Countries and

Political Risk
Analysis
Unit 6
 Country Risk Analysis
• Country risk refers to the risk of investing or lending
in a country, arising from possible changes in the
business environment that may adversely affect
operating profits or the value of assets in the country.
• For example, financial factors such as currency
controls, devaluation or regulatory changes, or
stability factors such as mass riots, civil war and other
potential events contribute to companies' operational
risks.
Slide no. 2
Country Risk Analysis
General investment
frameworks

High
High risk High
High return attractiveness
Market and
competitive
opportunities
Low Low risk
attractiveness Low return

Low

High Low
Risks
Slide no. 3
Country Risk Analysis

 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.

Slide no. 4
 Country Risk Analysis
• Country risk analysis 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.
Slide no. 5
Country Risk Analysis
Framework for country market and industry
attractiveness assessment

Slide no. 6
Country Risk Analysis
Subjective factors affecting country risk

 Country’s attitude towards private enterprise

 Risk of currency devaluation
 Productivity restrictions
 Social pressures
 Attitude of consumers in the host country

Slide no. 7
 CountryIndicators
Risk Analysis
of High Country Risk
• Large government deficit relative to GNP
• 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!!!!!!

Slide no. 8
Political Risk Analysis
• Political risk is a type of risk
faced by investors,
corporations, and
governments that political
decisions, events, or
conditions will significantly
affect the profitability of a
business actor or the expected
value of a given economic
action.

• Political risk can be

understood and managed with
Slide no. 9
 Political Risk Analysis
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
Slide no. 10
Political Risk Analysis
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.
Slide no. 11
Political Risk Analysis
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.
Slide no. 12