Local borrowing,
- Multiple production sources,
- Transfer-pricing capability,
* for managing exchange controls
* for exploiting discriminatory taxation
- Lobby local (host) government officials or business
leaders
- Take out OPIC/MIGA insurance.
34
 Political Risk Assessment for FDI
✦ Problems of Definition:
Most studies identify political risk with government actions
that impact on business operations.
Others have defined political risk on the basis of environmental
changes due to political developments like acts of violence,
instability, riots that have repercussions on business activity.

✦ These Definitions are Interdependent.

Environmental changes can prompt government actions as
much as government action/activity can provoke
environmental developments.
Robock (CJWB, 1971) offered an operational definition of political
risk as follows: "discontinuities in the business environment
occasioned by political developments." 35
 Distinction Between Political and Economic Risks:
→ Political Risks: stem from changes in policy positions or
environmental conditions.
→ Economic Risks: are associated with changes concerning
market, competitive, and technological factors that diminish
a firm's effectiveness and profit potential.
✦ Actors responsible for political risks becoming an actuality
are more easily identifiable than those responsible for the
economic risks becoming an actuality.
✦ Country, industry, and firm characteristics influence the
political vulnerability and intensity of political risk for a
business firm. 36
 Macro Approach:
Dimensions that affect all business enterprises in general.
 Micro Approach:
Dimensions that impact in a selective manner on
specific business activity.
 Macro Measurement:
A number of commercial and academic political
risk forecasting models are available.
* BERI - Business Environment Risk Index.
* BIIER- Business International Index for
Environmental Risk 37
 These are aggregate subjective assessments of a panel
of experts (typically via a Delphi Method).
✦ Others rely on quantified indicators of economic,
social, and political factors, e.g.,
✦ Political System Stability Index (PSSI) suggested by
Haendel and West (1975).
✦ Ecological Model Approach - based on the
proposition that the crucial measure of stability is the
frustration level in society.
✦ Profit Opportunity Recommendation Rating (POR)
✦ Global Corruption Index
38
 Micro Measurement:
Companies differ in their susceptibility to political
risk, depending on their industry, size,
composition of ownership, level of technology,
and degree of vertical integration, e.g.,
- Extractive Industries, e.g., gold, oil, etc.
- Utilities
- Financial Services
- Manufacturing
- Service Multinationals

39
✦ In general the greater the perceived or actual benefit
of a MNC to the host economy, and the more
expensive its replacement by a purely local operation,
the lower the degree of political risk to a MNC.
✦ When a MNC invests in a foreign country, it is
writing a call option to the host government.
The host government will
exercise this option, such as expropriating the MNC
property, only if the gains exceed the strike price, i.e.,
the option is in the money.

40
 Managing Political Risks
Pre-investment Planning:
* Avoidance
* Insurance
* Negotiating the environment
* Structuring the investment

41
→ Operating Policies:
* Planned divestment
* Short-Term profit max
* Changing the perceived benefit/cost ratio of host govt.
* Developing local stockholders
* Adaptation e.g., lobbying/politicking
* International production "network" strategy
* Controlling the location of intangible assets
* Local purchasing strategy
* "Sourcing" and "movement" of funds policy

42
→ PostExpropriation Policies:
* Rational negotiation
* Applying power
* Legal Remedies
* Management surrender

43
 Country Risk Analysis:
Country risk analysis is now a standard procedure in
international lending:
In the 1970s big money center banks and regional
banks lent billions of dollars to developing and
socialist countries.
The international debt crisis that followed in the wake of
"unrestricted" lending has drawn attention to the need to
assess "factors" that affect the likelihood that a "nation"
can be in default.
Instead of political risk, banks prefer to discuss
external environmental issues in terms of "country
risk". Political is treated as a subset of country risk44.
✦ Country risk analysis embodies the assessment of
the potential risks associated with doing business in
the political, economic, cultural and social
environment of a country.

✦ It examines “Political Economy”, the interaction of

politics and economics, to uncover political factors
that give rise to particular economic policies
(monetary and fiscal policies, exchange rate policies,
trade controls, labor laws, property rights, etc)

45
 Definition of Terms
✦ Political risk can be defined as political events that have
potential to cause financial, strategic or personnel losses
for a firm.
✦ Country risk refers to elements of risk inherent in doing
business in the economic, social, and political
environment of another country.
A political event in itself does not necessarily constitute a
risk to business.
Even a revolution as the most dramatic form of political
instability is neither a necessary nor a sufficient condition
for changes in policy relevant to foreign investment
(Kobrin, 1979). 46
Examples:
(1) Gulf oil in 1975 was able to negotiate a very
favorable relationship with the Marxist MPLA
during the Angolan civil war.

(2) Dow chemical was able to re-enter Chile after the

overthrow of Salvador Allende in 1973.

