Significance of Country Risk Assessment for International Expansion Decisions
Today all business transactions involve some degree of risk and when the business transactions occur across international borders, they carry additional risks not present in domestic transactions. These additional risks are called country risk. It includes risks upcoming from different factors in economic structures, policies, socio-political institutions, geography, and currencies. Country risk assessment is an attempt to identify the potential threats for these risks and to decrease the expected return of a cross border investment.
Therefore, the analytical tools have been improved on to drive the challenges brought by the globalization and new financial products. Emphasis shifted to diversification and hedging techniques and some statistic sophisticated models have been developed in order to objectify as much as possible the analysis, breaking it down into major components as economic, financial, currency and political risks.1
Consideration of the countrys social, political and legal environment should be taken into account while analyzing countrys risk including:
Natural and human resource potential of the country.
The ability of the government to recognize budgetary problems and implement appropriate remedial action.
The degree to which the countrys legal system can be relied upon to fairly protect the interests of foreign creditors and investors
The degree to which political, regional factionalism or armed conflicts are unfavorably affecting government of the country.
Government-imposed price, interest rate, and exchange control trends.
The reliability and transparency of financial information and accounting standards in the country.
The degree of how far do the countrys laws and government policies protect parties in electronic transactions and promotion of the technology development in a safe and sound manner.
Following is the Finlands