GSFM7223 Economics for Managers

TOPIC 7 SUB-TOPIC(s) Link (to Course Learning Outcome)

Globalization 7.0 Political And Country Risk Analysis CLO5
And 7.1 Elements Of Political Risk
Government
Relation

7.0 Political and Country Risk Analysis

Every firm would like to expand their company when there is an opportunity. Expanding company
mean more profits in future and long-term survival to the company. But expanding company is not an
easy job. One wrong decision not only can harm expanded company but also major company itself.
Due to that a good and accurate analysis need to be done before making any expanding decision. Most
major analysis is Country Analysis. How can country risk analysis affect firm decision to expand their
businesses?
Country Risk Analysis is the method use by the firm to analysis the ability and the situation of
the selected country in. This analysis is focusing on politic, economic, and social factor. Based on this
analysis firm can evaluate the risk of expanding their business into this country. If the risks are low,
then firm will make decision to expand business in that country but if the risk is high then firm will not
expand their business. Component under country risk analysis is divided into SEVEN (7) as follow:
➢ Economic Risk
Good economic indicator shows there are possible opportunity to get more profits from that
country. Economic risk is the risk of possible issues that can affect business due to the changes in
economic in foreign country. Example economics risk factors are such as changes in government
policy, trading partners, ruling government and economic growth (GDP). All these factors can affect
country and firm.

➢ Political Risk
Political Risk is the analysis of risk based on stability of the political situation the country.
Unstable political situation can create havoc in the country and effect business. Political situation such
as ruling party, corruption, transparent of the government and political intervention will help firm to
evaluate the cost and risk doing business in that country. High political risk mean political situation on
that country are not stable and business will not expand their business.

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➢ Sovereign Risk
Is the risk analysis on the capability of the country to repay their country debt. By paying debt of
the country on time it will show that the country can be trusted and dependable.

➢ Neighborhood Risk
Other than analyze risk in that county, we also need to see possible threat to that country from
outside such as neighbor country. Changes in neighbor countries also can sometimes affect business
on the country and country economics. The cause of the neighbor country can happen due to
geographical, trading partner, allies, and country perceived characteristic.

➢ Subjective Risk
Is the risk where firm analyze based on the subjective things related with the people and
customer in that country such as emotions, cultures, behaviors, tastes, preferences, lifestyles, religions,
caste, and norm. All these subjective factors can affect the survival and profits of the company.

➢ Transfer Risk
Firm will analyze the willingness of the country to permit firm to transfer out their money. Other
that use to invest, firm also will send back their profits to the HQ. Willingness of country will affect firm
decision to expand their business. If the country transfer risk is high, then firm will not expand business
in that country.

➢ Exchange Risk
Exchange risk is the risk where firm analyze based on change in exchange rate. Unstable or
high fluctuation in exchange market will affect export, import, balance of payment, inflation and many
more. Exchange risks are broad and have many factors that can affect it. High exchange risk shows
the country exchange rates are not stable. Due to that firm cost of production or cost of export will be
high.
Other than above risk, firm also will analyze certain important factors such as currency
reserves, interest rate, unemployment, and inflation of the country.

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7.1 Elements of Political Risk

Interference of government or ruling party in firm business have become norm in most of the
country. Government as institution that manage a country involved in firm affair when it’s related with
environtment, unemployment, health and safety, workers right and consumer right. Government will
involve with using certain tools such as tax, tariff, policies, law and regulation, subsidies and many
more. There are few people have said that political risk will create negative result where it will firm
might feel like they don’t have any freedom to make decision or businesses in that country and
eventually contribute to leaving the country. Element of political risk are divided into FIVE (5) as
follow:

➢ Operation

Risk where the ruling party come with decision or policy that may effect firm operations such as
taxation, regulation on product content, labour salary and method of production. These government
decision may increase the cost of operation for the firm and effect their business.

➢ Asset Risk

Risk where ruling party transfer the ownership of private firm to government, taking firm asset
for the public interest, restriction on asset owernership, regulation on local shareholder and loca
directorship that will effect firm businesses. Asset risk may demotivate firm and decrease investment
in that country.

➢ Personnel

Risk where firm get certain negative behaviour such as threat, kidnnapping, sabotage and
terrorism that related with political people due to did’t follow order from them. This may result firm feel
unsafe to do business in that country.

➢ Transfer Risk

Risk where the ruling party didn’t pay make royalty payment to firm, control transfer of profits to
HQ and also risk where firm can’t change local currency to other country currency. This will affect firm
capital and long term plan.

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➢ Contractual Risk

Risk where political party change the contract because of law or bureucratic or terminate the
contract because of violence of contract because of political change, revolution or war. Firm may feel
not confident to do business in that country and withdraw their investment.

- end of topic –

References:
1. Froeb, L., McCann, B., Ward, M., & Shor, M. (2016). Managerial Economics. 4th Edition:
Cengage Learning.
2. Paul G. F., Economics for Managers. 3rd edition: Pearson Education Limited
3. Sloman, John and Garratt, D., Wride,A., (2015), Economics, 9th edition, Pearson Education
Limited.
4. Coface. (2018). 7 types of country risk assessment. Available at:
http://blog.coface.com.au/country-risk/7-types-of-country-risk-
assessment/#:~:text=Country%20risk%20assessment%2C%20also%20known,a%20country%
20with%20excessive%20risk [Accessed: 24 January 2022]
5. Britannica. (2017). political risk analysis. Available at:
https://www.britannica.com/topic/political-risk-analysis [Accessed: 24 January 2022]

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