International Investments: ODA, FDI, FPI, FII, DR, ADR, GDR, IDR

1. International Investments
ODA, FDI ,FPI, FII, DR
TONY THOMAS
Lecturer
Research & Post Graduate Department of Commerce
St. Aloysius College, Edathua, Alappuzha, Kerala

2. OFFICIAL DEVELOPMENT ASSISTANCE (ODA)
 ODA is the official measure of foreign aid flow.
 ODA was introduced by Development assistance committee (DAC) of
Organisation for Economic Cooperation and Development (OECD)
 Official development assistance is defined as government aid designed to
promote the economic development and welfare of developing countries.
 Such assistance may be bilateral (Directly) or multilateral (Developmental
agencies).
 OECD maintains a list of developing countries and low income nations.

3. OFFICIAL DEVELOPMENT ASSISTANCE (ODA):
MODES OF FLOW
 Commitment to provide specified funds.
 Disbursement of actual expenditure.
 Grants of non repayable in nature.
 Loans with principal repayment only without any interest.
 Net disbursements = Grants + Loans – Loan principal repayment

4. ODA: INTERNATIONAL ORGANIZATIONS
 United Nations and UN administered funds
 European commission
 Concessional window of International monetary fund
 International Developmental assistance (IDA) of World Bank.
 Technical assistance activities of WTO
 Regional development banks like AFDB,ADB, EBRD, IDB
 Other multilateral agencies.

5. ODA : ACTIVITIES
 Development projects of schools, clinics, water supply systems etc.
 Emergency aid for natural or man made disasters.
 Contributions to Multilateral Development agencies.
 Food aid, Emergency and other developmental aids.
 Aid to refugees
 Debt relief
 Scholarships for students in developing countries.
 Aids to NGOs
 Reduced tariffs and concessions on imports from developing countries.

6. INTERNATIONAL INVESTMENT
 Foreign investment occurs when a company or individual from one nation invests in assets or
ownership stakes of a company based in another nation.
 International investment is the process by which the residents of one country acquire the
ownership of assets for the purpose of controlling the production, distribution and other
productive activities of an enterprise in another country.

7. TYPES OF INTERNATIONAL INVESTMENTS
1. Direct Investments
 Companies make physical investments and purchases in buildings, factories, machines, equipment etc.
 Foreign Direct Investment (FDI)
2. Indirect Investments
 Companies or financial institutions acquire shares in companies of a foreign country.
 Foreign Portfolio Investment (FPI)

8. SIGNIFICANCE OF FOREIGN INVESTMENT
 Links the host economy with global markets.
 Major source of capital
 Directly related to economic growth.
 Improvement in international trade.
 Upgradation of technology.
 Increases the scale of production and productivity.
 Mode of international trade or business entry.
 Strengthen up the foreign trade and production.
 Provide training and effective transfer of technical know how.
 Generates employment opportunities.
 Reinvestment of profit in the host country.

9. LIMITATIONS OF FOREIGN INVESTMENT
 Hindrance to domestic business and investments.
 Political risks
 Impact in exchange rates
 Influence on BOP of host country
 Not always economically viable
 Distorts the pattern of development of the host country.

10. FOREIGN DIRECT INVESTMENT - (FDI)
 FDI is a cross border investment.
 FDI occurs when a non resident investor invests directly in facilities to produce or
market a product or service in a foreign country.
 It is an investment in a foreign country where the investor retains control over the
investment.
 FDI as a mode of foreign entry involves ownership of assets and long term relationship,
reflecting investors lasting interest in a foreign firm.
 Investments in foreign securities, bonds and other forms of portfolio investments do
not form part of FDI.

11. TYPES OF FOREIGN DIRECT INVESTMENT
Based on nature of business activity
1. Horizontal FDI: Occurs when a company invests in the same business abroad that it operates
domestically. A firm enters a foreign country to produce and sell the same products produced at
home country. The firm duplicates its home country based activities.
2. Vertical FDI: Invests in a business abroad with the objective of locating different stages of
production in different countries. Expansion of a firm into a stage of production process other than
that of its original business in home country. There are two types;
Backward vertical FDI occurs when a firm expands its activities upstream or backward towards the
source of raw materials. Example : Toyota acquiring a tyre manufacturer or a rubber plantation in India.
Forward Vertical FDI occurs when a firm invests in an entity abroad to produce final outputs or to sell
the outputs of its domestic or home country production. Forward vertical FDI takes the firm nearer to
the market. Example: Toyota acquiring a car distributorship in USA.

