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.
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
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
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
Political EconomicFinancial Factors Conditions Subjective Country Risk Analysis 10/31/2011 6
Attitude of host government War Currency inconvertibility Bureaucracy Blockage of fund transfers Corruption Country Risk Analysis 10/31/2011 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.
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.
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.
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.
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.
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.
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
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.
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
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
Macro-assessment of country risk Country characteristics that affect profits Micro-assessment of country risk Country Risk Analysis 10/31/2011 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.
The overall assessment of country risk thus consists of : Macro-political risk Macro-financial risk Micro-political risk Micro-financial risk
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.
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.
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.
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
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 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
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