Country Risk and Political Risk

Abstract

Country risk represents a potentially adverse impact of a country’s environment on the cash flows generated by an FDI project. Country risk analysis is important for a number of reasons. First, the MNC can use it as a screening device to avoid investing in countries with excessive risk. A second reason is that it can be used to monitor countries where the MNC is currently engaged in international business. In this case, a decision to divest (which may involve a change of the location of the production facilities) may be taken if it is felt that country risk has become excessive. A third reason why the study of country risk is important for MNCs is the need to assess particular forms of risk for a proposed project considered for a foreign country. These forms of risk may be general, such as economic risk and political risk, or they may be more specific, such as the risk of a take-over by the host government. Of course, all these problems can be avoided by keeping away from international business, but this strategy would preclude potentially profitable opportunities. Furthermore, it is the antithesis of being a multinational firm.