Why country risk analysis is important in Agribusiness?

Why country risk analysis is important in Agribusiness? is a common question in terms of international business. Because—

A terrorist attack
A big labor strike in an industry
A national crisis due to a country scandal
Concern about the financial system of a country may trigger a significant outflow of funds
To enforce trade controls on imports

The expected cash flows to be generated by an MNC or the cost of funding projects may be influenced by either of these events and thus affect the valuation of the MNC.

Even if, in a given week, an MNC decreases its exposure to all such events, a new collection of events will occur in the following week. For each of these incidents, an MNC must consider whether it will affect its cash flows and whether the weather has changed the policy to which it should react. Risk analysis of countries is an ongoing activity. Many MNCs will not be influenced by all activities, but they will pay careful attention to any incidents that may influence the sectors or countries in which they work. They also agree that they cannot eradicate their exposure to all events, but they can at least attempt to restrict their exposure to any particular event in a single country.

Political Risk Factors:

An MNC must evaluate the risk of a nation not only in the countries in which it currently operates but also in those in which it plans to sell or set up subsidiaries. Performance may be significantly influenced by many risk characteristics of a region, and the MNC should be concerned about the likely degree of impact for each. The terrorist attack on the US on September 11, 2001, increased awareness of political danger.

As one would assume, an MNC can be affected by several country features related to the political climate. An extreme type of political risk is the likelihood of a subsidiary being taken over by the host nation. Some compensation is awarded in certain cases of expropriation. The properties are seized in other situations, and no compensation is given. Expropriation can occur peacefully or by force. A few of the common types of political risk are as follows.

The attitude of Consumers in the Host Country.

A mild type of political risk is a tendency for residents to buy products manufactured only locally. Even if the exporter tries to set up a foreign subsidiary, this principle may prevent the exporter from succeeding. All countries prefer to put some pressure on buyers to buy from producers owned locally. The general loyalty of customers to locally manufactured goods must be controlled by MNCs that are considering entering the international market. A joint venture with a local company could be more feasible than an export strategy if customers are very loyal to local products. The terrorist attack on 11 September 2001 prompted some customers to pay more attention to the country where the goods are made.

Actions of Host Government:

A host government’s various actions will affect an MNC’s cash flow. For instance, a host government may enforce requirements for pollution control as well as withholding taxes and restricting the movement of funds (which affect after-tax cash flows sent to the parent).

Lack of Restrictions;

In certain situations, in a host country, MNCs are negatively affected by the lack of limitations, which allows illicit business activity to take market share. The inability of the host government to enforce copyright laws against local companies that illegally copy the MNC product is one of the most alarming problems for MNCs. Local companies in Asia, for example, often copy software manufacturers from MNCs and sell them to consumers at lower rates. For this cause, software manufacturers are losing an estimated $3 billion in revenue annually in Asia. Furthermore, in some countries, regulatory structures do not properly protect a business from infringements of copyright or any unlawful means of gaining market share.

Blockage of fund Transfers;

MNC subsidiaries also return funds to the headquarters for loan repayments, supply purchases, administrative fees, repaid earnings, or other purposes. In certain situations, the host government may obstruct the transfer of funds, which may require subsidiaries to pursue projects which are not ideal. Alternatively, while the funds are blocked, the MNC can invest the funds in local securities which provide some return. This return, however, could be smaller than what should have been gained on funds transferred to the parent.

Currency Inconvertibility:

Some governments do not permit the conversion of the home currency into other currencies. Thus, by currency translation, the earnings produced by a subsidiary in these countries can not be transferred to the parent. An MNC parent may need to exchange it for products to extract benefits from projects in that country when the currency is inconvertible.

War:

Some countries tend to participate in persistent wars or undergo internal instability with neighboring countries. This can impact the safety of workers employed by a subsidiary of y and MNCs or by salespeople who try to set up export markets for the MNC. Moreover, countries threatened by the threat of war usually have unpredictable business cycles that more uncertainly market the cash flows produced by MNCs from such nations. On September 11, 2001, the terrorist attack on the UNITED states raised the expectation that the US will be engaged in a war. The potential exposure of MNCs to terrorist attacks has adversely affected them, especially if their subsidiaries are located in countries where anti-US attacks may occur.

