Country Risk Analysis is an assessment of potential risks and rewards from doing business in country.

Country risk represents potentially adverse impact of a countrys environment on the cash flow of the firm.

Country risk represents the potentially adverse impact of a countrys environment on the MNCs cash flows. Country risk can be used: to monitor countries where the MNC is presently doing business; as a screening device to avoid conducting business in countries with excessive risk; and to improve the analysis used in making longterm investment or financing decisions.
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Used to monitor countries where the firm is presently engaged in international business Used by the firm as a screening device to avoid countries with excessive risk
Used to assess particular forms of risk for a proposed project considered for a foreign country

Political

Financial

Factors

Economic Conditions

Subjective

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Attitude of host government War Currency inconvertibility Bureaucracy Blockage of fund transfers Corruption

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HAZARDS BASED ON GOVERNMENT ACTION. Marketers should consider a number of political risks : Confiscation : Is a process of a Government taking ownership of a property without paying any compensation. Eg : Chinese confiscation of American Property after coming to power in 1949. Expropriation : The Government takes ownership and offers some compensation.

Nationalization : Involves government ownership and it is the Government itself that operates the business being taken over. Domestication : Foreign companies offer voluntarily or are asked to offer control to a Nations Citizens. Eg : Pepsi, Coke, GM sold stake to locals. General Instability Risk : In relate to the uncertainty of the future viability of a host countrys political system.

Ownership / Control Risk : Possibility that a host countrys Government might take action to restrict investors risk. Operation risk : Possibility that a host countrys government might constraint an investors business operation in any one or all areas like production, marketing, finance etc. Transfer risk : Any future act by a government that might constraint the ability of a subsidiary to transfer payments, capital, profits out of a host country.

Attitude of Consumers in the Host Country

Some consumers may be very loyal to

homemade products.

Attitude of Host Government

The host government may impose special

requirements or taxes, restrict fund transfers, subsidize local firms, or fail to enforce copyright laws.

Blockage of Fund Transfers

Funds that are blocked may not be optimally

used.

Currency Inconvertibility
The MNC parent may need to exchange

earnings for goods.

War
Internal and external battles, or even the

threat of war, can have devastating effects.

Bureaucracy
Bureaucracy can complicate businesses.

Corruption
Corruption can increase the cost of

conducting business or reduce revenue.

Current and potential state of the countrys economy Financial distress Additional host government restrictions Moratorium on fund transfer Interest rates, exchange rates and inflation

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Current and Potential State of the Countrys Economy

A recession can severely reduce demand. Financial distress can also cause the

government to restrict MNC operations.

Indicators of Economic Growth

A countrys economic growth is dependent

on several financial factors - interest rates, exchange rates, inflation, etc.

Diversification of the economy Degree of reliance on a few key exports and the effects of a decline in the worldwide prices of those exports Exchange rate devaluation Frequency of government intervention in the money market and the ceilings of interest rates Possibility of recession

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Countrys attitude towards private enterprise Risk of currency devaluation Risk of government`s income reduction External flows dependence, Productivity restrictions Social pressures Attitude of consumers in the host country

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Macro-assessment of country risk

Country characteristics that affect profits Micro-assessment of country risk

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A macro-assessment of country risk is an overall risk assessment of a country without consideration of the MNCs business. A micro-assessment of country risk is the risk assessment of a country as related to the MNCs type of business.

The overall assessment of country risk thus consists of :

Macro-political risk

Macro-financial risk
Micro-political risk Micro-financial risk

A checklist approach involves rating and weighting all the identified factors, and then consolidating the rates and weights to produce an overall assessment. The Delphi technique involves collecting various independent opinions and then averaging and measuring the dispersion of those opinions.

Quantitative analysis techniques like regression analysis can be applied to historical data to assess the sensitivity of a business to various risk factors. Inspection visits involve traveling to a country and meeting with government officials, firm executives, and/or consumers to clarify uncertainties.

Iraqs invasion of Kuwait was difficult to forecast, for example. Nevertheless, many MNCs promptly reassessed their exposure to country risk and revised their operations. The 1997-98 Asian crisis also showed that MNCs had underestimated the potential financial problems that could occur in the high-growth Asian countries.

Country Risk Analysis