Arpit Mang

Country Risk

Ankit Kumar
Ankur Verma
Anustup Sreemani
Arpit Mangal
Ashish Dogra
Ashutosh Dubey

Arpit Mang

Definition

Country Risk Analysis is assessment of

potential risks and rewards from doing
business in country.

Country risk represents potentially

adverse impact of a countrys
environment on the cash flow of the
firm.

Arpit Mang

Definition
Country risk represents the potentially
adverse impact of a countrys environment on
the MNCs 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

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Arpit Mang

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 Mang

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

Ashutosh Du

Political

Financial

Factor
s

Economic
Conditions

Subjective

Country Risk Analysis

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Ashutosh Du

Political Risk Factors

Attitude of host government

War
Currency inconvertibility
Bureaucracy
Blockage of fund transfers
Corruption

Country Risk Analysis

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Ashutosh Du

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 Du

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
countrys political system.

Ashutosh Du

Political Risk
Ownership / Control Risk : Possibility that a
host countrys Government might take action
to restrict investors risk.
Operation risk : Possibility that a host
countrys government might constraint an
investors 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.

Ankur Ve

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 Ve

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 Ve

Political Risk Factors

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.

Ankur Verma

Financial Risk Factors

Current and potential state of the

countrys economy
Financial distress
Additional host government restrictions
Moratorium on fund transfer
Interest rates, exchange rates and
inflation

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14

Ankit Kumar

Financial Risk Factors

Current and Potential State of the

Countrys Economy
A recession can severely reduce demand.
Financial distress can also cause the

government to restrict MNC operations.

Indicators of Economic Growth

A countrys 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 recession

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Ankit Kumar

Subjective factors

Countrys 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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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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Ashish Dogra

Types of Country Risk

Assessment

A macro-assessment of country risk is

an overall risk assessment of a country
without consideration of the MNCs
business.
A micro-assessment of country risk is
the risk assessment of a country as
related to the MNCs 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 of
Country Risk Analysis

Iraqs 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.

Anustup Sreemani

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 governments 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

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]

Country Risk Analysis

Overall
score

Rank

Previous

Country

Norway

94.05

92.35

Luxembo
urg
Switzerla
nd
Denmark

Finland

87.81

Sweden

86.81

Austria

86.50

11

Canada

86.09

84.86

10

Netherla
nds
Australia

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90.65
88.55

84.16

25

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