(3) Iraq- Kuwait- Desert Storm- (Gulf War), 1992,

provide booming business to oil fire fighting
companies, and patriot missile manufactures
( e.g. Raytheon).

47
✦ The linkage between political events and risks
is often rooted in managerial decisions or the
absence of such decisions.
✦ Political turbulence and uncertainty can be
proactively managed into targets of competitive
opportunity - if management understands the
multidimensional and complex nature of political
risk.
✦ Socio-cultural, political, and economic
phenomena are highly interrelated.

48
 Different kinds of political risk events can be
divided into either:
 Extra-legal: any event that originates from outside
the existing authority such as terrorism, sabotage,
military coups, revolutions, etc.

 Legal-Governmental: a direct product of the

ongoing political process and includes such events
as democratic elections, changes in the law
concerning trade, labor, joint-venture, subsidy,
technology, monetary, and developmental
policies.
49
 Country-Risk Indicators:
✦ Fiscal irresponsibility: government deficit as a
percentage of GNP.
✦ Degree of waste in the economy.
✦ Coverage ratio = Exports/(Debt service).
✦ Resource base: natural, human, and financial
resources. A nation with substantial resources
(oil, gold, diamond) is a better economic risk.
✦ Capital flight = export of savings by citizens of a
nation because of safety concerns.
✦ Expropriations
✦ Inflation, BOP deficits, Growth rate of GDP,
Money supply growth rate, etc 50
 Indicators of Long-run Economic Health
✦ Incentives that reward risk-taking in productive
ventures.
✦ Legal system that promotes the development of free
markets.
✦ Minimal government intervention in the economy.
✦ Stable macroeconomic policies.
✦ Open economy.
✦ Incentives to save and invest.
✦ Political safety.
✦ Existence of basic human rights and freedom of the press.
51
 Market-oriented Vs Statist Policies:
Empirical evidence since the end of WWII shows that

market economies work and command economies do not.

✦ In a market economy (capitalism), economic

decisions are made by individual economic agents
based on prices of good , services, capital, labor, land,
and other factors.
✦ In a command economy (socialism/communism),
the leaders decide what, how, where, who, and quantity
of production, and then command others to follow the
central plan. 52
✦ The basic difference between a market economy
and a command economy is the way they harness
information and incentives.

✦ Markets work because economic decisions are made

by those who have the information necessary to
determine the trade-off that must be made and the
appropriateness of those trade-offs given their unique
skills, circumstances, and preferences … along with
market prices that indicate the relative values and
costs placed on those activities by the society.

✦ Pure command economies are now (2000s) rare

except Cuba and North Korea. 53
✦ Many nations follow statist policies in which markets
are combined with heavy government intervention in
the economy through various regulations, tax and
spending policies.
The state typically owns critical industries e.g.
minerals, air transportation, telecommunications,
aerospace, healthcare, oil, and power generation.

