Shapiro: Chapter 6

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Shapiro Chapter 6

• Country Risk Analysis

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Types of Political Risk

• Expropriation
• Currency controls
• Trade controls
• Tax and labor laws
• Regulatory restrictions
• Local production requirements

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Country Risk Analysis

• Political Stability
• Economic Factors
• Subjective Factors

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Political Stability

• Frequency of government change
• Level of violence
• Number of armed insurrections
• Conflicts with other states

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Political Stability

• Third World Countries
• They lack social cohesion, political legitimacy,
  and the institutional infrastructure necessary
  for economic growth.

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Economic Factors

• Inflation
• Balance of payments
• Growth rate of per capita GDP
• In general, the better a countrys economic
  outlook, the less likely it is to face political
  and social turmoil that will inevitably harm
  foreign countries.

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Worlds Largest Economies
Country GDP, Billions





8
Worlds Largest Economies
Country GDP, Billions





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Worlds Largest Economies
Country GDP, Billions
United States 10,208
Japan 4,149
Germany 1,847
United Kingdom 1,424
France 1,307
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Worlds Largest Economies
Country GDP, Billions
China 1,159
Italy 1,089
Canada 700
Mexico 618
Spain 582
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Subjective Factors

• Attitude toward
• private enterprise
• multinationals
• foreign direct investment (FDI)

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Political Risk Property Rights

• Uncertainty over property rights
• Governments ability to expropriate
• legal title
• stream of income
• Constraints on use of property

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Key Questions to Ask

• Has reform been institutionalized?
• Are regulatory and legal systems fair?
• Is the government competent in maintaining
  currency and political stability?

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Capital Flight

• Export of savings legal and illegal
• Fear of safety of capital (purchasing power)
• Impact of
• inflation
• devaluation (Mexico-1994)
• artificially low interest rates

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Country Risk Europe

• Over-regulated economies
• Inflexible labor markets
• Overly expansive social welfare programs

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Country Risk United States

• Litigation risks
• Employment laws
• Environmental laws

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Country Risk Japan

• Rigid business system
• Extensive government regulation
• Strong social traditions

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Economic Risk Factors

• Fiscal irresponsibility
• Monetary instability
• Controlled exchange rate systems
• Wasteful government spending

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Country Risk Factors (1)

• Large government deficit relative to GDP
• High rate of monetary expansion
• Low yielding government expenditures
• Price controls
• Interest rate ceilings
• Trade restrictions

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Country Risk Factors (2)

• Rigid labor laws
• High tax rates
• Many state-owned firms statism
• Socialist philosophy governments
  responsibility
• Pervasive corruption

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Positive Economic Factors

• Economic incentives
• Secure legal rights
• Low taxes
• Free markets
• Minimal regulations
• Stable economic policies

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Mexico then and now
Old Mexican Model New Mexican Model
Large budget deficits Fiscal restraint
Expansion of money Monetary discipline
Nationalization Privatization
Restricted FDI Attract FDI
High tax rates Tax reform
Import substitution Trade liberalization
Controlled currency Free exchange rates
Price interest controls Market-based rates
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