What is country risk and how can it affect the overall expansion of your business?

The country risk refers to the uncertainty associated to the collection that arises when negotiating an investment by a company in a country. Meaning that it deals with the possibility that in the future there will be an eventuality or an adverse tendency to materialize the interests of the company, due to alterations in administrative, regulatory, political, economic, social or cultural factors.

A distinction must be made between what is risk and what is uncertainty. Risk is a quantifiable concept whose probability of events or future trends can be calculated considering the probability to calculate the rate of return on investment of the company, although there is no unanimity among economists how to measure risk if a macro approach is followed and takes as a starting point the country, or is done from the point of view of the company that suffers it, following a micro approach.

Uncertainty, on the other hand, is a concept that cannot be quantified. The best protection against uncertainty is to avoid situations in which other actors, especially politicians, have discretion when making decisions, particularly adverse to the intentions of the company, keeping options as open as possible for the company.

Country risk may be due to different factors that may generate uncertainty, such as:

· Administrative factors, such as the delay in making administrative decisions that may affect the plans of the company.

· Political factors the political risk refers to the possibility of obtaining patrimonial losses, due to the governmental action of the country of destination or of other neighbors, and that, by proximity, affect that country of destination. This risk is associated with political stability, which may be jeopardized due to:

· Changes in the executive, legislative or judicial power, in relation to the legal or operative conditions that affect the companies. These changes may originate for internal, external or bilateral political reasons between the country of origin and the country of destination of the company.

· Changes of political or constitutional regime

· Issues related to problems with neighboring countries, but which affect the country’s investments (for example, the war between Argentina and Britain over the Malvinas Islands in 1982, ended the Argentine military regime) or with international organizations (for example, when At the end of 2001, the IMF decided not to help the Argentine government to deal with the debt service, which led to the fall of its president, De la Rua, and the fact that the country had up to five presidents in a week, making Argentina at that time in one of the countries with the highest country risk in the world).

· Level of violence in the country (number of violent deaths per 100,000 inhabitants, for example) or conflict with other countries.

· Regulatory factors that refer to non-uniform applications of operating conditions that affect the investment of the company in the target market by the government or the administration. These conditions in particular can refer to:

· The conditions of entry and exit of the operation.

· The tax framework, including the amortization rules.

· The applicable currency exchange rates, especially in countries with multiple currency changes.

· The modifications in the export requirements.

· The integration processes between countries with economic content. Belonging to a strong economic bloc, will involve the transfer of some administrative decisions, will reduce the level of risk of the given country (for example, Mexico has seen its country risk decrease since entering the Free Trade Agreement).

· The alteration of the rules of repatriation of benefits, frequently in the case of regulated sectors, such as energy, gas, electricity or telephony, carrying out changes in regulated tariffs.

· The possibility of expropriation or nationalization of assets, whether they are compensated or not.

· The granting of benefits to local companies.

· Economic factors:

· Macro factors: Unexpected changes in the economic cycle can change the operating and profit perspectives of the company, due to alterations in economic policy instruments such as monetary policy (variations in interest rates or money supply, for example) , the exchange rate policy (alterations in exchange rates between currencies), the possession of natural resources (a country’s management of its natural resources is an important factor of country risk as long as these resources represent an important part of the GDP, as for example Chile and its copper, Russia and Venezuela with its oil deposits, Colombia with its coffee, etc.), trade policy (imposition of tariffs and technical barriers to international trade …), among others.

· Micro factors: The unexpected entry of new competitors or the consolidation of large buyers can alter the operation of the sector in which the company operates.

· Social and cultural factors: The way in which this structure the society of the country, especially if there are great inequalities between social classes, diverse ethnic groups, xenophobic behavior, nationalist or fundamentalist, lack of press freedom, absence of democracy can be factors to consider to evaluate the social risk of a country. Because they can affect the structure of the demand and produce boycotts or other adverse reactions to the products or services offered by the company. The country risk is therefore an element to consider at the time of designing the strategy of internationalization, given that it can have serious consequences on the return on investment. It is therefore necessary to consider these factors when choosing the destination country of internationalization. Particularly considering that in the last 20 years, the crises of currency, inflation, stock market, internal debt, internal, external or bank debt, that is to say those motivated mainly by economic factors, have turned the international scenario into an increasingly volatile, in which we have attended up to an average of two crises per country, involving even the European countries and the OECD. On the other hand, also the intellectual property protection systems should be included in this section, given that the way in which the country of destination of the investment protects intangible assets: technology, know-how or even brands, can have an important influence on the international expansion in which the international company bases its potential for expansion. Such protection of intellectual property are only measures that allow the company to defend the main assets of the company, preventing competitors from taking advantage of the company’s technology. The world economic forum produces a ranking of the 190 countries of the world in relation to the protection of intellectual property, places Spain in 43rd place in this ranking, not far from China in 47th place, with which, we must think that technological protection in the case of Spain, is not a good position. Due to this, companies must consider when developing new technology projects, which may have to consider developing strategies from neighboring countries such as France, which occupies the seventh place in the protection of intellectual property or from Singapore, which occupies the second place and can offer a new market potential. Finally, sometimes country risk is aggravated in a supervening way, because political factors change once the investment is made. In these cases, Comerciando global, has experience in designing the strategy together with the company, in identifying the key interlocutors and reaching them, and can even lead the negotiations. In fact, global trading has represented several companies before the European Union, the FDA and the Codex Alimentarius, the world bank, as well as in the international federations of national sectoral associations, making possible the negotiation of positions and even legislative changes.