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Global Business Environment

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Global Business Environment Session 4 : Assessment of Business Environment & CRA and PRA Faculty: Dr. Bibek Ray Chaudhuri Session Date:22.1.2012 – PowerPoint PPT presentation

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Title: Global Business Environment


1
Global Business Environment
Session 4 Assessment of Business Environment
CRA and PRA
  • Faculty
  • Dr. Bibek Ray Chaudhuri

Session Date22.1.2012
2
Pre-Work
  • 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

3
Session Plan
  • Macroeconomics and Business (Contd.)
  • Economic Environment of Countries
  • Country Risk Analysis
  • Political Risk Analysis

4
Key Considerations while assessing Business
Environment
  • Countries Classified by Income Groups (2007)
  • 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

5
Key Considerations while assessing Business
Environment
  • Economic Growth
  • Past trends in GDP Growth
  • Stability of the economy
  • Inflation
  • Interest rate
  • Exchange Rate
  • Cost of living
  • General Confidence in a Countrys Economic System
  • Surpluses Deficits
  • BOP
  • External Debt
  • Internal Debt Privatization

6
Making sense of the Information Country Risk
Analysis
  • Performance
  • Strategy
  • Goals Autonomy, Productivity Equity
  • Policies Fiscal, Monetary, Industrial etc.
  • Context are given for a country (constraints
    resources)
  • Political
  • Institutional
  • Ideological
  • Physical
  • International
  • Evaluation
  • Diagnosing the causes
  • Evaluating the Future

7
Firm Strategy
  • 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)

8
Firms performing CRA
  • Standard Poors
  • Moodys
  • Economist Intelligence Unit
  • Political Risk Services
  • Business Environmental Risk Intelligence

9
Components of CRA
  • Country History
  • in order to identify aspects that could interfere
    in the countrys 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

10
COUNTRY RISK AS A CORPORATE RISK
  • 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

11
Indicators which are important for Assessment
  • Domestic
  • GDP
  • 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

12
Domestic (Continued)
  • Fiscal Policy
  • Budget Deficit/GDP ratio
  • Internal Debt/GDP ratio
  • Monetary Policy
  • Inflation rate
  • Money Supply Growth
  • Real Rate of Interest rate

13
External
  • 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)

14
External (continued)
  • External Debt Services/Exports
  • Capital Inflows
  • Exchange currency rate
  • Risk Management Practices
  • Conjectural Aspects
  • Whats in store for the future?
  • Vision of leaders
  • Projected cash flow on the basis of BOP

15
CRA (continued)
  • How the nation is seen by the World mainly in
    terms of capital inflows
  • Ability and Willingness to pay back

16
Strengths
17
Weaknesses
18
CRA (continued)
  • Risk levels and Exposure Limit
  • Pricing System
  • Follow up

19
Post Work
  • Group activity
  • choose a country and perform a CRA
  • the assignment should be submitted as PPTs by
    March 31st , 2012

20
Political Risk Analysis
21
Introduction
  • Definition of Political Risk
  • Possibility of an unexpected politically-
  • motivated event affecting the outcome of an
    investment
  • Instability vs. risk
  • Classified based on
  • - actor responsible
  • - nature of effect
  • - breadth (micro vs. macro)

22
Types of Political Risks
Cause Cause Cause
Result Government Others
Property Loss Confiscation Destruction
Income Loss Discrimination Disruption
23
Main Types of Political Risks
  • 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 gt 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?

24
Main Types of Political Risks (Continued)
  • Terrorism
  • 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

25
Main Types of Political Risks (Continued)
  • Restrictions on Cross-Border Transfer of
    Resources
  • Tariffs, NTBs inhibit sourcing, exporting
  • FX controls limit repatriation
  • Capital controls
  • Labour regs
  • Taxation Concerns
  • Restrictions on transfer pricing
  • Unitary taxation policies
  • Withholding taxes
  • Availability of tax holidays and other
    incentives

26
Main Types of Political Risks (Continued)
  • Investment Restrictions
  • Sectoral restrictions
  • Requirements for JVs, local ownership
  • Transparency of licensing procedures
  • Requirements for disclosure of technology
  • Requirements for forced divestiture
  • 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

27
Main Types of Political Risks (Continued)
  • 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
  • Regulations with Differential Effects on
    Foreigners
  • Some may be much harder for foreign companies to
    comply with

28
Main Types of Political Risks (Continued)
  • 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 non-proliferation)
  • - 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?

29
Techniques of PRA
  • 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)

30
Inverted U-Curve and Political Stability
High
High
Expectations
Living Standard
Political Instability
Low
Low
Economic Development
High
Low
31
Political Risk
  • Empirical Relationship
  • Most studies examine correlates of expropriation
  • Minor (1993) no link with stability
  • 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

32
Empirical Relationship (Continued)
  • Negative correlations (less risk)
  • - integrated subsidiaries that depend on rest of
  • network
  • - low/high tech
  • - lobbying
  • Makhija (1993) information indicating
  • convergence of MNC actions and government
  • economic objectives

33
The Economist Method Political Risk
Service (PRS) -- 100 points
  • 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

34
The Economist Method Political Risk Service (PRS)
-- 100 points
  • 17 points society
  • urbanization
  • Race
  • Religious fundamentalism
  • corruption
  • ethnic tension

35
Managing Political Risk (counter moves)
  • 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.

36
MNE Evaluation by Countries
  • 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

37
Cost-Benefit of MNEs
  • 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

38
Other Methods
  • Present Value of Costs and Benefits
  • Shadow price adjustments
  • Shifting perceptions over time

39
Divergence of Perceived Benefit-Cost Ratio
Perceived by Multinational Enterprise
Zone of disagreement
Economic Benefit Cost Ratio
Perceived by Host Govt.
40
Example of Differing Valuations
Item Sub-Item MNE-Value Govt. Value
Sales   20 18
Material   (-)14 (-)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
41
Post-Work-Session 5
  • 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
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