Tài chính doanh nghiệp - Global financial management

Topic #1: Assessing and managing country riskL. Gattis0Global Financial ManagementLearning Objectives1Define country risk and describe how it us used to make investment decisions from the standpoint of a multinational corporation (MNC)Describe the political and economic factors used to measure country riskDescribe country risk mitigation strategiesDescribe the opportunities of global investmentsCountry Risk Analysis2Country Risk Analysis is the assessment of potential investment or operating losses in a foreign country that arise from the political and economic environment. The term “political risk” is sometimes used to describe this risk, but country risk is a more general term for the risks of operating in a foreign market.Country Risk Analysis is used bySovereign bond investors to assess default risk (ability and willingness to pay)Banks to determine where to lend, the currency to denominate the loans, and the interest rate on the loan Investment firms to evaluate currency and equity investmentsMultinational companies (MNCs) to assess the risk of operating in a countryGlobal Opportunities3Obtain domestically scarce resources (extraction)Sell to new marketsLower production, distribution, servicing costs by outsourcing or foreign direct investment (FDI)FDI involves long term, active managementObtain global talent and ideasTax/Regulatory ArbitrageAccess to global capitalGlobal diversification of revenue and costsOpportunities: Raw Material and Capital Goods4 Consumers (Population) Consumers (Income)6Risk or Opportunity? Income Inequality7https://en.wikipedia.org/wiki/Gini_coefficientManufacturing Cost Index (BCG)8https://www.bcgperspectives.com/content/interactive/lean_manufacturing_globalization_bcg_global_manufacturing_cost_competitiveness_index/Opportunities: Outsource ManufacturingHourly Compensation by Country / Industry Cheap LaborOpportunities: Tax Arbitrage10 Tax Rates / U.S. InversionsOpportunities: Access to Trading Bloc11https://en.wikipedia.org/wiki/Trade_blocOpportunities: Diversification12https://www.thecapitalgroup.com/us/insights/investment-insights/simplify-with-worldwide-strategies.html* U.S., Pacific, and Europe use developed market large and mid cap equity MSCI indexesCountry Risk Factors13Economic/Financial Risk FactorsCurrency Risk: Exposure to rise or fall of exchange ratesExporting to ROW: Exposure to FX depreciation / USD apprec.If foreigners pay in USD: Price in FX rises, customers find substit.If foreigners pay in FX: USD value of sales fallOutsourcing: Exposure to FX appreciation / USD depreciationIf you pay in USD: no initial effects, but suppliers may raise pricesIf you pay in FX, USD price increasesInterest Rate Risk (Affects borrowing or investing returns)Exposure to decline in production, employment and incomesInflation RiskCountry Risk Factors14Political Risk FactorsSovereign Default Risk: primarily investment risk, but can cause crisisExpropriation Risk: confiscation of assets by government (less common today)Tax Risk: Exposure to changes in home of foreign tax expenseTrade Risk: Exposure to changes in tariffs, quotas, importation, exportationCurrency Convertibility / Repatriation RiskRegulatory Risk: Exposure to changes in regulation, costs/time of complianceLegal/Legislative Risk: Exposure due to changes in laws, rulings, enforcement (Intellectual Property Risk)Terrorism, War, Violence, Crime, Corruption, Sabotage RiskContract Enforcement Risk: Payment Risk, Performance RiskInfrastructure Risk: power, transport., commun., water, education, health, etc.Operating Risks (All other risks)Reputation Risk (E.g., Apple and Foxconn)Natural Disaster Risk15 Universe of Country Risk Measures https://en.wikipedia.org/wiki/List_of_countries_by_credit_ratingBusiness RiskPolitical RiskSupply ChainSovereign Debt RiskCountry RiskDoing Business Risk Ratings / Indexes16Quantitative MeasuresCurrency values, GDP, Debts, Trade/Budget Deficits, Money Supply, Tax RatesQualitative MeasuresRule of LawDemocratic/Authoritarian PoliciesFree Market/Command PoliciesOpen Economy / Closed EconomyRegulation / Price Controls / ProtectionismCorruptionReligious/Ethnic/Political tensionAssign weights to compute a single composite measureThe composite measures (and countries) are then grouped into categories such as low, medium, high risk17Heritage Foundation Economic Freedom18 RightsLabor MobilityPRS Risk Ratings(2015)PRS