COURSE: GLOBAL BUSINESS MANAGEMENT MGT610 DR. DIMITRIS STAVROULAKIS

1. COURSE: GLOBAL BUSINESS MANAGEMENT MGT610 DR. DIMITRIS STAVROULAKIS PROFESSOR OF HUMAN RESOURCE MANAGEMENT DEPT OF ACCOUNTING TEI OF PIRAEUS

2. Country Risk • Besides advantages, foreign countries bear inherent risks for investors. • Country risk results from a set of complex and interdependent socio-economic, financial and political factors. These factors are specific for a particular country, but they can spread fast due to global integration. • On the other hand, a country can be easily contaminated by negative regional or global forces.

3. Risk Assessment + • How much acceptable is high risk? Risk Level Unacceptable risk Tolerable risk level if anticipated Managed risk with proper hedging or insurance Acceptability - .

4. Main components of country risk Quantifiable but ultimately Judgmental,Insurable and Diversifiable • Economic risk • Financial risk • Foreign exchange risk • Political risk • Cultural environment risk • Legal and contractual risk (repudiation, confiscation, bribes) • Regional contamination risk (spill-over effect) • Systemic risk (global crisis) Qualitative Assessment .

5. Country Risk Assessment • Economic risk: Low growth, inflation, low or declining investment and savings ratios, interest rate rise, structural weakness of the banking system, budget deficit, liquidity and solvency risk (when a nation’s capital assets are composed more of debt than of equity) etc. • Financial risk: Credit crunch, banking crisis, current account deficit. • Foreign Exchange risk: Drop in official international reserves, devaluation, capital controls. .

6. NATIONALIZATION • In the spring of 2006 the Venezuelan government ordered all oil MNC to form Joint Ventures with state-controlled firms, the latter holding the majority stock. • When Total and ENI refused to conform, their oil fields were seized by the army. • By the same time President of Bolivia Evo Morales seized all oil fields from MNC. • By the same time President Rafael Correa of Ecuador confiscated all oil fields of Occidental Petroleum – the dispute continuing up to the present

7. Country Risk Assessment (cont) • Political Risk: (1)The risk incurred by lenders, exporters, or investors, when a payment or the repatriation of an investment is restricted afterwards by the arbitrary decisionof the host country government. This decision may be carried out through confiscation, repudiation (refusal to endorse an agreement), nationalization, default (breaking the promise of paying back) etc. (2)The risk owed to political turmoil, government change, or deteriorating governance: lack of transparency, political speculation, corruption, nepotism, bureaucracy. • Corruption is important, because it has been pointed by MNC as a cardinal reason for exiting, or minimizing investment in a country (e.g. IKEA in Russia).

8. Corruption Perception Index (CPI) 2010

9. Corruption Perception Index (CPI) 2012

11. Strategies for Countering Country-Specific Risks Cultural and Institutional Risk Transfer Risk Ownership Structure Human Resource Norms Blocked Funds • Local management & staffing • Joint venture • Pre-investment strategy to anticipate blocked funds Intellectual Property Religious Heritage • Fronting loans • Legal action in host country courts • Understand and respect host country religious heritage • Creating unrelated exports • Obtaining special dispensation • Support worldwide treaty to protect intellectual property rights Nepotism and Corruption • Disclose bribery policy to both employees and clients • Forced reinvestment Protectionism • Retain a local legal advisor • Support government actions to create regional markets

12. Country-Specific Risks • Transfer risks concern the limitations on the MNC’s ability to transfer funds into and out of a host country without restrictions. MNCs can react to potential transfer risk in 3 stages: • Prior to making the investment, a firm can analyze the effect of blocked funds • During operations a firm can attempt to move funds through a variety of repositioning techniques • Funds that cannot be removed have to be reinvested in the local country to avoid deterioration in real value

13. Transfer Risk MNCs use mostly the following strategies for transferring funds under restrictions: • Alternative conduits for repatriating funds • Transfer pricing goods & services between subs • Leading and lagging payments • Using fronting loans • Creating unrelated exports • Obtaining special dispensation

14. Transfer Risk (cont) • Fronting loans: Transferring funds from parent to host country. Certain countries (China) impose restrictions to the entrance of foreign capital. • A fronting loan is a parent-to-sub loan channeled through a financial intermediary. • The lending parent deposits the funds in an international bank, let’s say in London. • That bank in turn “loans” this amount to the borrowing subsidiary. • In essence, the bank “fronts” for the parent.

15. Transfer Risk (cont) • Creating unrelated exports • The main reason for strict exchange controls is the host country’s inability to attract hard currency. Anything a MNC can do to generate export sales helps the host country. • For its contribution to the host country economy, the MNC may ask for more currency repatriation. • All costs of establishing and operating the sub are paid in local currency. • The MNC may organize regular expensive events, conferences, and galas in the particular host country, all paid in local currency. • Special dispensation • If the firm is in an important industry to the development of the host country, it may bargain for a special exemption in order to repatriate some funds.

16. Transfer Pricing. • Sale contracts are signed between the sub and the parent, but trade terms invariably seem to favor the parent (high prices when the parent sells to sub, low prices when sub sells to parent). E.g. the sub purchases goods for $100.000 from the parent. These goods had been previously purchased from another sub for $10.000, and the parent simply had them repackaged. Agreements between hoteliers and tour operators: deposits in foreign banks. Other uses of Transfer Pricing: • Helps to justify high prices of MNC products in the host country whenever invoices are examined by local inspectors. • Enables MNC subs to evade high business taxation in certain countries. E.g. a Greek firm establishes a sub in Bulgaria as an intermediate. The Bulgarian sub orders materials from UK, and then sells them to Greece at a high price. • The home country has enacted low business taxation, therefore subs are “squeezed-out” of cash, that has to be piped and taxed at the HQ.

17. Transfer Risk (cont) • Leading & Lagging Payments They are based on calculated expectations of currency exchange swings. In order to get enough funds out of the host country, if the sub’s currency is likely to depreciate, the sub pays the parent in advance. If the sub’s currency is likely to rise, then payments are delayed. E.g. if the Malaysian Ringgit (MYR) is expected to drop regarding the USD, then the local sub is eager to pay the HQ now.

18. MH Bouchet/CERAM (c) [1] See http://www.prsgroup.com and PRS (2001b) for a more detailed description.

19. MH Bouchet/CERAM (c)