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

Perigrenees 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 countrys economy Financial distress in a country can encourage a government to implement policies that could limit the MNCs 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