Multinational Financial Management

Country Risk Analysis

People say they want clarification of the rules of the game, but I think it isn't very clear what isn't clear to them.

ADOLFO HEGEWISCH FERNANDEZ, Mexico's Subsecretary for Foreign Investment

Potential investors don't want flexibility, they want fixed rules of the game.

JOHN GAVIN, U.S. Ambassador to Mexico

LEARNING OBJECTIVES

• To define what country risk means from the standpoint of an MNC
• To describe the social, cultural, political, and economic factors that affect the general level of risk in a country and identify key indicators of country risk and economic health
• To describe what we can learn about economic development from the contrasting experiences of a variety of countries
• To describe the economic and political factors that determine a country's ability and willingness to repay its foreign debts

Multinational firms must constantly assess the business environments of the countries they are already operating in as well as the ones they are considering investing in. Similarly, private and public investors alike are interested in determining which countries offer the best prospects for sound investments. This is the realm of country risk analysis, the assessment of the potential risks and rewards associated with making investments and doing business in a country. Ultimately, we are interested in whether sensible economic policies are likely to be pursued ...