Lecture 19 - Country risk analysis. This chapter attempts to acquaint the student with various forms of risk that must be considered by a multinational corporation. Methods used to assess country risk are defined. It should be emphasized that country risk is often difficult to assess. | Country Risk Analysis 19 Lecture Chapter Objectives To identify the common factors used by MNCs to measure a country’s political risk and financial risk; To explain the techniques used to measure country risk; and To explain how MNCs use the assessment of country risk when making financial decisions. Why Country Risk Analysis Is Important Country risk represents the potentially adverse impact of a country’s environment on an MNC’s cash flows. Country risk analysis can be used: to monitor countries where the MNC is currently doing business; as a screening device to avoid conducting business in countries with excessive risk; and to revise its investment or financing decisions in light of recent events. Why Country Risk Analysis Is Important Political Risk Factors Attitude of consumers in the host country Some consumers are very loyal to locally manufactured products. Actions of host government The host government may impose special requirements or taxes, restrict fund transfers, and . | Country Risk Analysis 19 Lecture Chapter Objectives To identify the common factors used by MNCs to measure a country’s political risk and financial risk; To explain the techniques used to measure country risk; and To explain how MNCs use the assessment of country risk when making financial decisions. Why Country Risk Analysis Is Important Country risk represents the potentially adverse impact of a country’s environment on an MNC’s cash flows. Country risk analysis can be used: to monitor countries where the MNC is currently doing business; as a screening device to avoid conducting business in countries with excessive risk; and to revise its investment or financing decisions in light of recent events. Why Country Risk Analysis Is Important Political Risk Factors Attitude of consumers in the host country Some consumers are very loyal to locally manufactured products. Actions of host government The host government may impose special requirements or taxes, restrict fund transfers, and subsidize local firms. MNCs can also be hurt by a lack of restrictions, such as failure to enforce copyright laws. Political Risk Factors Blockage of fund transfers If fund transfers are blocked, subsidiaries will have to undertake projects that may not be optimal for the MNC. Currency inconvertibility The MNC parent may need to exchange earnings for goods if the foreign currency cannot be changed into other currencies. 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. Political Risk Factors Corruption Index Ratings for Selected Countries Maximum rating = 10. High ratings indicate low corruption. Financial Risk Factors Indicators of economic growth The current and potential state of a country’s economy is important since a recession can severely reduce demand. A country’s economic growth is dependent on several .
