Country Risk Analysis Ppt Sec B Group 3

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Country Risk Analysis Ppt Sec B Group 3

  1. 1.  Country Risk Analysis is assessment of potential risks and rewards from doing business in country. Country risk represents potentially adverse impact of a country’s environment on the cash flow of the firm.
  2. 2. Country risk represents the potentially adverse impact of a country’s environment on the MNC’s cash flows.Country risk can be used: to monitor countries where the MNC is presently doing business; as a screening device to avoid conducting business in countries with excessive risk; and to improve the analysis used in making long- term investment or financing decisions. Country Risk Analysis 10/31/2011 3
  3. 3.  Used to monitor countries where the firm is presently engaged in international business Used by the firm as a screening device to avoid countries with excessive risk Used to assess particular forms of risk for a proposed project considered for a foreign country
  4. 4.  Crisis in Mexico 1982 Crisis in China in 1989 1997 East Asian Currency crisis Crisis in Iraq Crisis in Iran, Afghanistan Recent sub-prime crisis starting in USA
  5. 5. Political EconomicFinancial Factors Conditions Subjective Country Risk Analysis 10/31/2011 6
  6. 6.  Attitude of host government War Currency inconvertibility Bureaucracy Blockage of fund transfers Corruption Country Risk Analysis 10/31/2011 7
  7. 7.  HAZARDS BASED ON GOVERNMENT ACTION. Marketers should consider a number of political risks : Confiscation : Is a process of a Government taking ownership of a property without paying any compensation. Eg : Chinese confiscation of American Property after coming to power in 1949. Expropriation : The Government takes ownership and offers some compensation.
  8. 8.  Nationalization : Involves government ownership and it is the Government itself that operates the business being taken over. Domestication : Foreign companies offer voluntarily or are asked to offer control to a Nations’ Citizens’. Eg : Pepsi, Coke, GM sold stake to locals. General Instability Risk : In relate to the uncertainty of the future viability of a host country’s political system.
  9. 9.  Ownership / Control Risk : Possibility that a host country’s Government might take action to restrict investor’s risk. Operation risk : Possibility that a host country’s government might constraint an investor’s business operation in any one or all areas like production, marketing, finance etc. Transfer risk : Any future act by a government that might constraint the ability of a subsidiary to transfer payments, capital, profits out of a host country.
  10. 10.  Attitude of Consumers in the Host Country › Some consumers may be very loyal to homemade products. Attitude of Host Government › The host government may impose special requirements or taxes, restrict fund transfers, subsidize local firms, or fail to enforce copyright laws.
  11. 11.  Blockage of Fund Transfers › Funds that are blocked may not be optimally used. Currency Inconvertibility › The MNC parent may need to exchange earnings for goods.
  12. 12.  War › Internal and external battles, or even the threat of war, can have devastating effects. Bureaucracy › Bureaucracy can complicate businesses. Corruption › Corruption can increase the cost of conducting business or reduce revenue.
  13. 13.  Current and potential state of the country’s economy Financial distress Additional host government restrictions Moratorium on fund transfer Interest rates, exchange rates and inflation Country Risk Analysis 10/31/2011 14
  14. 14.  Current and Potential State of the Country’s Economy › A recession can severely reduce demand. › Financial distress can also cause the government to restrict MNC operations. Indicators of Economic Growth › A country’s economic growth is dependent on several financial factors - interest rates, exchange rates, inflation, etc.
  15. 15.  Diversification of the economy Degree of reliance on a few key exports and the effects of a decline in the worldwide prices of those exports Exchange rate devaluation Frequency of government intervention in the money market and the ceilings of interest rates Possibility of recession Country Risk Analysis 10/31/2011 16
  16. 16.  Country’s attitude towards private enterprise Risk of currency devaluation Risk of government`s income reduction External flows dependence, Productivity restrictions Social pressures Attitude of consumers in the host country Country Risk Analysis 10/31/2011 17
  17. 17.  Macro-assessment of country risk Country characteristics that affect profits Micro-assessment of country risk Country Risk Analysis 10/31/2011 18
  18. 18.  A macro-assessment of country risk is an overall risk assessment of a country without consideration of the MNC’s business. A micro-assessment of country risk is the risk assessment of a country as related to the MNC’s type of business.
  19. 19.  The overall assessment of country risk thus consists of :  Macro-political risk  Macro-financial risk  Micro-political risk  Micro-financial risk
  20. 20.  A checklist approach involves rating and weighting all the identified factors, and then consolidating the rates and weights to produce an overall assessment. The Delphi technique involves collecting various independent opinions and then averaging and measuring the dispersion of those opinions.
  21. 21.  Quantitative analysis techniques like regression analysis can be applied to historical data to assess the sensitivity of a business to various risk factors. Inspection visits involve traveling to a country and meeting with government officials, firm executives, and/or consumers to clarify uncertainties.
  22. 22.  Iraq’s invasion of Kuwait was difficult to forecast, for example. Nevertheless, many MNCs promptly reassessed their exposure to country risk and revised their operations. The 1997-98 Asian crisis also showed that MNCs had underestimated the potential financial problems that could occur in the high-growth Asian countries.
  23. 23.  Large government deficit relative to GNP High rate of money expansion Substantial government spending yielding low rate of return High taxes Vast state-owned firms Attitude that government’s role is to maintain living standards Pervasive corruption Absence of basic government institutions  almost all are common for the developing countries!!!!!! Country Risk Analysis 10/31/2011 24
  24. 24. Country risk rankingsLeast risky countries, Score out of 100Source: Euromoney Country risk March 20101 Country risk rankings Least risky countries, Score out of 100Source: Euromoney Country risk March 2010[1] Overall Rank Previous Country score 1 1 Norway 94.05 Luxembour 2 2 92.35 g 3 3 Switzerland 90.65 4 4 Denmark 88.55 5 6 Finland 87.81 6 5 Sweden 86.81 7 7 Austria 86.50 8 11 Canada 86.09 Netherland 9 8 84.86 s 10 9 Australia 84.16Country Risk Analysis 10/31/2011 25
  25. 25.  Potential risk & rewards of doing business in a country Factors › Political › Financial › Economic Risk Assessment Measurement & comparison of country risk Terrorism Country Risk Analysis 10/31/2011 26
  26. 26. Country Risk Analysis

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