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Country Risk Analysis

Country risk analysis is important for multinational corporations (MNCs) to (1) avoid high-risk countries, (2) monitor risk in countries where they operate, and (3) assess risks for new foreign projects. Events like crises in Russia, Indonesia, China and Latin America in the 1980s demonstrated this importance. Country risk depends on political factors like government attitudes and policies, and financial factors like economic conditions, interest and exchange rates, which can impact cash flows. MNCs assess overall macro risks and industry-specific micro risks using techniques like checklists, surveys and visits to rate countries and determine investment strategies.

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Ajay Gaur
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816 views11 pages

Country Risk Analysis

Country risk analysis is important for multinational corporations (MNCs) to (1) avoid high-risk countries, (2) monitor risk in countries where they operate, and (3) assess risks for new foreign projects. Events like crises in Russia, Indonesia, China and Latin America in the 1980s demonstrated this importance. Country risk depends on political factors like government attitudes and policies, and financial factors like economic conditions, interest and exchange rates, which can impact cash flows. MNCs assess overall macro risks and industry-specific micro risks using techniques like checklists, surveys and visits to rate countries and determine investment strategies.

Uploaded by

Ajay Gaur
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter 19

Country Risk Analysis


Why country risk analysis is
important
 It can be used by MNCs as a screening
device to avoid countries with excessive risk
 It can be used to monitor countries where the
MNC is presently engaged in international
business
 Assess particular forms of risk for a proposed
project considered for a foreign country
Increase Awareness of
Country Risk
 Perigrenee’s bond investment in Russia
and consumer business in Indonesia
 Crisis in China in 1989
 In the 1980s the crises in Iran,
Afghanistan and some Latin American
countries made MNCs realize the
importance of effective country risk
analysis
Political Risk Factors
 Attitude of consumers in the host
country
 Attitude of host government
 Blockage of fund transfers
 Currency inconvertibility
 War
 bureaucracy
Financial risk factors(1)
 Current and potential state of the country’s
economy
 Financial distress in a country can encourage
a government to implement policies that could
limit the MNC’s market penetration there
 Additional host government restrictions may
be enforced after an MNC establishes a
foreign subsidiary
Financial risk factors(2)
 Interest rates, exchange rates and
inflation can also have an impact on
each other, which makes the overall
assessment of their impact on the
economy more complex
 It includes an assessment of all factors
related to the foreign country that
influence the cash flow of the MNC
Types of country risk
assessment
 Macro-assessment of country risk
 Country characteristics that affect
profits
 Micro-assessment of country risk
Techniques to assess country
risk
 Checklist approach
 Delphi technique
 Quantitative analysis
 Inspection visits
 Combination of techniques
Comparing risk ratings among
countries
 An MNC may evaluate country risk for several
countries, perhaps to determine where to
establish a subsidiary
 Foreign investment risk matrix(FIRM)
 FIRM displays the financial risk by intervals
ranging across the matrix from acceptable to
unacceptable
 The importance of political risk vs financial
risk varies with the intent of the MNC
Use of country risk
assessment
 Incorporating country risk in capital
budgeting
 Adjustment of the discount rate
 Adjustment of the estimated cash flows
 Application of country risk analysis
Exposure to host government
takeovers
 Reducing exposure to host government
takeovers
 Use a short term horizon
 Rely on unique supplies or technology
 Hire local labor
 Borrow local funds
 Purchase insurance

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