Grp15 country risk analysis


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Grp15 country risk analysis

  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 longterm investment or financing decisions.
  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. Political Financial Factors Economic Conditions Subjective 5
  5. 5.  Attitude of host government  War  Currency inconvertibility  Bureaucracy  Blockage of fund transfers  Corruption
  6. 6. 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. 
  7. 7. 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. 
  8. 8. 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. 
  9. 9.  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.
  10. 10.  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.
  11. 11.  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.
  12. 12.  Current and potential state of the country’s economy  Financial distress  Additional host government restrictions  Interest rates, exchange rates and inflation
  13. 13.  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.
  14. 14.  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
  15. 15.  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
  16. 16.  Macro-assessment of country risk  Country characteristics that affect profits  Micro-assessment of country risk
  17. 17. 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.
  18. 18.  The overall assessment of country risk thus consists of :  Macro-political risk  Macro-financial risk  Micro-political risk  Micro-financial risk
  19. 19. 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.
  20. 20.  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.
  21. 21.  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.
  22. 22.          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!!!!!!
  23. 23. Country risk rankings Least risky countries, Score out of 100Source: Euromoney Country risk March 20131 Country risk rankings Least risky countries, Score out of 100Source: Euromoney Country risk March 2013 Overall score Rank Previous Country 1 1 Norway 95.05 2 2 Luxembou rg 96.35 3 3 Switzerlan d 88.65 4 4 Denmark 87.55 5 6 Finland 85.81 6 5 Sweden 83.81 7 7 Austria 87.50 8 11 Canada 89.09 9 8 Netherland s 81.86 10 9 Australia 88.16
  24. 24.      Potential risk & rewards of doing business in a country Factors • Political • Financial • Economic Risk Assessment Measurement & comparison of country risk Terrorism