Country risk analysis is defined as a collection of risks associated with investing in a foreign country. These risks include political risk, exchange rate risk, and economic risk. Political risk refers to political decisions that influence an approachable environment for outside investment. Even if a country has a strong environment, if the political is risk is too high the country may not be a good candidate for outside investment. We saw this situation happen recently in Venezuela when Hugo Chavez was in power and nationalized many of the foreign oil companies. The economic risk refers to a country’s ability to pay back its debts. A country with stable finances and a strong economy generally provides more reliable investment opportunities that a country that has a weak economy and poor finances. I believe this is why China has invested so much in the United States and holds a high proportion of treasury bonds. The Chinese government in my opinion believes there is little to risk in owning American debts because while we do undergo recessions from time-to-time such in 2008, the United States generally maintains a triple A credit rating (S&P the exception). Country risk analysis is conducted generally through a variety of methods. One method is to gather historical date on the country’s current value fluctuation to ensure that a deal will not end up costing significantly more in a few months when the deal is finalized to minimize exchange rate risk. Another method is for the company to research the country’s laws governing business to minimize political risk. The last method is to look at demographic factors such as the income, population, and product adaption costs to find out if it’s worth the economic cost to enter the country’s market.
There is always a discussion in the news concerning our balance of trade: • Define a trade deficit and a trade surplus. What are the implications of a long-term trade deficit or trade surplus? What techniques are available to correct balance of payment deficit or surplus?
A trade deficit is caused when a country is importing more goods and services than it is exporting. A trade surplus occurs when a country exports more goods, services, and income than it imports. The balance-of-payments accounts keep track of the payments to and receipts from other countries for a particular time period. Looking at the balance-of-payments table in Chapter 5, the US imports goods and services nearly double more than the amount of goods and services it exports. According to the book, the only way in which a trade deficit can be financed in the long run is by selling off assets such as stocks, bonds, and corporations to other countries. In addition, the country must make interest payments to the owners of these assets such as foreign bondholders and stockholders. This prevents resources that might otherwise be used to invest in future growth in the host country. To limit a balance of payment deficit, a country might create tariffs, antidumping duties, or import quotas to limit the number of foreign products available for consumers. These techniques create a higher