Country Risk Analysis

Country: China

Sector: commercial aviation

Must have connection with the textbooks Chapter 6 (see attached)

Country Risk Analysis You will examine the country (i.e. China) from the perspective of a possible location for direct investment on the part of your firm. The purpose of this part of the report will be to provide a country risk assessment. This will involve outlining the economic, regulatory, and political stability of the country as well as any social and cultural risk factors that might help in determining the general level of risk. In general you are examining the country in terms of two aspects of risk – that or expropriation and also credit risk. You report should include brief summaries of the following topics. • A very brief history of the country and basic statistics (population etc.) • Basics of the economy and general economic health/prospects • Domestic stock market – size and liquidity, banking system • Tax environment and any relevant considerations • Political stability and level of corruption • Currency exchange rate system and any currency exchange controls • Any limitations on foreign currency transfers • Geopolitical issues – potential tensions with neighboring countries • Environmental risks, pollution • Social development – education of the labour force, poverty levels, GINI measure • Specific risks of expropriation/nationalization (any historical examples). A large part of your focus will be on trends over the last five years. Forecast of Exchange Rate In addition one section of your report will also provide a medium term (one to five year) forecast of the exchange rate for the currency (i.e. Chinese Yuan) and outline any uncertainties associated with your forecast. Detailed work on this forecast would be included as an Appendix. Specific Company/Industry Risk Your company belongs to a specific sector (i.e. commercial aviation). Particular industrial sectors may have historical reputations and/or risks associated with them. This may be due to the actions and activities of certain companies within the sector which may be viewed as detrimental within certain countries. For example the oil industry has developed a bad reputation in many countries. Many less developed countries have become concerned over the environmental impact of oil companies, the risk of which could lead to civil protest and government expropriation later on. You will assess your industry in terms of this issue by researching any prior environmental, regulatory, corruption or human rights issues that might be associated with it and noting it.



1. Identify a NZ company or industry to begin this country-risk analysis exercise. This may be a company that you have worked for, one that you have read about, or one that you hope to work for.

2. Use scanning techniques to compare at least 3 countries on broad indicators of opportunities and risks for your particular company.

3. Provide a 3-5 page report using either a grid or matrix (see below) to show why you chose this country for your company as an investment prospect

1. Sales Expansion.
a. Economic and Demographic Variables.
• Obsolescence and leapfrogging of products.
• Prices.
• Income elasticity.
• Substitution.
• Income inequality.
• Cultural factors and taste.
• Existence of trading blocs.

2. Resource Acquisition.
b. Cost Considerations.
• Labor
• Infrastructure
• Ease of transportation and communications.
• Governmental incentives and disincentives.

1. Factors to Consider in Analyzing Risk. There are a number of factors to consider when analyzing risk: 1) companies and managers differ on risk perception, tolerance for risk, and the expected returns; 2) one company’s risk is another company’s opportunity; 3) there are means available for reducing risk other than avoiding locations; 4) there are trade-offs between risk and return.
2. Political Risk.
• Analyzing past patterns.
• Analyzing opinions.
• Examining social and economic conditions.

3. Monetary Risk.
• Exchange rate changes.
• Mobility of funds.

4. Competitive Risk.
• Making operations compatible
• Spreading risk.
• Following competitors or customers.
• Heading off competition.

Two common tools for analysing information collected via scanning are grids and matrices. Both tools have plusses and minuses.
A. Grids

A grid can be used to make country comparisons according to a wide variety of relevant factors, such as ownership rules, potential returns, and perceived risk. Variables can be ranked and weighted according to specific criteria that reflect a firm’s situation and objectives. Although useful for establishing minimum scores and for ranking countries, grids often obscure interrelationships among countries.
B. Matrices

One matrix frequently used when doing country comparisons is the opportunity-risk matrix. When using this matrix, the manager plots a country according to the perceived value of the opportunity the country offers, on the one hand, and the expected level of risk associated with operating in that country on the other. Factors that are good indicators of risk and opportunity and the weight assigned to each must be identified and assigned by the firm. Once scores are determined for each country being considered, they can be plotted and reviewed from a comparative perspective. A useful application of this technique is to develop both present and future scores for countries (e.g., five years hence) because a significant shift in a score in the future could have serious implications with respect to the country selection process. Matrices are often based on subjective indicators which must be justified.


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