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Risk Management - Coggle Diagram
Risk Management
Foundations of Country Risk Management
Governments tend to have a short-sighted and opportunistic approach about FDI: they want their country to attract FDI at the same tome they are cautious and wary of long-term consequences.
Political power can be root cause of country risk in international business, and the way it is performed determines the level of threatening to a companyn or firm.
An industry that is prone to risk management is the extractive industry, as they are vulnerable to adverse action from the host governments.
Some reasons are:
Employment of thousands of people with direct impact on local communities' economy.
Subject to legal regimes and laws, with constant change.
As these kinds of companies produce waste products, they need to follow the legal compliance than other forms of investment.
Country risk is divided into firm-specific and country-specific political risk. This distinction allow analysis to differentiate what can affect a company -and thus find ways to mitigate or reduces the risks- and what come from a macroeconomy environment and they dknt have control over them.
Government risk: those that arise from the actions of a government authority, either legally or not
Instability risk: arise from political power struggles; these could be between memeber of the government or mass riots.
Sovereign risk: risk that a foreign central bank will alter its foreign-exchange regulations.
Country risk: refers to the likelihood that a sogereign state won't fulfill towards its lenders.
Political risk: Political and social developments that can have an impact upon the value or repatriation of FDI.
Transactional risk: the country, political, sovereign, economic,
financial, technical, environmental, developmental and sociocultural risks that an organization assumes in international transactions.
For an effective Risk Managing Process, is important to include common elements that will create an appropriate environment for risk management.
Some of them are:
Adequate risk management policies and procedures.
Effective process for analyzing country risk.
A country risk rating system.
Regular monitoring of country conditions,
Adequate internal controls and an audit function.
Country risk in perspective
After the Arab Spring and the Mena conflict in 2011, the perspective about country risk changed.
Analysts and companies had to change the way they used to approach risk.
Even though political change is expected due to socialinequalities and other factors, predicting when and how it may occur is very difficult.
A country's size and importance may prevent analysts from embracing country risk, meaning that they might not consider the risk in a country as important as in other.
Changes might not be changes at all, and the status quo might remain even if actions are taken.
In a globalized world, changes are not only limited to a country or region, as its scope might be higher and predicting what happens next -in both short and long term- will become more difficult.
Country risk involves politic, economic, sociocultural dynamics and history.
Risk perception helps shaping foreign investors behavior.
This depends on various factors like, prior experience, wisdom, perception and tolerance to risk and long-term objectives.
An example of this is FDI in "terrorist regions"; countries with terrorism problems might or might not have FDI dependig on the type of company, political and economic factors. Some factors that define this are economic health, level of public discord, media attention, costs, existence of law and good government corporate governance and government connections.
Companies have to decide between profit maximization and risk management and loss minimization.
Statistics and numbers help at the moment of assessing risk, but they should substitute qualitative analysis.