4. risk in business environment

7/30/2019 4. Risk in Business Environment

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Risk in Business Environment

Bedi Suresh,

Business Environment

Chapter 4

Risk in Business EnvironmentPages 52 to 65


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What is Risk

Risk is a state in which the number of possible

future events/outcomes are larger than the

number of events outcomes which will actually

take place

Different with uncertainty


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Scores are aggregated and updated regularly as the

environment changes.

Countries are rated as follows:

Score Risk Assessment

0-19 Minimal risk

20-34 Acceptable

35-44 High risk

> 45 Prohibitive


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Methods of Assessing Risk

1. Checklist

It is a qualitative technique

Make a list of those variables which affect thebusiness environment and assign some

risk element in it

This method gives a rough approximation aboutthe business environment risk and the

future outlook


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Continued---

Checklist can be used for comparing the same

country at different time periods or different

countries


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2. Expert based scoring system

Questionnaires designed to assess

environment risk are sent to acknowledged

experts and their opinions, observations and

comments are obtained

Scores are assigned to each question and then

it is averaged or aggregated

Can be used for cross national comparisons

Can be sent to business executives, prominent

citizens or social leaders


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Continued---

Delphi technique can be used


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3. Economic Methods

Are used to quantify risk

These methods are used for forecasting

Factors are identified which affect businessenvironment

Cause effect relationship is established

Well known methods are Regression AnalysisMethod and Time Series Analysis Method


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4. Rating and Ranking System

Similar to expert based scoring system

Countries are ranked

Tools for investors and business seekinginformation about the financial risk

Country rating is done on the basis of a number

of parameters Economic, Social, Financial,Political etc.

Standard and Poor, Bank of America


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5. Assessment of Countrys

Creditworthiness

Credit worthiness is based on a judgment of

the borrower by the potential creditor, of its

capacity to repay the new debt

Risk of default on a debt obligation is low

Credit worthiness of a country is the leading

indicator of its business environment risk


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6. Risk Benchmarking

Benchmarking is a process in whichorganizations evaluate various aspects of theirprocesses in relation to ideal practice

The acceptable range of different environmentfactors in a normally functioning healthyeconomy is ascertained and set as abenchmark

Then the environment risk of some othercountries is calculated by using the samecriteria and compared with the benchmarked

risk level


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Continued---

Relative riskiness of country 1

Actual level of business environment risk of

country 1

Actual business environment risk of the

reference country

0 taken as benchmark


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Risks to be studied

Country Risk

Political Risk


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Country Risk Analysis

Country risk refers to the likelihood that

changes in the business environment adversely

affects operating profits or the value of assets

in a specific country

Therefore, a collection of risks associated with

investing in a foreign country is called as

country risk

Includes political risk, exchange rate risk,

economic crisis, transfer risk


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Sources of Country Risk

Major types or sources of country risk are

political sources, socio-cultural sources and the

external sources


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Economic sources

GDP per head

Changes in industrial licensing policy

Variations in price controlTaxation and subsidy change

Changes in competitive environment

Inflationary pressureChanges in income and wealth distribution

Growth of unemployment and poverty


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Social and Cultural sources

Changes in family patterns

Changes in quality and level of education

Changing religious and ethical valuesChanges in life style and living conditions

Economic nationalism


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External sources

Changes in balance of payments

Conditions on repatriation of profits

Growth rate and variability of exports andimports

Changing volume, pattern and direction of

foreign investmentTrade disputes b/w countries


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Impact of country risk factors

Monetary policy swings

Monetary policy is the process by which the

central bank controls the supply of money,

availability of money and rate of interest.


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Expansionary Monetary Policy

Increases the total supply of money in the

economy

Used to combat unemployment in a recession

by lowering interest rates

Low rate of interest encourages consumer and

investment takes place


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Contractionary Policy

Decreases the total money supply

Involves raising interest rates in order to deal

with inflation

Demand for consumer durables may decrease

as these goods are heavily based on consumer

credit


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Industries of high national priority

To reduce the adverse impact of monetary

policy changes on selected industries, central

bank keeps a margin


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Fiscal Policy Variations

Is a measure which deals directly with those

matters which immediately influence the

consumption and investment expenditure and

hence, the income, output and employment inthe economy

In order to meet the deficit of budget

government imposes new taxes, take loans,reduce expenditure or issue the fresh currency


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Continued---

Every business is impacted by the differentmeans of fiscal policy

Government itself is a big buyer and investor,

reduced expenditure means slowdown ingovernment demand and slower growth ofpublic infrastructure

Rise in commodity taxes has a multiplier effectIf government starts borrowing it affects growthof private investment


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Exchange control

These controls greatly affect

Domestic firms with international businesstransactions

Foreign operations of multinational companies

This step is initiated if

Dwindling foreign exchange reserves

Persistent balance of payments deficits

Mounting burden of external debt

Difficulties of external debt servicing


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Exchange control measures

Multiple exchanges rates

Ex. Import of luxury goods may be applied high

exchange rate

Critically industry input or a consumer good of

basic necessity may be applied a low exchange

rate

High exchange rate may be used to attract

foreign investment


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Import controls

These controls are applied when the trade and

balance of payments positions are adverse and

foreign exchange reserves decline

Takes place through higher import duties and

non tariff measures

Firms, both with and without international

business operations, are affected by import

controls


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Trade related investment measures

TRIMS

Affect multinational companies and their

affiliates

Two measures

1. LCRs Local content requirements

2. DBRs Dividend balancing requirements


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Price Controls

Price controls are generally applied by the

governments on products of mass consumption

and substantial public interest like sugar,

cement, petroleum etc.

Price controls are often complimented by

subsidies and distribution of controls


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Political Risk Analysis

The risk that an investments could suffer as a

result of political changes or instability in a

country

The philosophy of the ruling government plays

a dominant role in determining the current

political environment

MNCs have to deal with domestic political andforeign political risks


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Types of political risk

A firm could be exposed to more than one type

of risk at a time

Franklin Root (1982) has given the following

classification of political risk


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General instability risk

This risk originates from the uncertainty about

the future viability of the host countrys system

The political system may change with a change

in government

Problem of political instability is more in poor

countries

This problem is further worsen in countries

which are heavily dependent on economic,

military and political support from outside


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Ownership Risk

It results from the probability that the

government might take action which may lead

to erosion in ownership

There could be the risk of confiscation,

expropriation, domestication, nationalization


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Operation risk

The government may restrict the operations of

the firm in production, finance, human resource

management and international business


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Transfer Risk

This risk applies to MNCs having affiliates in

foreign countries or to the domestic firms

having international business operations or

subsidiaries in the foreign countries

The risk arises from the possible actions of a

government which affect remittances or transfer

of profits, funds or assets.

4. risk in business environment

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