✦ The centralization of economic power in the state as

seen in developing/third world countries has turned
the state into a huge patronage machine and generated
a complex and corrupt bureaucracy to administer ill-
defined and all-encompassing rules and regulations.
54
✦ As a result, corrupt and inept officials use the
controls and regulations to enrich themselves and
further the interests of their ethnic groups, and/or
religious, or professional class, at the expense of
national economic health and well-being.
Examples: Russia, India, Pakistan, Indonesia, The
Philippines, Malaysia, Mexico, Most countries in
Africa, Middle and South America, Middle East,
and Eastern Europe.
✦ Also compare and contrast: former East and West
Germany, North and South Korea, Hong Kong and
Taiwan with Mainland China, and Singapore with
Malaysia.
55
 Applications
✦ As a result of the 1991 Gulf war, many MNCs
reassessed their exposure to country risk and revised
their operations accordingly.
✦ With the Asian crisis of 1997-98, many MNCs
realized that they had underestimated the potential
problems that could occur in high growth Asian
Emerging Markets.
✦ After 9/11 attack on the U.S., many MNCs adjusted
their business operations in countries where U.S.
firms may be targets of terrorists.
56
 APPENDIX
COMMONLY USED VARIABLES IN COUNTRY RISK ANALYSIS
Quantitative Variables
Macroeconomic
- GDP growth (nominal & in real terms)
- Per Capita GDP level
- Per Capita GDP increase (real terms)
- Savings to GDP (over time)
- - Investments to GDP (over time)
- Share foreign trade in GDP
- Current account deficit to GDP (over
time)
- Debt service to GDP
- Debt service to savings
- Debt service to public revenues
- Debt interest and direct investments
earnings of foreigners to GDP
- Short term external debt to GDP
- Foreign debt to GDP
- External liabilities (debt and quality) to
GDP
Qualitative Factors
- Type of government
- Orderliness of political succession
- Political stability
- Leadership ability demonstrated by
present government
- External political threats (war)
- Potential domestic political threats
(political unrest, riots, radical changes
of policy)
- Existence of political opposition
- Political freedom
- Ethnic minorities
- Persistent internal political chaos
- Effectiveness of government in
formulating policies regarding
important social and political
problems
57
Quantitative Factors <cont.>
- Consumer prices index CPI (over time)
- Wholesale prices index WPI (over
time)
- Comparison CPI and WPI
- Money supply growth
- Money supply growth to GDP growth
- Domestic assets banking system (over
time)
- Domestic credit creation (over time)
- Currency to total bank deposits
- Governmental spending to GDP
- Tax revenues to GDP
- Government deficit to GDP
- Military spending to GDP
- Level of short-term interest rates (over
time)
- Relative purchasing power of currency
(inflation rate to exchange rate
changes)
Qualitative Factors <cont.>
- Institutions designed to provide for
resolution of political and social
- Government’s ability to institute
economic reforms
- Institutional structures designed to bring
competing influences to bear upon
government policies
- Ideological differences between ruling
parties and political opposition
- Foreign investment climate
- Threat of nationalization
- Refusal to compensate expropriated
investors
- Nationalization-expropriation record
- Hospitality to private and foreign
capital
58
 Quantitative Factors <cont.>
External Accounts
-Total reserves
- Total reserves changes over time
- Reserves minus gold
- Reserves minus gold over time
- Availability IMF credit
- IMF credit to gross reserves
- Net foreign assets
- External assets commercial banks
- Reserves to imports
- Months-of-imports covered by reserves
- External debt to reserves
- Short-term external debt to reserves
- Debt service ratio (and over time)
- Public debt to exports (goods and
services)
- External debt to GDP
- Interest payments to exports (G & S)
Qualitative Factors <cont.>
- Income distribution
- Homogeneity of population
- Investment in human capital
- Poverty
- Existence of widespread corruption
- Importance of social security
- Education level of population
- Regional economic structure
- Degree of development and
diversification of economy
- Infrastructures
- Energy position
- State of economy and prospects
- Quality of government
- Fiscal and monetary policies
- Effectiveness of monetary policies
- Government’s economic development
plans
59
 Quantitative Factors <cont.>
- Current investment service ratio (includes
debt service and profits on foreign owned
investments)
- Principal payments to total external debt
- Total foreign debt
- Debt growth (%)
- External debt to current account receipts
- Composition external debt
- Debt to Western banks
- Time profile ratios
- Share short-term debt in total
- Borrowing on international markets
- Eurocurrency loans and bonds
- Average spread Euromarket borrowing
- Current account
- Current account imbalance over time
- Current account imbalance to exports (G & S)
- Current account to GDP
Qualitative Factors <cont.>
- Current account adjustment policies
- Persistent overspending in public
sector
- Wage-price policies
- Exchange rate policies
- Import restraint policy
- Control of inflation
- Foreign exchange controls
- Regulatory policies in financial sector
- Banking system
- Domestic capital markets
- Sophistication financial institutions
- Relative importance of private
investments
- Access to foreign capital markets
- Reputation for economic stability
- Country’s repayment record
- Current collection experience 60
 Quantitative Factors <cont.>
-Overall balance of payments over time
-Basic balance of payments over time
-Trade balance
-Trade balance over time
-Exports (goods)
-Export trends over time
-Export concentration, excluding oil
-Export vulnerability
-Export stability
-Export diversity
-Export market concentration
-Export goods and services
-Imports (goods)
-Import trends over time
-Import composition
-Import compressibility
-Import dependence
-Petroleum imports
-Trade account improvement/deterioration
-Terms of trade over time
-Main trading partners
-Percentage change exports to percentage
change imports
-Import coverage (imports to exports)
Qualitative Factors <cont.>
-Quality of management in public
and private sector
-Availability of technical and
management skill
-Effectiveness of entrepreneurial class
-Labor force
-Ability to take part in complex
modern occupations
-Unemployment as percent of labor
force
-External debt under control
-Import composition
-Quality relationship with major
trading partners
-Quality of relationship with U.S.A.
-Quality of relationship with IMF
-Willingness to provide data
61
 Other Variables
- Major natural resources
- Population growth
- Population density
- Degree of literacy of people
- Per capita expenditure on education
- Percentage of university graduates in population
- Density of medical facilities
- Gainful employment ratio
- Employment by economic sector
- Unemployment trend
- Degree of union organization
- Consumption (individual households)
- Extent of industrialization
- Import substitution industries
- Membership in trade pacts
- Membership in political and economic power blocks
- Bankruptcy rate 62
✦ Web Resources:
Moody’s: www.moodys.com
S&P www.standardandpoors.com

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