Chapter 19 Country Risk Analysis

1
Chapter 19 Country Risk Analysis
2
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

3
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

4
Political Risk Factors

• Attitude of consumers in the host country
• Attitude of host government
• Blockage of fund transfers
• Currency inconvertibility
• War
• bureaucracy

5
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

6
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

7
Types of country risk assessment

• Macro-assessment of country risk
• Country characteristics that affect profits
• Micro-assessment of country risk

8
Techniques to assess country risk

• Checklist approach
• Delphi technique
• Quantitative analysis
• Inspection visits
• Combination of techniques

9
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

10
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

11
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