country risk
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1. Which are the three most important variables that determine the level of country risk?
2. Which of the following three variables has the strongest impact on a country risk analysis: nationalism, religious fundamentalism, or political system? Explain.
3. When is country risk analysis a critical factor for a business going global?
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Which are the three most important variables that determine the level of country risk?
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1. Which are the three most important variables that determine the level of country risk?
The three most important variables are:
Political Risk: Political risk refers to the risk that the politics within a country will negatively affect a multinational's foreign direct investment in that country. Political risk can result from political change due to elections, revolts, recessions, or wars. These political changes and the resultant political risk can lead to expropriation, higher taxes or tariffs, reduced foreign direct investment incentives, local ownership requirements, local content requirements, or currency inconvertibility. The result can be the loss of assets, the termination of operations, reduced after-tax income, higher import costs, reduced revenue, management restrictions, higher operational costs, or an inability to repatriate funds.
Financial Risk: A country's financial risk is related to the ability of the national economy to generate enough foreign exchange to meet payments of interest and principal on its foreign debt. In essence this requires a system of measuring a country's ability to finance its official, commercial, and trade debt obligations.
Financial Risk Components include:
Foreign Debt as a Percentage of GDP
Foreign Debt Service as a Percentage of XGS
Current Account as a Percentage of XGS
Net Liquidity as Months of Import Cover
Exchange Rate Stability
Economic Risk: Not only do multinational corporations need to assess the future risks to a
foreign direct investment from ...
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- BCom, SGTB Khalsa College, University of Delhi
- MBA, Rochester Institute of Technology
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