Country risk analysis is used to assess potential risks and opportunities of conducting business in a foreign country. It represents the potentially adverse impacts of a country's political, economic, and financial environment on a company's cash flows. Country risk analysis can be used to monitor risk in countries where a company operates, screen countries to avoid excessive risk, and improve investment and financing decisions.

2.  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.

3. 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.
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4.  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

5.  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

6. Political
Economic
Financial Factors Conditions
Subjective
Country Risk Analysis 10/31/2011 6

7.  Attitude of host government
 War
 Currency inconvertibility
 Bureaucracy
 Blockage of fund transfers
 Corruption
Country Risk Analysis 10/31/2011 7

8.  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.

9.  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.

10.  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.

11.  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.

12.  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.

13.  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.

14.  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

15.  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.

16.  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

17.  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
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18.  Macro-assessment of country risk
 Country characteristics that affect profits
 Micro-assessment of country risk
Country Risk Analysis 10/31/2011 18

19.  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.

20.  The overall assessment of country risk
thus consists of :
 Macro-political risk
 Macro-financial risk
 Micro-political risk
 Micro-financial risk

21.  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.

22.  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.

23.  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.

24.  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

25. 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 84.16
Country Risk Analysis 10/31/2011 25

26.  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

27. Country Risk Analysis