Country-risk analysis

Country-risk analysis is the assessment of the level of political and economic risk associated with doing business in another country. Risk analysis is used when extending credit to foreign buyers making foreign direct investment decisions. Country-risk analysis includes analysis of

• the level of political stability
  
• regulation of businesses
  
• protection for private property
  
• government wage and price controls
  
• government budgets and deficits
  
• inflation
  
• unemployment
  
• interest rates
  
• exchange rates

Business managers do not like surprises. Each aspect of country-risk analysis is a potential source of uncertainty, which can lead to unpleasant surprises for anyone doing business abroad. One of the reasons foreigners have invested huge sums of capital in the United States for the last 20 years is the relatively low risk associated with American business ventures. By comparison, investors in Indonesia, Malaysia, Thailand, Argentina and many other industrializing countries have, at times, lost money due to changes in political and economic conditions. For example, many U.S.-based companies invested in Indonesia during the 32-year reign of President Suharto. His government imposed strict controls, creating, through force, a stable political and economic environment. The Indonesian economy grew rapidly, and its currency remained stable. In 1998 Suharto was forced out of office and replaced by President Wahid in national elections. With the Asian financial crisis that year, Indonesia’s economy decreased by over 13 percent, its currency and stock market plummeted, and political strife grew. In 2001, U.S. companies such as Newmont Mining and Exxon Mobil closed their Indonesian operations, citing risk of separatist revolt and conditions approaching anarchy.
Typically, multinational corporations (MNCs) conduct country-risk analyses before making major financial investments in new areas of the world. MNCs also pay consulting services to monitor changes in political and economic conditions around the world. One service provides a weekly update summarizing events in each country and providing analysis of the significance to businesses operating there.
To reduce country risk, companies will hedge against exchange-rate risk, seek assistance from U.S. government agencies, and insure investments through governmentsponsored corporations including the Overseas Private Investment Corporation and Export-Import Bank of the United States.