Chapter 19

Country Risk Analysis

Why country risk analysis is
important
 It can be used by MNCs as a screening
device to avoid countries with excessive risk
 It can be used to monitor countries where the
MNC is presently engaged in international
business
 Assess particular forms of risk for a proposed
project considered for a foreign country
Increase Awareness of
Country Risk
 Perigrenee’s bond investment in Russia
and consumer business in Indonesia
 Crisis in China in 1989
 In the 1980s the crises in Iran,
Afghanistan and some Latin American
countries made MNCs realize the
importance of effective country risk
analysis
Political Risk Factors
 Attitude of consumers in the host
country
 Attitude of host government
 Blockage of fund transfers
 Currency inconvertibility
 War
 bureaucracy
Financial risk factors(1)
 Current and potential state of the country’s
economy
 Financial distress in a country can encourage
a government to implement policies that could
limit the MNC’s market penetration there
 Additional host government restrictions may
be enforced after an MNC establishes a
foreign subsidiary
Financial risk factors(2)
 Interest rates, exchange rates and
inflation can also have an impact on
each other, which makes the overall
assessment of their impact on the
economy more complex
 It includes an assessment of all factors
related to the foreign country that
influence the cash flow of the MNC
Types of country risk
assessment
 Macro-assessment of country risk
 Country characteristics that affect
profits
 Micro-assessment of country risk
Techniques to assess country
risk
 Checklist approach
 Delphi technique
 Quantitative analysis
 Inspection visits
 Combination of techniques
Comparing risk ratings among
countries
 An MNC may evaluate country risk for several
countries, perhaps to determine where to
establish a subsidiary
 Foreign investment risk matrix(FIRM)
 FIRM displays the financial risk by intervals
ranging across the matrix from acceptable to
unacceptable
 The importance of political risk vs financial
risk varies with the intent of the MNC
Use of country risk
assessment
 Incorporating country risk in capital
budgeting
 Adjustment of the discount rate
 Adjustment of the estimated cash flows
 Application of country risk analysis
Exposure to host government
takeovers
 Reducing exposure to host government
takeovers
 Use a short term horizon
 Rely on unique supplies or technology
 Hire local labor
 Borrow local funds
 Purchase insurance