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Chapter 16
Country Risk Analysis
Lecture Outline
Political Risk Characteristics
Attitude of Consumers in the Host Country
Actions of Host Government
Blockage of Fund Transfers
Currency Inconvertibility
War
Bureaucracy
Corruption
Financial Risk Characteristics
Economic Growth
Measuring Country Risk
Techniques to Assess Country Risk
Deriving a Country Risk Rating
Comparing Country Risk Ratings Across Countries
Incorporating Country Risk in Capital Budgeting
Adjustment of the Discount Rate
Adjustment of the Estimated Cash Flows
Analysis of Existing Projects
Preventing Host Government Takeovers
Use a Short-term Horizon
Rely on Unique Supplies or Technology
Hire Local Labor
Borrow Local Funds
Purchase Insurance
Use Project Finance
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Country Risk Analysis 2
Chapter Theme
This chapter attempts to acquaint the student with various forms of risk that must be considered by a
multinational corporation. Methods used to assess country risk are defined. It should be emphasized that
country risk is often difficult to assess. Furthermore, it may change over time. A firm should incorporate
the country risk assessment in its decision of whether to begin (or continue) business in a particular
country. If it decides to conduct business there, it should continue to assess country risk as it decides
whether to expand in that country.
Topics to Stimulate Class Discussion
1. How would you rate the country risk of the U.S.? Would your rating change if you lived in a foreign
country? Why?
2. Some people say that you cannot separate the political and financial risk of a country. What does this
mean?
3. If you use a country risk rating system based on a scoring range of 0 to 100 (100 representing a very
safe country), and Country Z earns a score of 77, are you going to invest in that country? Explain
your answer. The point is to realize that the ratings are subjective, and it would help to consider a
probability distribution of possible outcomes before finalizing a decision.
POINT/COUNTER-POINT:
Does Country Risk Matter for U.S. Projects?
POINT: No. U.S.-based MNCs should consider country risk for foreign projects only. A U.S.-based MNC
can account for U.S. economic conditions when estimating cash flows of a U.S. project or deriving the
required rate of return on a project, but it does not need to consider country risk.
COUNTER-POINT: Yes. Country risk should be considered for U.S. projects. Country risk can indirectly
affect the cash flows of a U.S. project. Consider a U.S. project in which supplies are produced and sent to
a U.S. exporter. The demand for the supplies will be dependent on the demand for the exports over time,
and the demand for exports over time may be dependent on country risk.
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
Offer your own opinion on this issue.
ANSWER: In some cases, country risk could influence cash flows. When assessing a U.S. project, an
MNC should consider the ultimate source of the products that it produces, so that it can determine
whether the cash flows may be affected by country risk.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
