ACADEMIA SUMMARIES

Corporate Risk Assessment and

Business Strategy. A Prime Task for
Senior Management
The original paper contains 8 sections, with 10 passages identified by our machine learning
algorithms as central to this paper.

Paper Summary
SUMMARY PASSAGE 1

Section 1
Our framework for country risk analysis extends this tendency and develops a more complete
depiction of the risks and opportunities faced by managers. We emphasize the heterogeneity that
exists within country risk across various industries, firms , and even projects. We include three
detailed applications of the broader governance framework that we provide.

SUMMARY PASSAGE 2

[A]Risk And Capital Flows

Korea, Romania, and the Czech Republic), investors contemplating entry faced the equivalent of an
increase in corporate income taxes of 33 to 46 percent relative to the costs of entering a country with
stronger governance (i.e., the United States or Chile) (Wei and Hall 2001). In a similar analysis of
portfolio flows, countries were penalized by 900 to 1,316 basis points. Countries with poorer
governance also accumulated more debt relative to foreign direct investment (FDI) and more foreign
currency-denominated debt pointing to a potential correlation between governance and the likelihood
of financial crises (Wei and Wu 2001;Johnson et. al. 1998;Johnson 2002).
SUMMARY PASSAGE 3

5
Although such surveys and broad quantitative studies are useful for supporting the notion that
governance matters and hint at the complexities in ascertaining precisely how, neither the surveys
nor the studies provide substantial assistance to managers seeking to avoid the risks and seize the
opportunities provided by cross-national differences in governance. The development of such a
strategic framework requires an assessment of the global, national, industrial, and firm-level effects of
governance. This is what we attempt to fashion here.

SUMMARY PASSAGE 4

[A]The Dynamics Of Global Governance

There is no dissolvent to the tensions afflicting the world; quite the contrary, globalization is a
stimulus. Investors should therefore expand abroad to seize the advantage provided by these
different institutional structures, prices, cultures of management, and networks of international
governance in full recognition of the complexities involved in doing business "over there."

SUMMARY PASSAGE 5

[A]Comparing Different Business Conditions In Distinct

Territories
International diplomacy now regularly associates state institutions with corporations and non-
governmental organizations. Corporations negotiate the terms of their investments and the
distribution of its rents around the world with other firms, through direct discussions with
governments, and more indirectly through government channels.

SUMMARY PASSAGE 6

B]Markets
Relative prices for goods and services within the national economy relate to relative prices on world
markets through the balance of payments and the foreign exchange rate of the national currency with
regard to other currencies trading on world markets. Over the past decade, developing country
governments have sought to overturn the status quo distribution of income and wealth by attracting
foreign investors willing to fund their domestic transformation. Investors should recognize that,
despite the large potential for mutual gain, the interests of the developing country governments thus
differ markedly for their own goal of profit maximization: the division of rents as between the host
country and the parent company is and will remain a source of tension.
SUMMARY PASSAGE 7

[A]Business Systems And Indu Stry Analysis

At one level, preferential 14 treatment clearly signals a government's desire for international
investment and a more favorable investment climate. Such preferences, however, may be removed
or reversed in the future, requiring a careful analysis of the credibility of the policy regime in the light
of the country's position in the state system and the global economy, the structure of its national
political institutions, and the preferences of other influential actors in the polity over the time horizon
of the relevant policies. Less favorable policies may actually be preferred if they are perceived by
investors as more stable.

SUMMARY PASSAGE 8

[A]Firm Level Analysis

Firms, however, differ in their ability to manage these relationships (Lorenzoni and Lipparini
1999;Anand and Khanna 2000). Differences in the choice of governance or in its effectiveness may
lead firms in the same country and industry to face substantially different risk profiles if the host
country government perceives that reneging, altering, or reinterpreting an agreement with a
subsidiary that includes a well-connected local partner and multinational working closely together
involves lower political net benefits than a similar policy change imposed upon a solely foreign
venture. As ventures that involve local partners are more familiar with local factor-markets, culture,
politics, and other host country characteristics, joint ventures typically source and hire more from the
domestic economy than do their purely foreign-owned counterparts.

SUMMARY PASSAGE 9

[A]Applications
Were the world economy to truly converge into a single market, however, site selection would be
irrelevant as political, economic, and cultural characteristics would be identical (Ghemawat 2001).
Instead, nations remain distinct entities in each of these three dimensions, competing with each other
for the possibility of hosting Intel's US $500 million plant and the 2,000 jobs that it will bring to the
local economy directly, plus the additional jobs that could follow if other high-technology firms follow
Intel's lead. This process of competition among states for an investment of this size substantially
aided Intel in securing a larger share of the rents than would be possible for a smaller investor with
less potential spillover benefits (Gourlay 2001).
SUMMARY PASSAGE 10

Maria Figueres,
Consider, next, the outcome of investors who adopted the widely recommended governance
mechanism of taking on a local (i.e., host-country) partner with privileged political access in the cases
of Malaysia and Indonesia. The differential success of investors in these two countries following the
1997 Southeast Asian financial crisis illustrates the potential for a political backlash. Because the
formal institutional supports for private infrastructure investment in these countries were so weak, as
discussed above, Two lessons emerge from the experience of investors in the independent power
sector in Southeast Asia.