Page 202 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 12: Foreign Market Entry and Country Risk Management

Political risk ranges from unexpected changes in tax rules to outright expropriation of Notes
assets held by foreigners. It arises from the fact that a sovereign country can change the
“rules of the game” and that the affected parties may not have effective recourse.
Eiteman et al. (2004,) distinguish between firm-specific, country-specific, and global-specific
risk. Firm-specific risks are those risks that affect the MNE at the project or corporate level.
Governance risk due to goal conflict between a MNE and its host government is the main
political firm-specific risk. Foreign exchange and business risks also are firm-specific
risks. Country-specific risks are those risks that also affect the MNE at the project or
corporate level but are risks that originate at the country level. Transfer risk and cultural
and institutional risks are the two main risk categories at the country level. The former
concerns mainly the problem of blocked funds, whereas the latter spring from ownership
structure, human resource norms, religious heritage, nepotism and corruption, intellectual
property rights, and protectionism. Global-specific risks are those that affect the MNE at
the project or corporate level but originate at the global level.

Examples: Terrorism, the anti globalization movement, environmental concerns,
poverty, and cyber attacks.

The above definitions clearly indicate that there are a lot of different terms that are used to
explain country risk. But one common characteristics that all seem have is “troubles abroad”.
However, the differences in the definition can have an important impact on the way in which the
assessment and management of country risk is to be undertaken. For example, where some
definitions focus on the risk status of a country, others include the impact on the value of the
firm in their definitions. The first calls for general, country-specific, management and assessment
techniques. The latter suggest that tailor-made, firm-specific management and assessment tools
are more appropriate.

Self Assessment

Fill in the blanks:
5. …………………… are those risks that also affect the MNE at the project or corporate level
but are risks that originate at the country level.
6. …………………… risk concerns mainly the problem of blocked funds.
7. …………………… risk ranges from unexpected changes in tax rules to outright
expropriation of assets held by foreigners.

12.3 Objectives of Country Risk Ratings

Following the rapid growth in the international debt of less developed countries in the 1970s
and the increasing incidence of debt rescheduling in the early 1980s, country risk, which reflects
the ability and willingness of a country to service its financial obligations, has become a topic of
major concern for the international financial community. Country risk refers broadly to the
likelihood that a sovereign state or borrower from a particular country may be unable and/or
unwilling to fulfill their obligations towards one or more foreign lenders and/or investors.
Count credit ratings are regarded as proxies for macroeconomic and political fundamentals that
affect the probability of sovereign default. The rating agencies claim that they use qualitative
factors in forming their opinion of a country’s ability and willingness to service their debt. This
relates to items such as a country’s form of government, the adaptability of the political system,
the public governance, the succession of government, the consensus about policy decisions, and

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