Page 201 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes Self Assessment

Fill in the blanks:
1. There are three types of manufacturing investment by firms in foreign countries: market
seeking; resource seeking; and …………………… seeking.

2. Joint ventures (JVs), one of the more important types of …………………… relationship.
3. Franchising is a rapidly growing form of …………………… in which the franchiser provides
a standard package of products, systems and management services, and the franchisee
provides market knowledge, capital and personal involvement in management.
4. …………………… occurs when a company (supplier) sells its product abroad using another
company’s (carrier) distribution facilities.

12.2 Definitions of Country Risk

Country risk is defined and described by various empirical researchers in different ways.
Some of the definitions of country risk are presented below:

Root (1973) makes a distinction between transfer risks, operational risks, and risks on
capital controls. The first is the potential for restrictions on the transfer of funds, products,
technology and human capital. The second is the uncertainty about policies, regulations
or governmental administrative procedures which might hinder results and management
of operations abroad. The third relates to discrimination against foreign firms,
expropriation, forced local share holding.
Robock and Simmons (1973) assert that political risk in international investment exists
when discontinuities occur in the business environment when they are difficult to anticipate,
and when they result from political change.
Levi (1990) defines country risk as the risk that, as a result of war, revolution or other
political or social events, a firm may not be paid for its exports. According to Levi, country
risk applies to foreign investment as well as to credit granted in trade. Country risk exists
because it is difficult to use legal channels or to seize assets when the buyer is in another
jurisdiction. Foreign buyers may be willing but unable to pay because, for example, their
government unexpectedly imposes currency restrictions. Other added risks of doing
business abroad include uncertainty about the possible imposition or change of import
tariffs or quotas, possible changes in subsidization of local producers, and possible
imposition of no tariff barriers.
Levich (1998) defines country risk as the deviation from interest rate parity.

Shapiro (1999) defines a country risk as the general level of political and economic
uncertainty in a country affecting the value of loans or investments in that country. From
a bank’s stand point, it refers to the possibility that borrowers in a country will be unable
to service or repay their debts to foreign lenders in a timely manner.
Madura (2003) states that country risk is the potentially adverse impact of a country’s
environment on a (multinational) company’s cash flows. Madura distinguishes between
macro-and micro assessments of country risk. The first type of assessment is an overall
risk assessment of a country without consideration of the multinational’s business.
Micro-assessment is the risk assessment of a country as it relates to the multinational’s
type of business.

Eun and Resnick (2004) assert that country risk is a broader measure of risk than political
risk, as the former encompasses political risk, credit risk, and other economic performances.

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