Topic 1 - Country Risk Analysis

Question 1

What is Country Risk?

Answer 1

The potentially adverse impact of a country’s environment on an MNC’s cash flows

An MNC conducts country risk analysis when it applies capital budgeting to determine whether to implement a new project in a particular country or to continue conducting business in a particular country

Question 2

The below are…
- Attitude of consumers in the host country
- Actions of the host government
- Blockage of fund transfers
- Currency inconvertibility
- War
- Inefficient bureaucracy
- Corruption

Answer 2

Characteristics of Country Risk

Question 3

For a Multi-National Corporation, what are some Financial Risk Characteristics in a foreign country?

Answer 3

• Interest rates: higher interest rates tend to slow growth and reduce demand for MNC products
• Exchange rates: strong currency may reduce demand for the country’s exports, increase volume of imports, and reduce production and national income
• Inflation: inflation can affect consumers’ purchasing power and their demand for MNC goods.

Question 4

What is the difference between a Macro and Micro assessment of country risk?

Answer 4

Macro-assessment of country risk represents an overall risk assessment of a country and considers all variables that affect country risk except those that are company-specific

Micro-assessment of country risk involves assessment of a country as it relates to the MNC’s type of business

Question 5

The below are all….
- Checklist approach
- Delphi technique
- Quantitative analysis
- Inspection visits
- Combination of techniques

Answer 5

Techniques to Assess Country Risk

• Checklist approach: ratings assigned to various factors
• Delphi technique: collection of independent opinions without group discussion
• Quantitative analysis: use of models such as regression analysis
• Inspection visits: Meetings with government officials, business executives, and consumers to clarify risk
• Combination of techniques: many MNCs have no formal method but use a combination of methods

Question 6

Which factors are used to determine a Country Risk Rating?

Answer 6

An overall country risk rating using a checklist approach can be developed from separate ratings for political and financial risk

Image shows the ‘Checklist approach’.

Question 7

What is the Delphi technique?

Answer 7

The Delphi technique involves the collection of independent opinions on country risk.

Question 8

What is the Checklist approach?

Answer 8

The Checklist approach requires ratings and weights to be assigned to all factors relevant in assessing country risk.

Question 9

To best reduce exposure to a host government takeover, a subsidiary could:

Answer 9

• attempt to obtain supplies from its parent for which substitutes are not available

Question 10

Insurance purchased to cover the risk of expropriation ____, and will typically cover ____.

Answer 10

Insurance purchased to cover the risk of expropriation will be dependent on the company’s risk;

It will typically cover only a portion of the company’s total exposure.

Question 11

Country risk assessment should be used when:

Answer 11

• determining whether to establish a subsidiary in a foreign country
• determining whether to continue business in a foreign country.

Question 12

Country Risk Analysis

When determining whether a particular proposed project in a foreign country is feasible, Country risk analysis should be incorporated within:

Answer 12

• Country risk analysis should be incorporated within the capital budgeting analysis