Transcript Slide 1

Global Business Environment
Session 4 : Assessment of Business Environment & CRA and PRA
Faculty:
Dr. Bibek Ray Chaudhuri
Session Date:22.1.2012
EPGDIBVSAT 2011-12
Pre-Work
Global Business Environment/ Session: 4
• Read the article on Macroeconomics and
Well-timed Business Strategy by Peter
Navarro given as readings for this session
• Read Business Strategy and Political Risk
EPGDIBVSAT 2011-12
Session Plan
Global Business Environment/ Session: 4
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Macroeconomics and Business (…Contd.)
Economic Environment of Countries
Country Risk Analysis
Political Risk Analysis
EPGDIBVSAT 2011-12
Key Considerations while assessing
Business Environment
Global Business Environment/ Session: 4
• Countries Classified by Income Groups (2007)
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Low Income (GNI per capita $935 or lower)
Lower Middle Income (GNI per capita $936 to $3,705)
Higher Middle Income (GNI per capita $3,706 to $11,455)
Higher Income ($11,456 or more)
• Countries Classified by Economic Systems
 Command Economies
 Market Economies
 Mixed Economies
EPGDIBVSAT 2011-12
Key Considerations while assessing
Business Environment
Global Business Environment/ Session: 4
• Economic Growth
 Past trends in GDP Growth
 Stability of the economy
• Inflation
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Interest rate
Exchange Rate
Cost of living
General Confidence in a Country’s Economic System
• Surpluses & Deficits
 BOP
 External Debt
 Internal Debt & Privatization
EPGDIBVSAT 2011-12
Making sense of the Information:
Country Risk Analysis
Global Business Environment/ Session: 4
• Performance
• Strategy
 Goals: Autonomy, Productivity & Equity
 Policies: Fiscal, Monetary, Industrial etc.
• Context: are given for a country (constraints &
resources)
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Political
Institutional
Ideological
Physical
International
• Evaluation
 Diagnosing the causes
 Evaluating the Future
EPGDIBVSAT 2011-12
Firm Strategy
Global Business Environment/ Session: 4
• Given the CRA the firm should understand
how its interests are affected by alternative
scenarios
• Self Reading:
Case of Japan (for diagnosing the causes)
Case of China (for scenario generation)
EPGDIBVSAT 2011-12
Firms performing CRA
Global Business Environment/ Session: 4
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Standard & Poor’s
Moody’s
Economist Intelligence Unit
Political Risk Services
Business Environmental Risk Intelligence
EPGDIBVSAT 2011-12
Components of CRA
Global Business Environment/ Session: 4
• Country History
 in order to identify aspects that could interfere in the
country´s future behavior reducing the ability or
willingness to payback any external commitment
 The structure of the government and its features like
political and administrative organization
 Social aspects and their key-indicators like HDI,
population growth rate, infant mortality rate
EPGDIBVSAT 2011-12
COUNTRY RISK AS A CORPORATE RISK
Global Business Environment/ Session: 4
• Dependency Level: Whether dependent
on a narrow range of goods
• State of Finances: How much dependent
on external sources of funding
• Whether trading with few countries
• Whether too dependent on imports
EPGDIBVSAT 2011-12
Indicators which are important for
Assessment
Global Business Environment/ Session: 4
• Domestic
 GDP
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GDP Growth rate
GDP per capita
Gini Index
Unemployment rate
Internal Savings/GDP ratio
Investment to GDP ratio
Gross Domestic Savings/Gross Domestic Fixed
Investment
EPGDIBVSAT 2011-12
Domestic (Continued)
Global Business Environment/ Session: 4
• Fiscal Policy
 Budget Deficit/GDP ratio
 Internal Debt/GDP ratio
• Monetary Policy
 Inflation rate
 Money Supply Growth
 Real Rate of Interest rate
EPGDIBVSAT 2011-12
External
Global Business Environment/ Session: 4
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Growth rate of Exports
Variance of Exports
Growth rate of imports
Necessary imports
Export/Import ratio
Trade Balance
Current account/GDP ratio
International Reserves
(International Reserves-Gold)/Imports
External Debt/GDP ratio
Short term debt/Reserves(minus gold)
EPGDIBVSAT 2011-12
External (continued)
Global Business Environment/ Session: 4
 External Debt Services/Exports
 Capital Inflows
 Exchange currency rate
• Risk Management Practices
• Conjectural Aspects
 What’s in store for the future?
