Ch16CountryRiskAnalysis(国际金融管理-山东大学,秦.ppt

,Country Risk Analysis,16,Chapter,South-Western/Thomson Learning 2003,See c16.xls for spreadsheets to accompany this chapter.,Chapter Objectives,To identify the common factors used by MNCs to measure a countrys political risk and financial risk;To explain the techniques used to measure country risk;andTo explain how the assessment of country risk is used by MNCs when making financial decisions.,Country Risk Analysis,Country risk represents the potentially adverse impact of a countrys environment on the MNCs cash flows.,Country Risk Analysis,Country risk can be used:to monitor countries where the MNC is presently doing business;as a screening device to avoid conducting business in countries with excessive risk;andto improve the analysis used in making long-term investment or financing decisions.,Political Risk Factors,Attitude of Consumers in the Host CountrySome consumers may be very loyal to homemade products.Attitude of Host GovernmentThe host government may impose special requirements or taxes,restrict fund transfers,subsidize local firms,or fail to enforce copyright laws.,Political Risk Factors,Blockage of Fund TransfersFunds that are blocked may not be optimally used.Currency InconvertibilityThe MNC parent may need to exchange earnings for goods.,WarInternal and external battles,or even the threat of war,can have devastating effects.BureaucracyBureaucracy can complicate businesses.CorruptionCorruption can increase the cost of conducting business or reduce revenue.,Political Risk Factors,Corruption Perceptions Index,The index,which is published by Transparency International,reflects the degree to which corruption is perceived to exist among public officials and politicians.In 2001,91 countries are ranked on a clean score of 10.,Rank Country Score1Finland9.93New Zealand9.44Singapore9.27Canada8.913U.K.8.314Hong Kong7.916Israel7.616U.S.A.7.618Chile7.520Germany7.421Japan7.1,Rank Country Score23France6.726Botswana6.027Taiwan5.938South Africa 4.842South Korea4.246Brazil4.051Mexico3.757Argentina3.557China3.579Russia2.388Indonesia1.9,Find out more about Transparency International and the Corruption Perceptions Index by visiting http:/www.transparency.org/documents/cpi/2001/cpi2001.html.,Online Application,Financial Risk Factors,Current and Potential State of the Countrys EconomyA recession can severely reduce demand.Financial distress can also cause the government to restrict MNC operations.Indicators of Economic GrowthA countrys economic growth is dependent on several financial factors-interest rates,exchange rates,inflation,etc.,What are the political and financial outlook for various countries?,Online Application,Consult the Country Commercial Guides prepared by embassy staff at http:/www.usatrade.gov/website/ccg.nsf/ccghomepage?openform.,Refer to the CIAs World Factbook at http:/www.odci.gov/.,Visit http:/,Types of Country Risk Assessment,A macro-assessment of country risk is an overall risk assessment of a country without consideration of the MNCs business.A micro-assessment of country risk is the risk assessment of a country as related to the MNCs type of business.,Types of Country Risk Assessment,The overall assessment of country risk thus consists of:Macro-political riskMacro-financial riskMicro-political riskMicro-financial risk,Note that the opinions of different risk assessors often differ due to subjectivities in:identifying the relevant political and financial factors,determining the relative importance of each factor,andpredicting the values of factors that cannot be measured objectively.,Types of Country Risk Assessment,Techniques of Assessing Country Risk,A checklist approach involves rating and weighting all the identified factors,and then consolidating the rates and weights to produce an overall assessment.The Delphi technique involves collecting various independent opinions and then averaging and measuring the dispersion of those opinions.,Techniques of Assessing Country Risk,Quantitative analysis techniques like regression analysis can be applied to historical data to assess the sensitivity of a business to various risk factors.Inspection visits involve traveling to a country and meeting with government officials,firm executives,and/or consumers to clarify uncertainties.,Often,firms use a variety of techniques for making country risk assessments.For example,they may use a checklist approach to develop an overall country risk rating,and some of the other techniques to assign ratings to the factors considered.,Techniques of Assessing Country Risk,Developing A Country Risk Rating,A checklist approach will require the following steps:Assign values and weights to the political risk factors.Multiply the factor values with their respective weights,and sum up to give the political risk rating.Derive the financial risk rating similarly.,Developing A Country Risk Rating,Multiply the ratings with their respective weights,and sum up to give the overall country risk rating.,Assign weights to the political and financial ratings according to their perceived importance.,A checklist approach will require the following steps:,Developing A Country Risk Rating,Different country risk assessors have their own individual procedures for quantifying country risk.Although most procedures involve rating and weighting individual