Define Country Risk and Political Risk. How these risks are managed by a Multinational Company (MNC)?

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Country Risk:

Country risk refers to the risk of investing or lending in a country, arising from possible changes in the business environment that may adversely affect operating profits or the value of assets in the country. For example, financial factors such as currency controls, devaluation or regulatory changes, or stability factors such as mass riots, civil war and other potential events contribute to companies' operational risks.

Political Risk:

Political risk is the risk an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policymakers or military control. Political risk is also known as "geopolitical risk," and becomes more of a factor as the time horizon of investment gets longer. They are considered a type of jurisdiction risk.

Managing these risks by a Multinational Company (MNC):

(i) The simplest way to manage political and country risks is to avoid investing in a country ranked high on such risks. Where investment has already been made, plants may be wound up or transferred to some other country which is considered to be relatively safe.

(ii) Another way to manage these risks is adaptation. Adaptation means incorporating risk into business strategies. MNCs incorporate risk by means of the three strategies: local equity and debt, development assistance and insurance.

(iii) These risks can also be managed by trying to prove to the host country that it cannot do without the activities of the firm. This may be done by trying to control raw materials, technology, and distribution channels in the host country.

(iv) These risks are always related to the amount of capital at risk. MNC can decide to lease facilities instead of buying them, or it can rely more on outside suppliers, provided they exist.



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