 Vision of leaders
 Projected cash flow on the basis of BOP
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CRA (continued)
Global Business Environment/ Session: 4
• How the nation is seen by the World:
mainly in terms of capital inflows
• Ability and Willingness to pay back
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Strengths
Global Business Environment/ Session: 4
EPGDIBVSAT 2011-12
Weaknesses
Global Business Environment/ Session: 4
EPGDIBVSAT 2011-12
CRA (continued)
Global Business Environment/ Session: 4
• Risk levels and Exposure Limit
• Pricing System
• Follow up
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Post Work
Global Business Environment/ Session: 4
• Group activity
choose a country and perform a CRA
the assignment should be submitted as
PPTs by March 31st , 2012
EPGDIBVSAT 2011-12
Global Business Environment/ Session: 4
POLITICAL RISK ANALYSIS
EPGDIBVSAT 2011-12
Introduction
Global Business Environment/ Session: 4
• Definition of Political Risk
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Possibility of an unexpected politicallymotivated event affecting the outcome of an investment
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Instability vs. risk
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Classified based on
- actor responsible
- nature of effect
- breadth (micro vs. macro)
EPGDIBVSAT 2011-12
Types of Political Risks
Global Business Environment/ Session: 4
Cause
Result
Government
Others
Property Loss
Confiscation
Destruction
Income Loss
Discrimination
Disruption
EPGDIBVSAT 2011-12
Main Types of Political Risks
Global Business Environment/ Session: 4
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Expropriation
“Forced divestment of equity ownership of a foreign direct investor”
(Minor 1994)
Peaked in the mid-70s; almost nil now
Mostly Africa till 1980, then Latin America
Declined since:
- Key sectors already nationalized
- Economic need = > privatization
- Regulate rather than expropriate
Many hosts have joined MIGA (Multilateral Investment Guarantee
Agency)
Some controversy over future:
- is free enterprise here to stay, or will there be a backlash when
privatization, etc. fails to provide widespread benefits?
EPGDIBVSAT 2011-12
Main Types of Political Risks (Continued)
Global Business Environment/ Session: 4
b) Terrorism
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Terrorist acts infrequent, but spectacular
- L. America #1 esp. kidnappings
- U.S. – owned corps. Esp. targets, U.S. public institutions
- China, India, Turley, Israel etc.
-sept 11, Iraq
Little research-seems to be primarily groups denied a voice in
legitimate channels
Symbolism particularly important (MacDonalds, etc.)
Selective Intervention
Most risks are less dramatic changes in the rules of the game.
Some areas of government policy affect foreign-owned companies
more than most domestic ones
EPGDIBVSAT 2011-12
Main Types of Political Risks (Continued)
Global Business Environment/ Session: 4
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Restrictions on Cross-Border Transfer of Resources
Tariffs, NTBs inhibit sourcing, exporting
FX controls limit repatriation
Capital controls
Labour regs
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Taxation Concerns
Restrictions on transfer pricing
Unitary taxation policies
Withholding taxes
Availability of tax holidays and other incentives
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Main Types of Political Risks (Continued)
Global Business Environment/ Session: 4
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Investment Restrictions
Sectoral restrictions
Requirements for JVs, local ownership
Transparency of licensing procedures
Requirements for disclosure of technology
Requirements for forced divestiture
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Operating Restrictions
limits on expansion, ownership of land, etc.
Discriminatory access to labour, inputs
Restrictions on local market access
Performance requirements (e.g. employment & export levels, etc.)
Unequal access to government procurement
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Main Types of Political Risks (Continued)
Global Business Environment/ Session: 4
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Non-Neutrality of the Legal Environment
Judges or other arbiters insulated from political pressure
International and regional conventions
International conventions re compensation
Guarantees of national treatment
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Regulations with Differential Effects on Foreigners
Some may be much harder for foreign companies to
comply with
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Main Types of Political Risks (Continued)
Global Business Environment/ Session: 4
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“Crossfire” Problems
Activities may lead to international or home country sanctions or
consumer boycotts against the country or firms that deal there
- human rights abuses (e.g. imprisonment, torture or murder of
political opponents; use of prison labor; persecution of minority
groups; not abiding by election results)
- conflicts with neighboring countries
- lack of concern for the environment, endangered species, etc.
- disregard for international agreements (e.g. re nuclear nonproliferation)
- the misuse of social issues as means of protectionism
What kind of cross-fire problems associated with Iraq wine-makers in
the Bordeaux region faced?
