global business environment
DESCRIPTION
Global Business Environment. Session 4 : Assessment of Business Environment & CRA and PRA. Faculty: Dr. Bibek Ray Chaudhuri. Session Date:22.1.2012. Pre-Work. Read the article on Macroeconomics and Well-timed Business Strategy by Peter Navarro given as readings for this session - PowerPoint PPT PresentationTRANSCRIPT
Global Business Environment
Faculty:Dr. Bibek Ray Chaudhuri
Session 4 : Assessment of Business Environment & CRA and PRA
Session Date:22.1.2012
EPGDIBVSAT 2011-12
Global Business Environment/ Session: 4
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
EPGDIBVSAT 2011-12
Global Business Environment/ Session: 4
Session Plan
• Macroeconomics and Business (…Contd.)
• Economic Environment of Countries
• Country Risk Analysis
• Political Risk Analysis
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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
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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 Country’s Economic System
• Surpluses & Deficits BOP External Debt Internal Debt & Privatization
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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
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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)
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Firms performing CRA
• Standard & Poor’s
• Moody’s
• Economist Intelligence Unit
• Political Risk Services
• Business Environmental Risk Intelligence
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Components of CRA
• Country History in order to identify aspects that could interfere in the
country´s 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
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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
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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
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Domestic (Continued)
• Fiscal Policy Budget Deficit/GDP ratio Internal Debt/GDP ratio
• Monetary Policy Inflation rate Money Supply Growth Real Rate of Interest rate
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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)
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External (continued)
External Debt Services/Exports Capital Inflows Exchange currency rate
• Risk Management Practices
• Conjectural Aspects What’s in store for the future? Vision of leaders Projected cash flow on the basis of BOP
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CRA (continued)
• How the nation is seen by the World: mainly in terms of capital inflows
• Ability and Willingness to pay back
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Strengths
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Weaknesses
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CRA (continued)
• Risk levels and Exposure Limit
• Pricing System
• Follow up
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Post Work
• Group activity
choose a country and perform a CRA
the assignment should be submitted as PPTs by March 31st , 2012
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POLITICAL RISK ANALYSIS
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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)
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Types of Political Risks
CauseCause
ResultResult GovernmentGovernment OthersOthers
Property LossProperty Loss ConfiscationConfiscation DestructionDestruction
Income LossIncome Loss DiscriminationDiscrimination DisruptionDisruption
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Main Types of Political Risks
a) 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 = > 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?
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Main Types of Political Risks (Continued)
b) 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.)c) 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
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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
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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
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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
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Main Types of Political Risks (Continued)
d) “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?
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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)
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Inverted U-Curve and Political Stability
Political Instability
High
Low
Low
Low
High
HighEconomic Development
Living Standard
Expectations
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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”
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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
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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
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The Economist MethodPolitical Risk Service (PRS) -- 100 points
17 points society:• urbanization• Race• Religious fundamentalism• corruption• ethnic tension
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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.
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MNE Evaluation by Countries
• Concern of GovernmentsIndependence: Whether the presence of
MNE will affect sovereignty of the host country
Impact on Domestic firmsHidden Value: Undervaluation of assets,
non-transfer of technology etc.Responsibility: Long-term or short run
commitment
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Cost-Benefit of MNEs
ENOTRF
BenefitCost
/}*
ratio
•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
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Other Methods
• Present Value of Costs and Benefits
• Shadow price adjustments
• Shifting perceptions over time
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Divergence of Perceived Benefit-Cost Ratio
Economic Benefit
Cost Ratio
Perceived by Host Govt.
Perceived by Multinational Enterprise
Zone of disagreement
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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
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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