COUNTRY RISK ANALYSIS

COUNTRY RISK ANALYSIS

1. Identify a NZ company or industry to begin this country-risk analysis exercise. This may be a company that you have worked for, one that you have read about, or one that you hope to work for.

2. Use scanning techniques to compare at least 3 countries on broad indicators of opportunities and risks for your particular company.

3. Provide a 3-5 page report using either a grid or matrix (see below) to show why you chose this country for your company as an investment prospect

Opportunities
1. Sales Expansion.
a. Economic and Demographic Variables.
• Obsolescence and leapfrogging of products.
• Prices.
• Income elasticity.
• Substitution.
• Income inequality.
• Cultural factors and taste.
• Existence of trading blocs.

2. Resource Acquisition.
b. Cost Considerations.
• Labor
• Infrastructure
• Ease of transportation and communications.
• Governmental incentives and disincentives.

Risks
1. Factors to Consider in Analyzing Risk. There are a number of factors to consider when analyzing risk: 1) companies and managers differ on risk perception, tolerance for risk, and the expected returns; 2) one company’s risk is another company’s opportunity; 3) there are means available for reducing risk other than avoiding locations; 4) there are trade-offs between risk and return.
2. Political Risk.
• Analyzing past patterns.
• Analyzing opinions.
• Examining social and economic conditions.

3. Monetary Risk.
• Exchange rate changes.
• Mobility of funds.

4. Competitive Risk.
• Making operations compatible
• Spreading risk.
• Following competitors or customers.
• Heading off competition.

COUNTRY COMPARISON TOOLS
Two common tools for analysing information collected via scanning are grids and matrices. Both tools have plusses and minuses.
A. Grids

A grid can be used to make country comparisons according to a wide variety of relevant factors, such as ownership rules, potential returns, and perceived risk. Variables can be ranked and weighted according to specific criteria that reflect a firm’s situation and objectives. Although useful for establishing minimum scores and for ranking countries, grids often obscure interrelationships among countries.
B. Matrices

One matrix frequently used when doing country comparisons is the opportunity-risk matrix. When using this matrix, the manager plots a country according to the perceived value of the opportunity the country offers, on the one hand, and the expected level of risk associated with operating in that country on the other. Factors that are good indicators of risk and opportunity and the weight assigned to each must be identified and assigned by the firm. Once scores are determined for each country being considered, they can be plotted and reviewed from a comparative perspective. A useful application of this technique is to develop both present and future scores for countries (e.g., five years hence) because a significant shift in a score in the future could have serious implications with respect to the country selection process. Matrices are often based on subjective indicators which must be justified.

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