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Country Risk Analysis

Country risk analysis involves assessing political, financial, and other risks that could negatively impact a multinational corporation's cash flows in a given country. Political risks include attitudes of local consumers, actions of the host government like taxes and regulations, potential blockages of fund transfers, currency issues, and risks of war, bureaucracy, or corruption. Financial risks center around how economic growth, interest rates, exchange rates, and inflation could affect demand. Country risk is measured through both macro assessments of overall country risk and micro assessments specific to an MNC's industry and operations.

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34 views6 pages

Country Risk Analysis

Country risk analysis involves assessing political, financial, and other risks that could negatively impact a multinational corporation's cash flows in a given country. Political risks include attitudes of local consumers, actions of the host government like taxes and regulations, potential blockages of fund transfers, currency issues, and risks of war, bureaucracy, or corruption. Financial risks center around how economic growth, interest rates, exchange rates, and inflation could affect demand. Country risk is measured through both macro assessments of overall country risk and micro assessments specific to an MNC's industry and operations.

Uploaded by

V.Annapurna
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Country Risk Analysis

WhWhat is Country Risk?


• Country risk is the potentially adverse impact of a country’s
environment on an MNC’s cash flows.
• An MNC conducts country risk analysis when it applies capital
budgeting to determine whether to implement a new project in a
particular country or to continue conducting business in a particular
country.
Country Risk Characteristics

Political Risk Characteristics


1. Attitude of consumers in the host country - a tendency of
residents to purchase only locally produced goods.
2. Actions of the host government - A host government might
impose pollution control standards and additional corporate
taxes, as well as withholding taxes and fund transfer
restrictions.
3. Blockage of fund transfers - A host government may block fund
transfers, which could force subsidiaries to undertake projects
that are not optimal (just to make use of the funds).
4. Currency inconvertibility - Some governments do not allow the
home currency to be exchanged into other currencies.
Country Risk Characteristics

Political Risk Characteristics (cont)


5. War – Conflicts with neighboring countries or internal turmoil
can affect the safety of employees hired by an MNC’s
subsidiary or by salespeople who attempt to establish export
markets for the MNC
6. Inefficient bureaucracy - Bureaucracy can delay an MNC’s
efforts to establish a new subsidiary or expand business in a
country.
7. Corruption – Corruption can occur at the firm level or with
firm-government interactions. Transparency International has
derived a corruption index for most countries (see
www.transparency.org).
Country Risk Characteristics

Financial Risk Characteristics

Economic Growth is influenced by:


• Interest rates: higher interest rates tend to slow
growth and reduce demand for MNC products
• Exchange rates: strong currency may reduce demand
for the country’s exports, increase volume of imports,
and reduce production and national income.

• Inflation: inflation can affect consumers’ purchasing


power and their demand for MNC goods.
Measuring Country Risk

• Macro-assessment of country risk represents


an overall risk assessment of a country and
considers all variables that affect country risk
except those that are firm-specific.

• Micro-assessment of country risk involves


assessment of a country as it relates to the
MNC’s type of business.

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