Bureaucracy;

Another risk factor for a nation is government bureaucracy, which may complicate the business of MNCs. Although this consideration may seem insignificant, it was a major deterrent for MNCs that in the early 1990s considered projects in Eastern Europe. Many governments in Eastern Europe have not been able to promote the entry of MNCs into their markets.

Corruption:

Corruption may have a detrimental effect on a multinational MNC corporation because it can increase the cost of doing business or decrease sales. There may be different types of corruption between businesses or between a company and the government. For instance, an MNC can lose revenue because a government contract is awarded to a local company that pays off officials of the government.

Financial Risk factor:

In the evaluation of national risk, financial factors should be taken into account alongside political factors. The current and future state of the country’s economy is one of the most evident financial factors. And MNC that exports to a country or establish a subsidiary in a country that is very concerned about the demand for its goods by that country. Of course, this demand is highly affected by the economy of the region. A recession in the country could significantly reduce demand for exports of MNCs or products sold by a local subsidiary of MNCs. A weak European economy adversely affected the European business output of Ford Motor Com., Nike, Walt Disney Com., and many other U.S.-based MNCs in the early 1990s and again in the 2000-2002 period.

Techniques to Assess Country risk:

Once all the macro and macro factors that merit consideration in the country risk assessment have been defined by an organization, it will wish to introduce a framework for assessing these factors and deciding a country risk ranking. To accomplish this task, different methods are available. Some of the techniques that are more common include the following:

Checklist approach
Delphi technique
Quantitative analysis
Inspection visits
Combination of techniques

Each technique is briefly discussed in turn.

Checklist Approach:

A checklist approach includes making a decision on all political and financial variables that relate to the evaluation of country risk by a company. A list of different financial and political factors is allocated to the ranking, and these ratings are then consolidated to provide an overall assessment of the country’s risk. From available data, certain variables may be measured, while others must be measured subjectively.

There is a substantial amount of information available on the Internet about nations. This data can be used to establish ratings of the different factors used to assess the risk of a nation. In order to determine a specific nation, this element is then translated to a certain numerical ranking. More weights should be applied to those variables believed to have a greater effect on the risk of the nation. The estimation of certain variables and the applied weighting system are also subjective.

Delphi Technique:

Without community debate, the Delphi approach requires the gathering of individual opinions. The MNC could survey individual employees or outside consultants who have some experience in determining the risk characteristics of a specific country, as applied to country risk analysis. The MNC receives responses from its survey and may then attempt to evaluate some consensus opinions on the risk perception of the country. It then sends this survey summary back to the survey respondents and asks for additional input on the country’s risk summary.

Quantitative Analysis:

After the financial and political variables have been calculated for a period of time, quantitative analysis models can try to classify the features that affect the level of risk of the country. Regression analysis, for example, can be used to determine risk, as it can measure the sensitivity of a single variable to other variables. Over a series of previous months or quarters, a company could regress a measure of its business operation against national characteristics. Results from such an examination would show the vulnerability of a specific company to the economy of a nation. This is useful knowledge for businesses in the overall risk assessment of the region.

Inspection Visits:

Inspection visits include visits to a country and meetings with government officials, managers of businesses, and/or customers. Such a meeting will help to explain the firm’s uncertain views on a region. Indeed, without a trip to the host country, some factors, such as inter-country relationships, can be hard to determine.

Combination of Techniques:

A survey of 193 companies that are heavily involved in international business showed that about half of them do not have a structured national risk assessment process. This does not mean that they fail to determine the danger of the region, but rather that no validated approach can be used. As a result, a number of methods are used by many MNCs, likely using a checklist approach to define important factors and then using the Delphi method, quantitative analysis, and inspection visits to assign scores to the different factors.