Country Risk Assessment

Why is country risk important?

  • Impacts a countries environment on an MNCs cash flows 
  • MNCs use analysis to revise its investment/financing decisions in light of events (poltiical events, terrorism, finacial crisis, majot outflow of fudns, impositions on trade resctitrions…etc )   to determine how it affects their cash flows 
  • They can’t completely eliminate all exposure to these events but can attempt to limit exposure to any single country specific event
  1. What is country risk?

In 3 pages explain the following:

  1. Political Risk factors in Venezuela:
  • Attitudes of consumers in the host country
  • Actions of the host government 
  • Blockage of fund transfers
  • War
  • Bureaucracy 
  • Corruption
  • Where it currently does business but also to where it expects to export or establish subsidiaries
  • Extreme form of political risk is the possibility that the host country will take over a subsidiary → in some cases assets can be confiscated 
  • More common forms:
    • Attitudes of consumers in the host country
      • Mild form of political risk 
      • This refers to the tendency of residents to purchase only locally produced goods that could prevent its success
      • This comes from the fact that countries tend to exert pressure on consumers to purchase locally produced goods and locally owned manufacturers 
      • MNCs wanting to enter a foreign market must monitor the general loyalty → if consumers are very loyal to local goods then a joint venture w a local company may b more feasible 
    • Actions of the host government 
      • Ex. impose pollution control standards, additional corporate taxes, withholding taxes, Fund transfer restrictions , new policies of a new government, changing attitudes
      • Some mncs look at turnover in govt members as a proxy of countries political risk – but it is not the whole picture 
      • A host government can use MNCs to coincide with its own goals → requiring that employees are local employees, requiring special permits, subsidise competitors
      • On the flip side of all these rules the lack of restrictions is also dangerous → allows for illegitimate business behaviour 
        • Ex. the failure of host governments to enforce copyright laws against local firms that illegally copy MNC products and sell for lower price  
    • Blockage of fund transfers
      • Host govt may block fund transfers 
    • Currency inconvertibility
      • Some govt do not allow the home currency to be exchanged into other currencies 
      • When it is inconvertible → mnc parent may need to exchange it for goods to extract benefits from projects in that country 
    • War
      • Constant conflict or internal turmoil → volatile business cycles → uncertainty 
      • Affects safety of employees 
    • Bureaucracy 
      • Complicate business , hard to facilitate the entrance of MNC into markets 
    • Corruption 
      • Increase the cost of conducting business or can reduce revenue 
      • Between firms or between firms and government 
      • Different law enforcement rules

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