Country Risk

Ankit KumarAnkur Verma

Anustup SreemaniArpit MangalAshish Dogra

Ashutosh Dubey

Arpit Mangal

Definition

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.

Arpit Mangal

Definition

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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; andto improve the analysis used in making long-term investment or financing decisions.

Arpit Mangal

Importance

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

Arpit Mangal

Awareness of Country Risk

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

Arpit Mangal

Factors

Political

Economic Conditions

Subjective

Financial

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Ashutosh Dubey

Political Risk Factors

Attitude of host government War Currency inconvertibility Bureaucracy Blockage of fund transfers Corruption

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Ashutosh Dubey

Political Risk

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.

Ashutosh Dubey

Political Risk

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.

Ashutosh Dubey

Political Risk

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.

Ashutosh Dubey

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.

Ankur Verma

Political Risk Factors

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.

Ankur Verma

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

Ankur Verma

Financial Risk Factors

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

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Ankur Verma

Financial Risk Factors

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.

Ankit Kumar

Economic Conditions

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 recession04/10/2023Country Risk Analysis 16

Ankit Kumar

Subjective factors

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

country04/10/2023Country Risk Analysis 17

Ankit Kumar

Types of Country Risk Assessment

Macro-assessment of country risk

Country characteristics that affect profits

Micro-assessment of country risk

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Ankit Kumar

Types of Country Risk Assessment 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.

Ashish Dogra

Types of Country Risk Assessment The overall assessment of country risk

thus consists of : Macro-political risk Macro-financial risk Micro-political risk Micro-financial risk

Ashish Dogra

Techniques of Assessing Country Risk

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.

Ashish Dogra

Techniques of Assessing Country Risk

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.

Ashish Dogra

Applications ofCountry Risk Analysis

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.

Ashish Dogra

Indicators of high country risk

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!!!!!!

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Anustup Sreemani

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Country risk rankings Least risky countries, Score out of 100Source: Euromoney Country risk March 2010[1]

Rank Previous Country Overall score

1 1 Norway 94.05

2 2 Luxembourg

92.35

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

9 8 Netherlands

84.86

10 9 Australia 84.16

Country risk rankingsLeast risky countries, Score out of 100Source: Euromoney Country risk March 20101

Anustup Sreemani

Summary

Potential risk & rewards of doing business in a country

Factors› Political› Financial› Economic

Risk Assessment Measurement & comparison of country risk Terrorism

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Anustup Sreemani

THANK YOU

Country Risk Analysis

Anustup Sreemani