UNIT II

Country Risk & Its Management

Country Risk or Political Risk

 Said to be exist when –

 Sudden and unanticipated changes in political

set-up in the host country

 Lead to unexpected discontinuities in business

by changing the business environment.
Country Risk or Political Risk
Different Forms
 Expropriation & Confiscation

 Currency Inconvertibility

 Credit Risk

 Risk from (Internal & External) Wars

 Conflict of Interest

 Corruption
Country Risk or Political Risk
Evaluation
 Qualitative Approach
 ThroughInterpersonal Contacts
 Research by Experts

 Quantitative Model
 Probability of Change in Govt. – 50%
 Probability of Nationalization – 40%
 Probability of Inadequate Compensation – 40%
 With these, probability of Nationalization without
adequate compensation is
0.5 x 0.4 x 0.4 = 0.08
Country Risk or Political Risk
Management

 Management prior to Investment

 Management during Lifetime

 Management following Nationalization

Country Risk or Political Risk
Management
 Management prior to Investment

 Integration of risk in Capital Budgeting

 Negotiating agreements with the Host Government

 Insurance of Risk
Country Risk or Political Risk
Management
 Management during Lifetime

 Joint Ventures

 Political Support

 Structured Operating Environment (Dependency)

 Anticipatory Planning
Country Risk or Political Risk
Management
 Management after Nationalization

 Negotiation

 Political and Economic Pressure

 Arbitration (Third Party Involvement)

 Legal Course of Action

International Trade Theories

Why does Nations Trade?