Country Risk Management -PEST

Study of Global Business Environment

Prof: Sham Choughule

MBA-IIFT New Delhi

Update on I B
China Overtake Japan in Economy in Q2 India will grow faster than China by 2015 Bharti Airtel to invest $ 10m in Seychelles Hindustan Petroleum eyes shells African assets Coal India close to acquiring three mines abroad BSNL can buy gear from Chinese Co Train falls into China river Intel to acquire MCAFee for $7.7 bn Corus to invest 185 GBP million at port Talbot Plant 15 Million people have been displaced due flood in Pakistan Vedanta is dealing with Cairn India 51% stake for 8.5 bn Myanmar to hold 1st elections in 20 Years

Various factor affecting business

Tata Nano is a rear-engined, four-passenger city car built by Tata Motors, aimed primarily at the Indian market. It is the cheapest car in the world today TATA Nano Motors in Singur plant W.B Location shifted to Gujarat due opposition from Mamata Banarjee Political Leader

Opposition to Reliance SEZ in Navi Mumbai PASCO South Korea investment in India 1997 East Asian Currency crisis Crisis in Iraq Crisis in Iran, Afghanistan Recent sub-prime crisis starting in US

PASCO failure in India

The $12 billion Pohang Iron and Steel Company (POSCO-South Korea) project in Orissa is the largest foreign investment project ever in India 23 June, 2005: Global steel giant POSCO signed a Memorandum of Understanding (MoU) with the Government of Orissa in Bhubaneswar for the construction of a steel plant as well as development of iron ore mines in the state The Posco Pratirodha Sangram Samiti (PPSS), the organization at the forefront of the anti-Posco agitation in the state It was only after five years of signing the MoU, the deadlock broke when the POSCO Pratirodh Sangram Samittee (PPSS), a local outfit spearheading the agitation, agreed to allow the official to conduct the socio economic survey after a discussion with the Chief Minister, who promised the PPSS activists to personally visit the area to have on the spot assessment of the situation and judge the ground realities.

Political Risk for $12 Billion FDI

The Orissa government on Saturday stopped land acquisition for the proposed Posco steel facility in Jagatsinghpur district even as it denied having violated the Forest Rights Act (FRA), 2006

The project by the South Korean steel giant has failed to take off for five years due to opposition by local people

Country risk
Country risk refers to the risk of investing in a country, dependent on changes in the business environment that may adversely affect operating profits or the value of assets in a specific country. For example, financial factors such as currency controls, devaluation or regulatory changes, or stability factors such as mass riots, civil war and other potential events contribute to companies' operational risks

PEST
P=political environment -due to political and legal changes India-Pakistan Sri Lanka Myanmar E=Economics factor Economic factor of country India China European country African country S=Social and culture factor India V/s Gulf country T=Technology Advance countries USA V/s Bangaladesh
Use of computer-mobiles

Objectives
What are the environments ? Environments means factor affecting to your business in foreign country Important of environments
Environments helps the Business to formulate and run the business in the global competitive market Example-Garware Company V/s Chinese Co in African market in Morraco Thus a global company has to formulate strategies based on its mission, objectives & Goal

Objective of study
Environment helps the business to formulate and run the business in the competitive global market A global company has to formulate strategies based on its mission objectives and goals Reason to go global Entry mode Access gravity of competition And then adjust business strategy as per various risk factor

Least risky countries, Score out of 100

Rank 1 2 3 4 5 6 7 8 9 10 Previous Country Overall score

1
2 3 4 6 5 7

Norway
Luxembourg Switzerland Denmark Finland Sweden Austria

94.05
92.35 90.65 88.55 87.81 86.81 86.5

11
8

Canada
Netherlands

86.09
84.86

Australia

84.16

Country risk ratings March 2010 The least-risky countries for investment

Country risk analysis (CRA)

All business transactions involve some degree of risk. When business transactions occur across international borders, they carry additional risks not present in domestic transactions. These additional risks, called country risks These typically include risks arising from a variety of national differences in economic structures, policies, socio-political institutions, geography, and currencies. Country risk analysis (CRA) attempts to identify the potential for these risks to decrease the expected return of a cross-border investment.

Environment
Business environments creates opportunities and threat Example China is opportunities or threat to India -------------------------------------------------------------- Discussion in the class Cant say -? Yes -? No -?

