This document discusses country risk analysis. It defines country risk as the risk of investing or operating in a foreign country due to changes in the business environment that could negatively impact profits or asset values. Country risk can arise from political, economic, and financial factors such as currency controls, riots, wars, currency devaluations, recessions, and restrictions on transferring funds out of the country. The document outlines various methods and factors for analyzing country risk, such as assessing political stability, economic conditions, terrorism risk, exchange rate volatility, and strategies firms can use to reduce their exposure to host government takeovers.

1. COUNTRY RISKANALYSIS

2. Country risk refers to the risk of investing or lending
in a country, arising from possible changes in the
business environment that may adversely affect
operating profits or the value of assets in the
country.
For example, financial factors such as currency
controls, devaluation or regulatory changes, or
stability factors such as mass riots, civil war and
other potential events contribute to companies'
operational risks.
INTRODUCTION

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Country Risk is also sometimes referred to
as political risk; however, country risk is a
more general term that generally refers
only to risks affecting all companies
operating within or involved with a
particular country.
Country risk represents the potentially
adverse impact of a country’s environment
on the MNC’s cash flows.

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COUNTRY RISK ANALYSIS
 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.
CAN BE USED-

5. There are many factors from which risk can be analyzed
following are some examples that can be contributed :-
•Political
• Economic
•Location
•Transfer Risk
•Economical Risk
•Exchange Rate Risk
•Financial Factor
•Terrorism
•Corruption
FACTORS

6. POLITICAL RISK FACTORS
 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.

7. 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.

8. 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.

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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
ECONOMIC FACTORS

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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
SUBJECTIVE FACTORS

11. Global Terrorism Index
The Index is designed to assess the risk of terrorism in
each country, or against that country’s interests abroad,
over the next 12 months.
It does this by qualitatively rating five key factors for
each country – Motivation, Presence, Scale, Efficacy
and Prevention – and then giving each of these a
quantitative weighting in order to determine its
overall Terrorism Risk
TERRORISM

12. • Economic Risk is the significant change in the
economic structure or growth rate that
produces a major change in the expected
return of an investment.
• Arises from the changes in fundamental
economic policy goal
ECONOMIC RISK FACTOR

13. •Transfer Risk is the risk arising from a decision by a foreign
government to restrict capital movements . Restrictions could
make it difficult to repatriate profits, dividends, or capital.
•It usually is analyzed as a function of a country's ability to
earn foreign currency, with the implication that difficulty
earning foreign currency increases the probability that some
form of capital controls can emerge
TRANSFER RISK FACTOR

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Exchange Risk is an unexpected adverse movement in the
exchange rate. Exchange risk includes an unexpected
change in currency regime such as a change from a fixed
to a floating exchange rate.
A country's exchange rate policy may help isolate
exchange Risk. Managed floats, where the government
attempts to control the currency in a narrow trading
range, tend to possess higher risk than fixed or currency
board systems.
Floating exchange rate systems generally sustain the
lowest risk of producing an unexpected adverse exchange
movement.
The degree of over-or under-valuation of a currency also
can help isolate exchange rate risk
EXCHANGE RISK FACTOR

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Location or Neighbor hood Risk includes
spillover effects caused by problems in a region,
in a country's trading partner, or in countries
with similar perceived characteristics.
Geographic position provides the simplest
measure of location risk. Trading partners,
international Trading alliances, size, borders, and
distance from economically or politically
important countries or regions can also help
define location risk
LOCATION RISK FACTORS

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 Sovereign Risk concerns whether
 a government will be unwilling or unable
to meet its loan obligations , or is likely to
renege on loans it guarantees.
 Sovereign risk can relate to transfer risk
in that a government may run out of
foreign exchange due to unfavorable
developments in its balance
ofpayments.
S
SOVEREIGN RISK FACTOR

17. 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.
FINANCIAL RISK FACTORS

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.
TYPES OF COUNTRY RISK
ASSESSMENT

19. To reduce the chance of a takeover by the host
government, firms often use the following strategies:
Use a Short-Term Horizon
This technique concentrates on recovering cash
flow quickly.
REDUCING EXPOSURE
TO HOST GOVERNMENT TAKEOVERS

20. Rely on Unique Supplies or Technology
 In this way, the host government will not be able to take
over and operate the subsidiary successfully.
 Hire Local Labor
 The local employees can apply pressure on their
government.
REDUCING EXPOSURE
TO HOST GOVERNMENT TAKEOVERS

21. Borrow Local Funds
The local banks can apply pressure on their government.
Purchase Insurance
Investment guarantee programs offered by the home
country, host country, or an international agency insure
to some extent various forms of country risk.
REDUCING EXPOSURE
TO HOST GOVERNMENT
TAKEOVERS

22. Thank You