risk factors,the number,type,rating,and weighting of the factors will vary with the country being assessed,as well as the type of corporate operations being planned.,Developing A Country Risk Rating,Firms may use country risk ratings when screening potential projects,or when monitoring existing projects.For example,decisions regarding subsidiary expansion,fund transfers to the parent,and sources of financing,can all be affected by changes in the country risk rating.,Comparing Risk RatingsAmong Countries,One approach to comparing political and financial ratings among countries is the foreign investment risk matrix(FIRM).The matrix measures financial(or economic)risk on one axis and political risk on the other axis.Each country can be positioned on the matrix based on its political and financial ratings.,The Foreign Investment Risk Matrix(FIRM),Actual Country Risk Ratings Across Countries,Some countries are rated higher according to some risk factors,but lower according to others.On the whole,industrialized countries tend to be rated highly,while emerging countries tend to have lower risk ratings.Country risk ratings change over time in response to changes in the risk factors.,http:/www.worldbank.org/data/wdi2001/pdfs/tab5_2.pdfhttp:/,Online Application,How risky is your country?Look up:,Incorporating Country Risk in Capital Budgeting,If the risk rating of a country is in the acceptable zone,the projects related to that country deserve further consideration.Country risk can be incorporated into the capital budgeting analysis of a project by adjusting the discount rate,orby adjusting the estimated cash flows.,Adjustment of the Discount RateThe higher the perceived risk,the higher the discount rate that should be applied to the projects cash flows.Adjustment of the Estimated Cash FlowsBy estimating how the cash flows could be affected by each form of risk,the MNC can determine the probability distribution of the net present value of the project.,Incorporating Country Risk in Capital Budgeting,Applications ofCountry Risk Analysis,Alerted by its risk assessor,Gulf Oil planned to deal with the loss of Iranian oil,and was able to avoid major losses when the Shah of Iran fell four months later.However,while the risk assessment of a country can be useful,it cannot always detect upcoming crises.,Applications ofCountry Risk Analysis,Iraqs invasion of Kuwait was difficult to forecast,for example.Nevertheless,many MNCs promptly reassessed their exposure to country risk and revised their operations.The 1997-98 Asian crisis also showed that MNCs had underestimated the potential financial problems that could occur in the high-growth Asian countries.,Online Application,For more information on the Asian crisis,check out the following sites:http:/www.stern.nyu.edu/nroubini/asia/AsiaHomepage.htmlhttp:/www.asienhaus.org/navigat/english/asienhau.htm,Reducing Exposureto Host Government Takeovers,The benefits of DFI can be offset by country risk,the most severe of which is a host government takeover.To reduce the chance of a takeover by the host government,firms often use the following strategies:Use a Short-Term HorizonThis technique concentrates on recovering cash flow quickly.,Reducing Exposureto Host Government Takeovers,Rely on Unique Supplies or TechnologyIn this way,the host government will not be able to take over and operate the subsidiary successfully.Hire Local LaborThe local employees can apply pressure on their government.,Borrow Local FundsThe local banks can apply pressure on their government.Purchase InsuranceInvestment guarantee programs offered by the home country,host country,or an international agency insure to some extent various forms of country risk.,Reducing Exposureto Host Government Takeovers,The U.S.government provides investment insurance through the Overseas Private Investment Corporation(OPIC).Visit the OPIC at http:/www.opic.gov/.The World Banks Multilateral Investment Guarantee Agency(M IGA)offers political risk insurance to investors in emerging economies.Visit the M IGA at http:/www.miga.org.,Online Application,Impact of Country Risk on an MNCs Value,Why Country Risk Analysis Is ImportantPolitical Risk FactorsAttitude of Consumers in the Host CountryAttitude of Host GovernmentBlockage of Fund TransfersCurrency InconvertibilityWarBureaucracyCorruption,Chapter Review,Chapter Review,Financial Risk FactorsCurrent and Potential State of the Countrys EconomyIndicators of Economic GrowthTypes of Country Risk AssessmentMacro-Assessment of Country RiskMicro-Assessment of Country Risk,Chapter Review,Techniques of Assessing Country RiskChecklist ApproachDelphi TechniqueQuantitative AnalysisInspection VisitsCombination of Techniques,Chapter Review,Developing a Country Risk RatingExample of Measuring Country RiskVariation in Methods of Measuring Country RiskUsing the Country Risk Rating for Decision-MakingComparing Risk Ratings Among CountriesActual Country Risk Ratings Across Countries,Chapter Review,Incorporating Country Risk in Capital BudgetingAdjustment of the Discount RateAdjustment of the Estimated Cash FlowsApplications of Country Risk Analysis,Chapter Review,Reducing Exposure to Host Government TakeoversUse a Short-Term HorizonRely on Unique Supplies or TechnologyHire Local LaborBorrow Local FundsPurchase InsuranceImpact of Country Risk on an MNCs Value,