10 Largest countries in world

Rank Country Area (square kilometers) 1Russia 17,075,200 2Canada 9,984,670 3United States 9,826,630 4China 9,596,960 5Brazil 8,511,965 6Australia 7,686,850 7India 3,287,590 8Argentina 2,766,890 9Kazakhstan 2,717,300 10Sudan 2,505,810

Types Environment
Political High political risk -Pakistan Economy Zimbabwe Inflation rate -1033 % Social & Cultural Europe V/s China Technical-use of Computers Natural facts Earthquake in Indonesia Internal 31 states have their own law in India Sale tax

One of the cultural event in Brazil Similar carnival in Thailand India-(Goa)

Levels of Environments
Macro External factor Political- Social cultural technological Micro level Market competition-customers suppliers Banks Financial institute Shareholder

Political Risk
Foreign Politicsrelated to one country Domestic Politics International Politics Example-USA impact on many countries

San Suu Kyi

Nature of Political Risk Factors that Contribute to Political Risk Social Unrest Attitude of Nationals Policies of the Host Government Example Enron in India

Political Risk
Political Risk concerns risk of a change in political institutions stemming from a change in government control, social fabric, or other non-economic factor. This category covers the potential for internal and external conflicts, expropriation risk and traditional political analysis. USA V/s India on Visa fees Indian firms Wipro, Tata, Infosys and Satyam, which send thousands of employees each year to the United States to work at their clients locations as technicians and engineers. The legislation proposes to raise the fees on H-1B visas for companies who have more than 50 percent of their employees on such visas for highly skilled professionals from $320 to $2,320. Similarly the fee on L visas given to multinational transferees is hiked from $320 to $2,570.

Political Risk
Thailand India

Risk assessment requires analysis of many factors, including the relationships of various groups in a country, the decision-making process in the government, and the history of the country Thailand Political battle distrubed Economic development
The government and supporters of coup-ousted former prime minister Thaksin Shinawatra has moved off the streets and into the courts, His autocratic style and self-serving economic policies, however, turned the Bangkok middle class and political elite against him. He was overthrown by a coup Sep 19, 2006.

Pakistan
Pakistan's political system is broken: its political parties are ineffective, functioning for decades as instruments of two families, the Bhuttos and the Sharifs, two clans, both corrupt. The BhuttoZardari axis may be considered "left leaning," while the Sharif brothers may be considered "right leaning." The Sharifs are much closer to Pakistan's military, and to Pakistan's Muslim fundamentalists

Pakistan is Highest political risk due instability and threats from Taliban

Political risk
political risk providers tend to use qualitative methods, focusing on political analysis. However, there is no consensus on methodology in assessing credit and political risks. Example- Political risk is more in Pakistan than Somalia

Global Competitiveness Index2009-10

Global Competitiveness Index 2009-10 V/s 2008-09 Out of 133 ountries
Rank-2009-10
1 2 3 4 5 6 7 8 9 10 49 50

Country
Switzerland USA Singapore Sweden Denmark Finland Germany Japan Canada Netherland INDIA Jordan

Score
5.6 5.59 5.55 5.51 5.46 5.43 5.37 5.37 5.33 5.32 4.3 4.3

Rank-2008-9
2 1 5 4 3 6 7 9 10 8 50 48

Source: World Economic Forum /Business Standard 9 Sept 2009

The Globalization Index 2007

1-Singapore 2-Hong Kong 3-Nertharland 4-Switzerland 5-Ireland 6-Denmark 7-US 8-US Canada 9-Jorden 10-Estonia

The globalization index is an annual study which assesses the extent to which nation to are becoming more or less globally connected taking into four categories

1)Economic integration 2) Personal contact 3) Technology connectivity 4)Political engagement

Even though India is fast growing economy and emerging market in the world, the country has been named as the 2nd last globalization nation in 72 nation. (Year 2006 position -61 out of 62 ) International consultancy and private research firm AT Kearney has ranked India at the 71th place in its annual ranking of worlds most globalized nation >70 % population leaves in rural area >-50% population under load shading >Only 5% use of internet >

Economic Risk
Financial risk analysis providers and credit rating agencies use different methodologies to assess and rate countries' comparative risk exposure. Credit rating agencies tend to use quantitative econometric models and focus on financial analysis Interest rates, exchange rates and inflation Non payment from buyer (importer)

