Foundations of Multinational Financial Management Alan Shapiro John Wiley

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Foundations of Multinational Financial
Management Alan Shapiro John Wiley Sons

• Power Points by
• Joseph F. Greco, Ph.D.
• California State University, Fullerton

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Country Risk Analysis

• Chapter 5

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THE MEASUREMENT OF POLITICAL RISK

• I. MEASURING POLITICAL RISK
• A. Country-specific perspective

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THE MEASUREMENT OF POLITICAL RISK

• B. Political Stability
• 1. Measured by
• a. Frequency of government changes
• b. Level of violence
• c. Number of armed insurrections
• d. Conflict with other states

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THE MEASUREMENT OF POLITICAL RISK

• C. Economic Factors
• 1. Indicators of political unrest
• a. Rampant inflation
• b. Balance of payment deficits
• c. Slowed growth of per capita GDP

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THE MEASUREMENT OF POLITICAL RISK

• D. Subjective Factors
• 1. Profit Opportunity Recommendation
• 2. Political Risk and Uncertain Property
  Rights

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THE MEASUREMENT OF POLITICAL RISK

• 3. Capital Flight
• a. Definition
• the export of savings by a
• nations citizens because of
• safety-of-capital fears.
• b. Measurement use the
• balance-of- payment account

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THE MEASUREMENT OF POLITICAL RISK

• c. Causes of capital flight
• 1.) Inappropriate economic policies
• 2.) Expectation of devaluation
• 3.) High political risk

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ECONOMIC AND POLITICAL FACTORS

• II. Economic and Political Factors Primary
  focus How well is the country doing
  economically?
• A. Fiscal Irresponsibility
• -high government deficits
• B. Monetary Instability
• C. Controlled Exchange Rate System
• -currency usually overvalued
• D. Wasteful Government Spending
• -inability to service foreign debt

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ECONOMIC AND POLITICAL FACTORS

• D. Resource Base
• -lack of strong work ethic
• E. Country Risk and Adjustment to External
  Shocks
• 1. What are the impacts of external shocks
• -how well a nation responds varies

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ECONOMIC AND POLITICAL FACTORS

• 2. Key Indicators of Country Risk
• a. Relative size of government debt
• b. Money expansion
• c. Existence of government- imposed barriers
  to market forces

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ECONOMIC AND POLITICAL FACTORS

• 2. Key Indicators of Country Risk (cont)
• d. Level of tax rates
• e. amount of government-owned firms
• f. Political and fiscal responsibility
• g. Amount and extent of corruption

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ECONOMIC AND POLITICAL FACTORS

• Key indicators of economic health
• a. Structural incentives
• b. Legal structure
• c. Clear incentives to save
• d. Open economy
• e. Stable macroeconomic policies