COURSE: GLOBAL BUSINESS MANAGEMENT
MGT610
DR. DIMITRIS STAVROULAKIS
PROFESSOR OF HUMAN RESOURCE MANAGEMENT
DEPT OF ACCOUNTING
TEI OF PIRAEUS
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.
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
.
Main components of country risk
 Economic risk
 Financial risk
 Foreign exchange risk
Quantifiable but ultimately
Judgmental,Insurable and
Diversifiable
 Political risk
 Cultural environment risk
 Legal and contractual risk
Qualitative
Assessment
(repudiation, confiscation, bribes)
 Regional contamination risk
(spill-over effect)
 Systemic risk (global crisis)
.
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.
.
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
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 decision of 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).
Corruption Perception Index (CPI) 2010
Corruption Perception Index (CPI) 2012
Strategies for Countering Country-Specific Risks
Cultural and
Institutional Risk
Transfer Risk
Blocked Funds
Ownership Structure
Human Resource Norms
• Joint venture
• Local management &
staffing
• Pre-investment strategy to
anticipate blocked funds
Intellectual Property
Religious Heritage
• Fronting loans
• Understand and respect host • Legal action in host
• Creating unrelated exports
country courts
country religious heritage
• Support worldwide treaty
• Obtaining special
Nepotism and Corruption
to protect intellectual
dispensation
property rights
• Disclose bribery policy to both
• Forced reinvestment
employees and clients
• Retain a local legal advisor
Protectionism
• Support government
actions to create
regional markets
.
.
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
.
.
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
.
.
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.
.
.
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.
.
.
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
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.
Business Environment Risk Intelligence
BERI provides a Political Risk Index
assessing the social and political
environment of a country. It is built on the
opinion and scores provided by a hundred
experts with a diplomatic or political science
background. Governance quality is included
into political risk analysis along with
government effectiveness and social
indicators.
http://beri.com
Political Risk Services[1]: The PRS
analyses cover a hundred countries and are
updated on a quarterly basis.
International Country Risk Guide
measures and tracks corruption perception
in government, law and order,
expropriation risk, as well as the quality of
bureaucracy. These measures stem from
the subjective assessment of experts
around the world.
http://prsgroup.com
Thanks to its unique policy dialogue with more
than 180 countries, the World Bank has
developed a comprehensive database of
composite governance indicators, measuring
perceptions of voice and accountability,
political stability, government effectiveness,
regulatory quality, rule of law, and corruption.
www.worldbank.org/wbi/governance/
The London-based Economist Intelligence
Unit (EIU) provides a comprehensive é-year
forecasting country risk analysis on some
100 EMCs., on a quarterly basis. The EIU
method flows from expert’s answers to a
series of 77 predetermined qualitative and
quantitative questions.
http://eiu.com
To look upon governance and corruption,
Moody’s takes into consideration the
structures of social interaction, social and
political dynamics, as well as the
economic fundamentals. Moody’s relies on
the judgment of a group of credit risk
professionals to weigh the various risk
factors as well as the impact of each of
these factors upon business prospects.
http://moodys.com
Standard and Poor’s rating approach is both
quantitative and qualitative. It is based on a
checklist of 10 categories, including
governance and political risk. The political
risk factors gauge the impact of politics on
economic conditions, as well as the quality of
governance and the degree of government
support in the population. S&P assigns short
term and long-term ratings.
http://standardandpoors.com
Euromoney publishes ratings of some 180
countries since 1982 on a semi-annual basis.
The methodology is built from a blend of
quantitative criteria and qualitative factors
coming from surveys with about 40 political
analysts and economists. Political risk
receives a 25% weighting, as much as
economic performance. Countries are graded
on scale from 0 (worst) to 100 ( best).
www.euromoney.com
Institutional Investor’s ratings are
published twice a year since 1979 to assess
the creditworthiness of about 150
countries, based on a survey of some 100
international bankers’ perception of
creditworthiness, including economic,
financial and socio-political stability
criteria. The resulting score scales from
zero (very high chance of default) to 100
(least chance of default).
www.institutionalinvestor.com
Transparency International, a non-profit
non-governmental organization in Berlin,
provides an annual survey of corruption
practices in nearly 90 countries since 1995.
The Corruption Perception Index is based on a
wide network of information sources with
local NGOs, domestic and foreign
corporations, investors, and business contacts.
www.transparency.org
MH Bouchet/CERAM (c)
Heritage Foundation established
since 1985, in partnership with the
WSJ, an economic freedom index for
some 160 countries, both industrialized
and developing. The ranking is based
on various socio-political and
economic criteria, including political
stability, state interference, regulatory
framework, institutional strength, and
corruption scope.
www.heritage.org
PricewaterhouseCoopers’s Opacity
Index measures the lack of clear,
accurate, formal and widely
accepted practices in a country’s
business environment. As such, it
focuses on the relative state of
corrupt business practices, the
transparence of the legal system and
the regulatory framework. It
represents a quantitative approach
to measuring opacity and its
resulting extra risk premium that
stems from the additional business
and economic costs.
www.opacityindex.com/
The Institute for Management
Development’s World
Competitiveness Report analyses 49
industrialized and emerging economies
around the world based on a farreaching survey since 1989. Its analysis
of the institutional framework
addresses issues such as state
efficiency, transparency of government
policy, public service’s independence
from political interference, bureaucracy
as well as bribery and corruption.
www.imd.ch
Freedom House focuses since 1972 on
corruption levels in a number of
developing and transition economies
around the world. FH publishes an
annual assessment of state of freedom
in various countries on the base of
political rights and civil liberties.
Political stability and civil liberties are
ranked on a scale of 1 (best) to 7
(worst).
www.freedomhouse.org/ratings.index.h
tml
The Political and Economic
Stability Index of Lehman Brothers
and Eurasia measures relative
stability in around 20 EMCs by
integrating political science theories
with financial markets
developments. The monthly
evaluation uses both quantitative
and qualitative criteria, including
institutional efficiency, political
legitimacy, economic performance,
and government effectiveness.
www.legsi.com
Political and Economic Risk
Consultancy (PERC) specializes in
strategic business information and
analysis in East and Southeast Asia,
with emphasis on corruption and
business costs. Annual risk reports
survey over 1,000 senior expatriates
living in to obtain their perceptions of
corruption, labor quality, intellectual
property rights risks and other systemic
shortcomings.
www.asiarisk.com
MH Bouchet/CERAM (c)