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Objectives
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Objectives •To identify the common factors used by MNCs to measure a country’s political risk; •To identify the common factors used by MNCs to measure a country’s financial risk; •To explain the techniques used to measure country risk; •To explain the roles of “local color” and “local reality” in international business relations; and •To explain how the assessment of country risk is used by MNCs when making financial decisions. Why Country Risk Analysis Is Important Country risk represents the potentially adverse impact of a country’s environment on the MNC’s cash flows. Country risk can be used : q to monitor countries where the MNC is presently doing business; q as a screening device to avoid conducting business in countries with excessive risk; and q to improve the analysis used in making long-term investment or financing decisions. Political Risk Factors q Attitude of Consumers in the Host Country. Some consumers may be very loyal to local products. q Attitude of Host Government The host government may impose special requirements, restrictions, or additional taxes, subsidize local firms, or fail to enforce copyright and patent laws. q Blockage of Fund Transfers q “Slow” bureaucracy may be looking for bribes or ownership q Funds may not seem to be optimally used: “Bribe the Prince” may indeed be optimal. q Currency Inconvertibility q The MNC parent may need to exchange earnings for goods produced by the country. q War (Impolite to mention this…). Internal and external battles, or even the threat of war, can have a devastating effect. q Bureaucracy. Bureaucracy can complicate business. q Corruption. Corruption can increase the cost of conducting business or reduce revenue. Financial Risk Factors q One financial factor is the current and potential state of the country’s economy.
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