In one month, you see your net income wiped out before your eyes.
JOHN VONDRAS, U.S. WEST MANAGER IN INDONESIA.53
Closely connected to a countrys political stability is its economic environment, and the relative risk that it may pose to foreign companies. A countrys level of economic development generally determines its economic stability and therefore its relative risk to a foreign firm. Most industrialized nations pose little risk of economic instability; less developed nations pose more risk.
A countrys ability or intention to meet its financial obligations determines its economic risk. The economic risk incurred by a foreign corporation usually falls into one of two main categories: its subsidiary (or other investment) in a specific country may become unprofitable (1. if the government abruptly changes its domestic monetary or fiscal policies or '(2. if the government decides to modify its foreign- investment policies. The latter situation would threaten the ability of the company to repatriate its earnings and would create a financial or interest-rate risk.54 Furthermore, exchange-rate volatility results in currency translation exposure to the firm when the balance sheet of the entire corporation is consolidated. This risk may cause a negative cash flow from the foreign subsidiary. Currency translation exposure occurs when the value of one countrys currency changes relative to another. For a U.S. company operating in Mexico, for example, the peso devaluation meant that the companys assets in that country were worth less when translated into dollars on the financial statements; on the other hand, the firms liabilities in Mexico were less also. When exchange-rate changes are radical, as with the devaluation of the Russian ruble in 1998, there are repercussions around the world. Not only is it unfortunate for the Russian people whose money suddenly can buy so much less, but it also means that Russian firms do not have enough buying power to buy products from overseas, which means that the sales of foreign companies will go down. On the other hand, foreign companies have more purchasing power in Russia to outsource raw materials, labor, and so on.
Because every MNC operating overseas exposes itself to some level of economic risk, often affecting its everyday operational profitability, managers constantly reassess the level of risk the company may face in any specific country or region of the world. Four methods of analyzing economic risk, or a countrys creditworthiness, are recommended by John Mathis, a professor of international economics who has also served as senior financial policy analyst for the World Bank. These methods are (1. the quantitative approach, (2. the qualitative approach, (3. a combination of both of these approaches, and (4. the checklist approach.
The quantitative method, says Mathis, attempts to measure statistically a countrys ability to honor its debt obligation.55 This measure is arrived at by assigning different weights to economic variables to produce a composite index used to monitor the countrys creditworthiness over time and to make comparisons with other countries. A drawback of this approach is that it does not take into account different stages of development among the countries it compares.
The qualitative approach evaluates a countrys economic risk by assessing the competence of its leaders and analyzing the types of policies they are likely to implement. This approach entails a subjective assessment by the researcher in the process of interviewing those leaders and projecting the future direction of the economy.
The checklist approach, explains Mathis, relies on a few easily measurable and timely criteria believed to reflect or indicate changes in the creditworthiness of the country.56 Researchers develop various vulnerability indicators that categorize countries in terms of their ability to withstand economic volatility. Most corporations recognize that neither this, nor any single approach, can provide a comprehensive economic risk profile of a country, and therefore they try to use a combination of approaches.
In 2002, companies around the world are still feeling the effects of their exposure to economic risk in Asian countries as the economic decline that began with Thailand in 1997 deepened. It also appeared that Japan was not taking sufficiently radical steps to turn around its economy. The reverberations on the earnings of MNCs and on the worlds stockmarkets, felt around the world, reconfirmed for everyone the intrdependence of world economies. It clarified the points of interface between world economic issues and business, and indeed that of the individual welfare. See Comparative Management in Focus for further details.
Economic Risk : Economic article from Global Management Catagory Economic Risk
Economic Risk Economic article from Economic Global Management.Free learning from data about Economic Risk Economic Global Management Business Management,online business management,business management classes,online business management degrees