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Analyzing Country Risks

Analyzing Country Risks. The Multinational: Threat or Benefactor. Accusations of Threat · Corruption of governments · Pollution of environments · Seller of tainted products · Avoider of taxes · Destroyers of economies - manipulate prices - compete for loans

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Analyzing Country Risks

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  1. Analyzing Country Risks

  2. The Multinational: Threat or Benefactor Accusations of Threat ·Corruption of governments ·Pollution of environments ·Seller of tainted products ·Avoider of taxes ·Destroyers of economies - manipulate prices - compete for loans - make countries vulnerable to global downturns

  3. The Multinational: Threat or Benefactor Accusations of Threat ·Fragmenter of religious and cultural order ·Tool of home country; hostility to host country

  4. The Multinational: Threat or Benefactor Image of Benefactor ·Extensive public relations activities ·Socially responsible behavior in host country ·Contributions to local community ·Adherence to a code of ethics ·Focus on job creation, technology and infrastructure enhancement

  5. Investment Planning

  6. Categories of Country Risk Political Risk  Forced divestment  Unwelcome regulation  Interference with operations  Political upheaval

  7. Categories of Country Risk Macroeconomic Risk  Lack of economic growth  Weak savings  Poor infrastructure  Unavailable labor

  8. Categories of Country Risk Social Risk  Criminal activity  Religious activity  Culture clashes  Labor violence  Unrest due to non-government actions

  9. Governments and Risk

  10. Country Risk IndicatorsInternal Analysis Political Risk  Regional political stability  Violent deaths  Population pressures on the government  Income distribution (use World Bank tables)

  11. Country Risk IndicatorsInternal Analysis Macroeconomic Risk  GDP growth  Inflation and interest rates  External debt  Exchange rate stability  Current account and FDI balances

  12. Country Risk IndicatorsInternal Analysis Social Risk  Cultural/linguistic fragmentation  Level of urbanization  Deteriorating infrastructure  Deteriorating health/education  Status of women and local minority groups

  13. External Sources of Country Risk Analysis Index of Economic Freedom (Transparency) • Trade Policy • Banking controls • Taxation • Wage/price controls • Regulation • Property rights • Monetary policy • Black market activities • Foreign investment policy • Government consumption of output

  14. External Sources of Country Risk Analysis Human Rights Violations • Freedom of expression • Political rights • Treatment of woman • Worker rights and other minorities violations • Civil Liberties • Barriers against assembly  • Disappearances

  15. External Sources of Country Risk Analysis Country/Political Risk Purveyors • Government planning • Ability of leaders failures • Political power of military, religious, cultural groups • External conflict • Internal conflict

  16. External Sources of Country Risk Analysis Country/Political Risk Purveyors • Government Contract • Current account repudiation balance vs. FDI flows • Quality of bureaucracy • External debt problems • Inflation • Forex controls • Expropriations/ • Foreign reserves nationalizations

  17. Managing Country Risk ·Do not invest or reduce investment ·Eliminate some risks with insurance • OPIC • MIGA • Private sources ·Match risks and returns   • Increase the hurdle rate (required R.O.I.) • Manipulate cash flows

  18. Managing Country Risk Cope with or reduce risks • Create complex operations • Build local support (people, employees, banks, suppliers, local investors) • Avoid transfer pricing abuses • Offer government something

  19. Managing Country Risk Cope with or reduce risks · Lobby in host and home countries · Pursue legal means to recoup losses • Host country courts • Home country courts

  20. Risk Insurance Purveyors Private O.P.I.C.M.I.G.A.Sources insure in high risk countries?   – government contract repudiation? –   military-related investments ?  – 

  21. Risk Insurance Purveyors Private O.P.I.C.M.I.G.A.Sources Coverage Limit ? $200 million $50 million negotiated Partialexpropriation covered? –  negotiated Host country investment approval? General w/ US specific none

  22. Coping with Non-Country Risks RiskStrategy  Business risk • Develop wide product range • Build customer loyalty • Increase efficiency • Hire competent managers Commercial risk• Credit checks on customers • Demand advance payments • Require letters of credit • Purchase insurance

  23. Coping with Non-Country Risks RiskStrategy  Financial risk • Avoid debt • Turn S/T into L/T loans Market risk • Improve efficiency • Constantly innovate • Build consumer/brand loyalty

  24. Coping with Non-Country Risks RiskStrategy Currency risk • Use forward contracts • Use same currency for assets and liabilities • Raise efficiency: reduce pricesafter harmful currency change, if needed

  25. Matching Risks and Returns ·For higher risk, increase hurdle rate Company may have a global hurdle rate   How much? ·Adjust cash flows (maintain hurdle rate)

  26. Matching Risks and Returns Uncertainty absorption - self insure against loss  - base charge on OPIC or private rates  - add self-insurance charge, assess ROI Expected values adjustment - calculate expected loss from specific risk  - increase revenues or decrease other expenses  - use external sources for info

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