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.
Country Risk Analysis 10/31/2011 3
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
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7. Attitude of host government
War
Currency inconvertibility
Bureaucracy
Blockage of fund transfers
Corruption
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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
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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
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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
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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!!!!!!
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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
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26. 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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