Page 217 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes Political Risk: Political risk relates to the fear that governments might interfere with the free
and unencumbered flow of capital into and out of a country.
Resource Base: The resource base of a country consists of its national, human and financial
resources.

12.9 Review Questions

1. “Political risk is 50% of the exercise but inseparable from economic risk”. In this context
explain the various economic and political factors that significantly affect country risk
analysis.
2. Briefly explain the various techniques to assess country risk. Give examples to illustrate
your answer.
3. Explain the criteria for assessing country risk by Euromoney and Institutional Investor.
4. ‘Country risk analysis is a difficult task and recent events in several countries have
dramatised the importance of country risk analysis.’ Do you agree? Give examples to
illustrate your answer.
5. How can exposure to country risk be reduced by a MNC in the long run? In this context
explain why country risk analysis is not always accurate.

6. ‘Five decades ago, Argentina was considered to be one of the wealthiest nations in Latin
America. However, gross fiscal indiscipline has brought down the country to the current
risk. The country today, is on the verge of collapse.’

(a) Do you think there is a way out for Argentina?
(b) What role do you envisage for the IMF in this regard? Can the IMF put together a
rescue package for Argentina? Discuss.

7. Discuss the key indicators that MNCs should assess in calculating the degree of political
and economic risk they face in a country, particularly one undergoing political and
economic transition.
8. Briefly discuss a framework that can facilitate a formal assessment of country risk and its
implications for corporate decision making.
9. ‘Fiscal irresponsibility is one sign of a country that it is likely to be politically risky
because it will probably have an insatiable appetite for money.’ Elucidate. (Hint: An
important indicator of country risk is the government deficit as a percentage of gross
domestic product.)
10. Why is country risk analysis important for an MNC? Discuss with examples.

Answers: Self Assessment

1. Efficiency 2. Collaborative
3. Licensing 4. Piggybacking
5. Country-specific risks 6. Transfer
7. Political 8. Inflation

9. Resource 10. Economic
11. Creditworthiness 12. Current

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