Most corrupt Asian Economy

Rank
0 1 2 3 4 5 6 7 8 9 10 11

Score
1.2 1.87 2.1 5.11 6.23 6.25 6.29 6.3 6.67 7.54 8.03 9.4

Country
Singapore Hong Kong Japan Macau Taiwan Malaysia China South Korea India Vietnam Indonesia Phillippines

From 0 to 10= ) as best possible score and 10 is worst The Philippines is seen as the most corrupt economy in Asia

Source: Hongk kong based political & Economic risk consultancy group

Africas Poverty Problem

Being a continent with numerous third world countries, Africa needs to keep up obviously. The slow progress in Africas economy is attributed to the unfavourable weather/climate conditions that greatly affect their agriculture. One problem to Africas poverty is the ever present corruption. Countries like Kenya of Nigeria have corruption as an almost natural thing. But one spark is the majority of North Africa is looking good economically than South Africa. But South Africa has its aces too, like Johannesburg and Port Cape Town.

Top 12 economies in the world -2010

Per captia GDP in $ Rank Country Population in Million GDP in $ trillion

1
2 3 4 5 6 7 8 9 10 11 12

USA
Japan China Germany France UK Italy Brazil spain Canada India Russia

46.003
39.787 3.666 41.008 40.887 35.196 35.105 8.142 31.182 39081 1.044 8.661

310
127 1.339 82 65 62 60 193 47 34 1.184 142

14.3
5.1 4.9 3.4 2.7 2.2 2.1 1.6 1.5 1.3 1.2 1.2

Source: IMF

Highest rate of Inflation in the world

Rank
1 2 3 4 5 6 7 8 9 10

Country
Zimbabwe Angola Burma Haiti Venezuela Iraq Belarus Dominican Ghana Turkey

inflation %
384.7 76.6 49.7 37.8 31.1 29.3 28.2 27.5 26.7 25.3

Rank
11 12 13 14 15 16 17 18 19 20

Country
Zambia Uruguay Ethiopia Suriname Iran Tajiistan laos Romania Liberia Guinea

inflation %
21.4 19.4 17.8 17 16.4 16.3 15.3 15.3 15 14.8

Economic Risk
Diversification of the economy Degree of reliance on a few key exports and the effects of a decline in the worldwide prices of those exports

Exchange rate devaluation Frequency of government intervention in the money market and the ceilings of interest rates Possibility of recession Non payment from foreign buyer of export procedure

Global Personal tax rates

Global Personal tax in %

Rank
1

Country
Denmark

Tax %
62

2
3 4 5

Swden
China Germany France

55
45 42 40

6
7 8 9 10

USA
India Canada Bangaladesh Sigapore

35
30 29 25 20

Social & Cultural

God (Khandoba) eating meat in Kholapur Lord Ganesh eating Modak as Prasad Tirupati Balajee prasad is Laddu Lord Ganesh in Navi Mumbai & Thailand ----------------------------------------------------------------------------------------

Greeting cards of Valentine Day cannot import in India due to opposition from political parties Wine is banned in Gujarat & Tamilnadu Problem for EU-27

Cultural factors
Dressing habits -veil in Gulf V/s Taiwan Living styles festival and dance Eating habits Pizza V/s Zhunaka Bhakar Vegetarian V/s Non Vegetarian in India Chinese food Eraqis eats dried fruits Arab eats Basmati Rice Languages -16 Languages in India

Cultural differences
Brazil V/s Indonesia

China V/s Uganda

Social factors
Cow meat cannot export from India Caste factor in India Religion Jain Shewtambar V/s Digambar Hindu- Kumbhamela -Cow Tirth Muslim Muslim law in gulf eye for eye camel race Marriage ceremony wastage of time & money People to work- India V/s Malana Attitude to wealth Level of Education Ethics Alphanso Mango Crime rate Looting, Illegal Excavations, Theft, War

Arab women wear the niqab, a face-covering Islamic veil, as they shop in Souk Hamediah, Damascus' oldest market, Syria

India is the land of old social traditions and religious practices and one of bad religious practices of Devadasi is still prevailing here

Terrorism & Maoists are major threat to India

Middle East Iraq Iran nuclear ambition, internal consternation Israel Israeli cycle of violence with Palestine AsiaAfghanistan Talibanian culture + Idol of Bhudha broken by Taliban Indonesia Jemmah Islamia, Al-Qaedas kissing cousin Philippines domestic terrorists India Threats from 1)Terrorism 26/11 2) Maoists Zarkhand & orrisaa

