ib class 02a
TRANSCRIPT
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Country
RiskAnalysis
T.J. Joseph
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Country Risk Analysis
Country risk represents the potentially adverse
impact of a countrys environment on the
international businessMostly country risk is arising frompolitical and
economic factors
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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.
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Political Risk Factors
Stability of the local political environment
Changing policies by successive political parties
Example: Case of Enron in India
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.
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Terrorism and 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.
Political Risk Factors
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Economic Risk Factors
Current and Potential State of the Countrys Economy
A recession can severely reduce demand.
Fiscal position of the government
BoP position
Macroeconomic instabilities
Examples: the crisis of Mexico, Russia, Brazil, Asia and,Argentina.
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Economic Risk Factors Indicators of Economic Growth
A countrys economic growth is dependent on several
financial factors - interest rates, exchange rates,
inflation, etc.
Resource Base
Consists of national, Human, and financial resources
Adjustment to External Shocks
How well a nation responds varies external shocks
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Measuring Political Risk
Country-specific perspective
A. Political Stability
Measured by: Frequency of government changes
Level of violence
Number of armed insurrections
Conflict with other states
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Measuring Political RiskB. Economic Factors
Indicators of political unrest
Rampant inflation
Balance of payment deficits
Slowed growth of per capita GDP
Intellectual Property Protection
C. Cultural and Institutional Factors
Cultural issues religious, language, tradition
Legal framework, IPRs, etc.
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Measuring Economic Risk Factors
How well is the country doing economically?
A. Fiscal Irresponsibility- high government deficits
B. Monetary Instability Money supply, inflation,
interest rate, Gross Domestic Savings
C. Controlled Exchange Rate System
- currency usually overvaluedD. Wasteful Government Spending
- inability to service foreign debt
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Key Indicators of Country Risk
Relative size of government debt
Money expansion
Existence of government-imposed barriers to
market forces
Level of tax rates
Amount of government-owned firms Political and fiscal responsibility
Amount and extent of corruption
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Key indicators of economic health
a. Structural incentives
b. Legal structure
c. Incentives to save
d. Open economy
e. Stable macroeconomic policies
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Techniques of Assessing Country Risk
Checklist approach
Delphi technique
Quantitative analysis
Inspection visits
Combination of techniques
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A checklist approachinvolves rating and weighting all
the identified factors, and then consolidating the
rates and weights to produce an overall assessment.
The Delphi techniqueinvolves collecting various
independent opinions and then averaging and
measuring the dispersion of those opinions.
Techniques of Assessing Country Risk
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Quantitative analysistechniques like regression
analysis can be applied to historical data to assess
the sensitivity of a business to various risk factors.
Inspection visitsinvolve traveling to a country and
meeting with government officials, firm executives,
and/or consumers to clarify uncertainties.
Techniques of Assessing Country Risk
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Often, firms use a combination of techniques for
making country risk assessments.
For example, they may use a checklist approach to
develop an overall country risk rating, and some of
the other techniques to assign ratings to the factors
considered.
Techniques of Assessing Country Risk
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Applications of Country Risk Analysis
While the risk assessment of a country can be
useful, it cannot always detect upcoming crises.
Iraqs invasion of Kuwait was difficult to forecast
The 1997-98 Asian crisis also showed that MNCs had
underestimated the potential financial problems
that could occur in the high-growth Asian countries.
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Reducing Exposureto Host Government Takeovers
The benefits of FDI can be offset by country risk, the
most severe of which is a host government takeover.
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.
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Reducing Exposureto Host Government Takeovers
Rely on Unique Supplies or Technology
In this way, the host government will not be able
to take over and operate the subsidiarysuccessfully.
Hire Local Labor
The local employees can apply pressure on theirgovernment.
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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 internationalagency insure to some extent various forms of
country risk.
Reducing Exposureto Host Government Takeovers
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Raters of Country Risk
Rating of a countrys creditworthiness is mainly
compiled by two magazines:
Institutional Investorand Euromoney
Their analyses are based on a number of
macroeconomic political and financial variables
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Note that the opinions of different risk
assessors often differ due to subjectivities in: identifying the relevant political and financial
factors,
determining the relative importance of eachfactor, and
predicting the values of factors that cannot be
measured objectively (methodology)