Country Risk Analysis Country Risk Country risk

Transcript:Country Risk Analysis Country Risk Country risk:
Country Risk Analysis Country Risk Country risk involves the potentially adverse impact of a country’s environment on an MNC’s cash flows. Country risk includes the adverse political and economic risks of operating in a country. sovereign risk The narrower risk associated with a government defaulting on its bond payments is called sovereign risk . Example A recession in a country that reduces the revenues of exporters to that nation is a realization of country risk. Labor strikes by a country’s dockworkers, truckers, and transit workers that disrupt production and distribution of products, thus lowering profits, also qualify as country risks. Clashes between religious groups that prevent people in a country from shopping can also be considered country risks. Example We have significant international operations and plan to continue expanding our operations abroad where we have limited operating experience, and this may subject us to increased business and economic risks that could affect our financial results. Facebook We could be subject to economic, political, regulatory and other risks arising from our international operations. Netflix Country Risk MNCs periodically conduct a country risk analysis to determine the exposure of their existing foreign business operations to country risk. They also conduct a country risk analysis when considering new direct foreign investment. Financial managers must understand how to measure country risk and incorporate country risk within their capital budgeting analysis so that they can make investment decisions that maximize their MNC’s value. Country Risk Characteristics Political Risk Characteristics/Factors Political risk can impede the performance of a local subsidiary. An extreme form of political risk is the possibility that the host country will take over a subsidiary. In some cases of expropriation, compensation (in an amount determined by the host country government) is awarded. In other cases, the assets are confiscated and no compensation is provided. Expropriation can take place peacefully or by force. The following are some of the more common characteristics of political risk: Political Risk Characteristics/Factors Expropriation or Nationalization Attitude of consumers in the host country Actions of host government Blockage of fund transfers Currency inconvertibility War Inefficient bureaucracy and Corruption Contract Repudiation Taxes and Regulation Exchange Controls Corruption and Legal Inefficiency Expropriation or Nationalization The most extreme form of political risk is the possibility that the host country takes over an MNC’s subsidiary, with or without compensation. This is the worst-case scenario for firms. Attitude of Consumers in the Host Country