Technical risk
Innovation in communication Morsk code Telegramme Telephone Radio /VHF Mobile Mobile with camera Mobile with internet

Failed States Index Scores 2007

1 2 3 4 5 6 Sudan Iraq Somalia Zimbabwe Chad Cote d'Ivoire 9. 2 9 9. 2 9. 7 9. 1 8. 6 9. 8 9 9 8. 7 8. 9 8. 3 10 10 8. 5 8. 8 9. 5 9. 8 9 9. 5 8 9. 1 7. 9 8. 4 9. 1 8. 5 7. 5 9. 5 9 8 7. 7 8 9. 2 10 8. 3 8. 9 10 9. 4 10 9. 5 9. 5 9. 5 9. 5 8. 5 10 9. 6 9. 1 7. 9 10 9. 7 9. 7 9. 7 9. 2 9. 2 9. 9 10 10 9. 5 9. 6 9. 6 9. 7 9. 8 10 9 9. 7 9. 3 9. 8 10 10 7 9 9. 8 113.7 111.4 111.1 110.1 108.8 107.3

7
8 9

Democratic Republic of Congo

Afghanistan Guinea

9. 4
8. 5 7. 8

8. 9
8. 9 7. 4

8. 8
9. 1 8. 1

7. 6
7 8. 3

9. 1
8 8. 5

8
8. 3 8. 5

8. 3
8. 8 9. 6

8. 7
8 8. 9

8. 9
8. 2 8. 6

9. 6
9 8. 1

8. 6
8. 5 9

9. 6
10 8. 5

105.5
102.3 101.3

110
177

India
2

8.3
1.6

3.2
1

7.1
1.1

8.9
2

4.6
2.1

4.8
1

6.7
1.3

5.4
1.5

5
1

5.6
1

4.2

70.8
1.5 17.1

Nor way

Technical risk
Technology is application of knowledge Technological environment has significant and direct influence on business in general and International business in particular The different between two countries is mostly reflected by level of economy Example 2>B & white TV >colour 14>TV . 21> 29 3DV 4DV

Investment in technology
Advance Countries invest considerably in R & D and new technology
% in total investment for technology
15%

Country Austrelia

China
Japan

12%
14%

New zealand
Singapore

13%
6%

India
Korea

11%
10%

Natural Risk
Sudden Natural Risks Eathquakes Floods Major Storms Landslides Regular Natural Risks Rainfall Wind Temperature Changes
Pakistan 15 million people displaced

Natural Risk
Georgia
Tbilisi, Capital, Hit by a 6 Richter Scale Earthquake on 25 April 2002 Historic District, Nominated for World Heritage List Lack of Regular Maintenance for Decades Seriously Endangered before the Earthquake

Iran Bam, Hit by a 6.5 Richter Scale Earthquake on 26 December 2003

Country risk analysis

Country risk analysis rests on the fundamental premise that growing imbalances in economic, social, or political factors increase the risk of a shortfall in the expected return on an investment. Imbalances in a specific risk factor map to one or more risk categories.

Country risk analysis

Mapping all the factors at the appropriate level of influence creates an overall assessment of investment risk. The mapping structure differs for each type of investment, so an imbalance in a given factor produces different risks for different investments High risk-C Medium B No risk A Total how many got A Advise to the company
Risk A B C

Political

* *

Economic

Social/Cultural

* *
*

Technology

Other-Natural

Total

Risk Management
The MNC have to manage the risks in order to reduce the consequences by way of
1)Mainting sound diplomatic relations with other countries Avoiding investment in enemy countries Estimating demand for the product in foreign country Insurance of various business operation Example 1) Insurance policy for damage of Export cargo 2) ECGC policy for Non payment of Export receivable 3) Port assets and financial loss Insurance JNPT port 4) Oil Refinery-Jamnagar of Reliance By way of reinsurance

Reading
Post work International Business Environment Chapter 3 Book International Business P. Subba Rao

Case study
Study more on various issues involved in PASCO investment in India

Thanks
Submit your presentation of Country Risk Management ASAP 10-15 slides only

Prof: Sham Choughule shamc2001@yahoo.co.in