Country Risk Analysis-An Oerview INB 355

Country Risk Analysis Study of business environment in different countries with an objective of predicting the likelihood of various kinds of risks that businesses operating in those countries may face. The term ‘business environment’ is defined by a certain set of predetermined and observable social, political and economic variables. Factors affecting Country Risk: (i) Economic (ii) Political (iii) Social

Examples of situations where Country Risk could play an important role – A military dictator after coming to power announced that all foreign nationals should be deported within 24 hours. The management of MNC had to leave in haste and did not find time to sell FDI invested in the country take out the funds. A country suffered Balance of Payment Crisis as a result of which the currency depreciated sharply. Profits in that currency therefore lost value when converted to another currency. Agencies that are internationally known for their Country Risk Analysis are – Standard & Poor and Moody’s. These agencies review countries regularly on various parameters and rate them from a business risk perspective.

Economic Factors GDP growth Unemployment Tax as % of GDP Inflation Interest rates Exchange rate stability Balance of trade Balance of payment Current and Potential State of the Country’s Economy: A recession can severely reduce demand. Financial distress can also cause the government to restrict MNC operations.

Political Factors System of government – Collectivism: stresses the primacy of collective goals over individual goals 2. Individualism: an individual should have freedom in his own economic and political pursuits 3. Democracy: government is by the people, exercised either directly or through elected representatives 4. Totalitarianism: one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties

Political Factors Major political parties and their ideologies Party in power, it vision, succession plan, etc. Leading opposition parties and their ideologies and visions

Political Freedom in 2015

Social Factors Culture and history Educational levels Attitudes towards foreigners, change, technology, profits, etc

Other Factors Performance on Human Development Index: According to Nobel-prize winner Amartya Sen, economic development should be seen as a process of expanding the real freedoms that people experience. The United Nations used Sen’s ideas to develop the Human Development Index (HDI) which is based on life expectancy at birth educational attainment whether average incomes are sufficient to meet the basic needs of life in a country

Other Factors Economic and Financial Institutional Set-up Law and order situation Social stability World opinion about the country Possibilities of war, external and internal aggression, etc. Vulnerability to natural disasters such as floods, earthquakes, etc.

Rankings of Corruption by Country 2015

Rankings of Corruption by Country 2015

How Can Managers Determine A Country’s Overall Attractiveness? Country Attractiveness

Legal Factors There are three types of legal systems 1. Common law - based on tradition, precedent, and custom This law is flexible. Law is interpreted considering the situation. The interpretation of a particular case will be reference point for other similar cases. E.g. Great Britain’s former colonies follow this law. Like, India, Bangladesh.

Legal Factors 2. Civil law - based on detailed set of laws organized into codes -This law is not flexible and there is no scope for interpretation. -Judges do not have the power to interpret law rather they are given power to apply the law. E.g. More than 80 countries, including Germany, France, Japan and Russia operate under civic law. 3.Theocratic law - law is based on religious teachings E.g. Islamic countries like, Saudi Arabia follow Islamic law

Property Rights and Corruption Property rights - the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource Property rights can be violated through -Private action – theft, piracy, blackmail -Public action - legally - ex. excessive taxation or illegally - ex. bribes or blackmailing The Foreign Corrupt Practices Act makes it illegal for U.S. companies to bribe foreign government officials to obtain or maintain business over which that foreign official has authority

Intellectual Property and Corruption Intellectual property - property that is the product of intellectual activity It can be protected using Patents – exclusive rights for a defined period to the manufacture, use, or sale of that invention Copyrights – the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit Trademarks – design and names by which merchants or manufacturers designate and differentiate their products