Risk RatingsPRS Risk RatingsPRS Risk RatingsCurrency Risk – Big Mac Index23Cheap Big Macs = Undervalued Currency (likely to appreciation) Environment Index24 of Doing Business - Chile25 Risk: Hofstede Model26 Distance: the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequallyIndividualism: the degree of interdependence a society maintains among its membersMasculinity:  indicates that the society will be driven by competition, achievement and success, with success being defined by the winner / bestUncertainty Avoidance: The extent to which the members of a culture feel threatened by ambiguous or unknown situations and have created beliefs and institutions that try to avoid theseLong Term Orientation: describes how every society has to maintain some links with its own past while dealing with the challenges of the present and futureIndulgence:  the extent to which people try to control their desires and impulsesCulture Clusters27https://www.youtube.com/watch?v=U-XdlbgFxZoEnglish Proficiency28MNC Country Risk Analysis Uses29Screen countries for potential investments (or countries to avoid)Adjust the discount rates and cash flows used to value foreign investmentsMonitor risks of existing foreign investments (Exit/Suspension Decision)Design entry, financing, and operating strategies to mitigate country riskRisk and Opportunities and Valuation30Country BenefitsMarket SizeCost AdvantageResourcesRegional access (regional exports and options to expand)Country Costs (Quantifiable Costs of doing business today)Bureaucracy, RegulationCorruptionLegal / Contract EnforcementInfrastructureSecurityCulturalCosts to mitigate risks (e.g. insurance, legal services, lobbying, training)Country RisksUnexpected deterioration in economic, legal, political, regulatory, security environmentCrises Other risks with unquantifiable likelihoods or cash flowsNPV = Σ CFt / (1+k)tMitigation Strategies31Mitigation before operationsDiversify across countries and regionsPerform country risk and opportunity assessment and carefully select/omit new marketsEnsure adequate compensation for risk (valuation, NPV)Minimize financial investment (e.g., wholly owned subsidiary/LLP, nonrecourse debt, project finance, development bank/govt financing, partnerships, franchising, licensing)Insurance contracts from governments, international agencies, private banksBorrow locally (reduces FX risk of financing and offsets fx-denominated receivables)International Tax Strategy (Incorporation, Contracts, Transactions)Mitigation Strategies32Mitigation during operationsCultivate local stakeholders (financial, political, supplier, customers)Country Specific HR policies (cultural dimensions, bribery, etc.)Physical location security and crisis trainingCurrency derivatives to hedge appreciation of fx denominated payables/imports/outsourcedCurrency derivatives to hedge depreciation of fx-denominated receivables/profits/dividendsFX-adjustment invoice “risk sharing” clausesUse partnerships to deal with culture risk, ease of doing businessMonitor country riskExit Strategy (cultivate viable alternatives)Team Assignment #133Perform a country screen for a highly successful U.S. apparel company. The hypothetical company (USXWear) wants to expand globally to the following regions: (1) Latin America, (2) Europe, (3) Africa, and (4) Australia-Asia. USXWear will select one country in each of the four regions as the primary regional production and marketing location, logistics hub, and home market to the extent that it has a large consumer base.You may use any information from this presentation, textbook and other outside resources. Team Deliverable: 2-3 page, written report, single spaced, including tables, maps, etc.. The report should include brief country profiles which include risks and opportunities. The report should also describe your methodology for selection (qualitative and quantitative). If you rely heavily on commercial country risk ratings, be sure to describe what it measures. What are the key’s to successful expansion in these countries?Format: Written consulting report to USXWear CEO, Lou Gattis. The CEO plans to visit each country that you recommend for further due diligence.Be ready to pitch and defend your country selections to the classAssessmentQuality of country screening methodology. Quality of selected country profiles (the 4 selected countries)Quality of written report (structure, language, clarity, professional appearance)