COUNTRY RISK ANALYSIS

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COUNTRY RISK ANALYSIS

• CHAPTER 6

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POLITICAL RISK

• Definition risk that a subsidiarys host
  government intervenes in the economy as to
  adversely affect firm value.
• Ways in which the host government can do this?

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POLITICAL RISK

• Political Stability how long current govt is
  likely to remain in power.
• Why might this be important?

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MEASURING POLITICAL RISK

• Political Stability can be measured by
• a. Frequency of government changes?
• b. Level of violence?
• c. History of armed insurrections?
• d. Current or past conflicts with other states?

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ECONOMIC RISK

• Economic Stability will the govt be tempted to
  intervene in the economy?
• Why might this be important?

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MEASURING ECONOMIC RISK

• Economic stability can be measured by
• - Level of inflation
• - Balance of payments
• - Growth of per capita GDP
• - Extent of govt borrowing/deficit
• - Currency exchange system/controls
• - Resource base

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SUBJECTIVE FACTORS COUNTRY RISK

• - Are property rights respected?
• - Does population rely on govt first to
  provide a good living?
• - Are there many state-owned firms?
• - Are residents of the country investing?

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• Capital Flight transfer of capital out of the
  country to avoid govt policies.

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SUBJECTIVE FACTORS COUNTRY RISK

• Causes of capital flight
• - Inappropriate economic policies
• - Expectation of devaluation
• - High political risk

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COUNTRY RISK

• Key Indicators of Country Risk
• - Relative size of government debt
• - Money expansion
• - Existence of government-imposed barriers
  to market forces
• - Level of tax rates
• - Number of government-owned firms
• - Political and fiscal responsibility
• - Amount and extent of corruption
• - Reliance on govt to fix provide

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COUNTRY RISK

• Key indicators of economic health
• - Incentives for risk-taking
• - Legal structure
• - Clear incentives to save
• - Open economy
• - Stable macroeconomic policies

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COUNTRY RISK

• Management of country risk
• - Avoidance
• - Insurance
• - Negotiation
• - Structure of investment