EPGDIBVSAT 2011-12
Techniques of PRA
Global Business Environment/ Session: 4
• Observational Data Techniques : Based on historical data of
destabilizing events and level of economic deprivation forecasts are
generated
• Expert-Based Techniques:
 Unstructured/Unsystematic: based on discretion of the analyst with
no explicit procedure
 Unstructured/Systematic: parameters are specified but degree of
usage and how inference is drawn is not explicit
 Structured/Unsystematic: Rating of experts are considered but the
basis of these ratings are not available (BERI Index)
 Structured/Systematic: consistent panel of experts rate on a specific
set of issues for different groups (WPRF)
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Inverted U-Curve and Political Stability
Global Business Environment/ Session: 4
High
Expectations
High
Living Standard
Political
Instability
Low
Low
Low
Economic
Development
High
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Political Risk
Global Business Environment/ Session: 4
• Empirical Relationship
 Most studies examine correlates of expropriation
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Minor (1993): no link with stability
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Positive correlations (more risk)
- extractive, service and key sectors
- JVs with the host government
- host countries with pervasive governments
(“hands-on”)
- medium-technology
- need for scapegoats
- “obsolescing bargains”
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Empirical Relationship
(Continued)
Global Business Environment/ Session: 4
 Negative correlations (less risk)
- integrated subsidiaries that depend on rest of
network
- low/high tech
- lobbying
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Makhija (1993): information indicating
convergence of MNC actions and government
economic objectives
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The Economist Method
Political Risk Service (PRS) -- 100 points
Global Business Environment/ Session: 4
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33 points economic factors:
falling GDP/per capita
high inflation
capital flight
decline in productivity
raw materials as percentage of exports
50 points politics:
bad neighbours
authoritarianism
staleness
illegitimacy
generals in power
war/armed insurrection
EPGDIBVSAT 2011-12
The Economist Method
Political Risk Service (PRS) -- 100 points
Global Business Environment/ Session: 4
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17 points society:
urbanization
Race
Religious fundamentalism
corruption
ethnic tension
EPGDIBVSAT 2011-12
Managing Political Risk (counter moves)
Global Business Environment/ Session: 4
 Insurance from EDC, etc.
 JVs with local or foreign partners
 Local stakeholders
 Structural dependency
 Lobbying
 Planned divestiture with s/t profits
 Integrate with strategy
 Security for expatriates
 General rule: make the costs to the government of an
undesirable move to the firm very costly. Provide
“incentives” for appropriate government regulations
and policies.
EPGDIBVSAT 2011-12
MNE Evaluation by Countries
Global Business Environment/ Session: 4
• Concern of Governments
Independence: Whether the presence of
MNE will affect sovereignty of the host
country
Impact on Domestic firms
Hidden Value: Undervaluation of assets,
non-transfer of technology etc.
Responsibility: Long-term or short run
commitment
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Cost-Benefit of MNEs
Global Business Environment/ Session: 4
Cost  Benefit rat io 
F  R * T }  O  N / E
•F= Local factor payments by MNEs
•R*= After tax payments to local capital
•T= Taxes collected by the government
•O = Opportunity cost of local factors
•N = Net External Economies
•E = Payments to external factors of
production
•If this ratio is greater than one then the
project is beneficial for the society
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Other Methods
Global Business Environment/ Session: 4
• Present Value of Costs and Benefits
• Shadow price adjustments
• Shifting perceptions over time
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Divergence of Perceived Benefit-Cost Ratio
Global Business Environment/ Session: 4
Perceived by
Multinational
Enterprise
Economic
Benefit
Cost Ratio
Zone of
disagreement
Perceived by
Host Govt.
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Example of Differing Valuations
Global Business Environment/ Session: 4
Item
Sub-Item
MNE-Value
Sales
Govt. Value
20
Material
(-)14
18
(-)11.5
Local Labour
6
0
Imported Raw Material
6
10
Local Raw Material
2
1.5
Overhead
(-) 2
(-)4
Interest
(-2.3)
(-)4.6
Remitted Abroad
2
4
Paid Locally
0.3
0.6
Profit
1.7 (-)2.1
EPGDIBVSAT 2011-12
Post-Work-Session 5
Global Business Environment/ Session: 4
• Group Assignment
• Perform a Political Risk Analysis of your chosen
country considering any of the following sectors
 Oil
 FMCG
 Automobiles
 Steel
• Assignment must be submitted by 31st March,
2012 in PPT format