12. 3. Conglomerate FDI: Firm invests abroad to manufacture products or offer services that are not offered
by it in the home country. FDI occurs when an unrelated business is added abroad.
Based on asset mobilisation strategy
1. Greenfield investment: Establishment of new factories and plants in foreign country. Occurs when
multinational corporations enter into developing countries to build new factories or plants. It
creates new production capacity and jobs, transfer of technology etc.
2. Brownfield investment: Acquiring an existing foreign enterprise in the country of interest through
cross border mergers and acquisitions. It occurs when a company or firm purchases an existing
facility to begin new production. It is mainly done through mergers and acquisitions. It does not
create expansion of production capacities or job opportunities.
Greenfield FDI makes additional production capacity, whereas Brownfield FDI is the purchase of
existing production capacities

13. MODES OF FDI ENTRY
 Wholly owned subsidiaries
A wholly owned subsidiary is a company that is completely owned by another company called the
parent company or holding company. It is a mode of FDI entry where the foreign investor of firm
owns 100% shares of the new firm . The investor can start a new firm as its wholly owned subsidiary
or purchase or acquire a domestic firm in the foreign country.
 Joint ventures
A contractual business undertaking between two or more parties. The management of the company
is shared by the partnering companies as per mutual agreement. Example: Toyota Kirloskar motor
private limited, a joint venture between Toyota motor corporation (Japan) and Kirloskar group (India).
Two methods : Equity joint venture and Contractual joint venture.
 Mergers and Acquisitions
Mergers and acquisitions result in transfer of existing assets from the local firms to foreign company.
It is a form of investing abroad involving the complete purchase of an existing firm.

14. MOTIVES FOR FOREIGN DIRECT INVESTMENT
 Vertical Integration: To ensure availability and quality of raw materials and intermediate inputs
companies locate their plants at the source of materials. Oldest motive behind going multinational.
For example: In sectors of mining firms get located near the source of ores.
 Factor Price Differences: Advanced countries have located parts or whole of their operations in
developing countries to take advantage of low labour costs. Example: Multinationals have started
100 % owned subsidiaries in India to take advantage of cheap, but skilled manpower in computer
software to produce for developed country markets.
 Large Domestic Market: Aim is to produce for the local domestic market taking advantage of
superior technology already developed in the parent country, management expertise. For example:
MNCs are attracted to countries like India and Brazil on account of the large market scope.

15.  Technological know-how: Technology cannot be efficiently transferred by means of licensing
agreements or the cost of such transfer may be very high. In such a case a firm can make much
higher profits by starting operations in a foreign country rather than transferring technical know
to a local entrepreneur.
 Brand reputation: Companies known for their quality and technological excellence may not wish to
entrust production to the hands of a local firm. Thus through FDI the subsidiary of a large
multinational has easier access to capital than a small local licensee firm.
 Corporate Image: Firms with high corporate image, trademark and loyalty can exploit the image by
starting operations abroad to serve the local markets.
 Product Life Cycle: When product reaches maturity stage in its life cycle in home market, the firm
shifts to other markets which have less intense competition.

16.  Exchange rate fluctuations: Real exchange rate changes can alter the relative profitability of
producing in different locations.
 Foreign clients: Firms in service industries such as advertising, accounting and auditing firms,
consultancy firms etc. may follow their clients abroad through FDI.
 Strategic Considerations: FDI is motivated by strategic considerations in an oligopolistic industry. A
firm must move abroad so as not to lose any advantage conferred by lower costs.
 Home Country regulations: Various regulations in the home country such as environment acts,
safety regulations etc. may lead the firm to shift production to a country with looser regulatory
framework.

17. COST-BENEFIT OF FDI
 FDI brings mixed benefits to both home country (FDI source), host country (FDI
destination) and the investor (MNC).
 Cost – Benefit analysis includes evaluating all the potential costs and revenue or
benefits that may be generated as a result of FDI to the stakeholders.

18. HOST COUNTRY BENEFITS OF FDI
FDI has positive impact on host country by supplying capital, technology and management resources
that would boost host country’s (Destination country) economic growth rate.
 Inflow of Resources: Resources which are scarce in host country are transferred from foreign
country like foreign capital, technology, machineries, equipment.
 Economic development & Employment opportunities
 Favourable Balance of Payments
 Foreign Exchange Earnings
 Sources of tax revenue

19. HOST COUNTRY COSTS OF FDI
Critics of FDI argue that there are adverse economic and political effects on the host country.
 Increased competition causes threats to domestic companies and local products.
 Adverse effects on employment: jobs created by FDI investment in host country is offset by losing
market share to their home country competitors. As a result the net number of new jobs created
by FDI may not be as great as initially claimed.
 Negative Balance of payments due to taking back the dividends to their home countries which
affects the current account of host country and purchase or sale of assets by foreign firms may
affect the capital account also.
 Threat to sovereignty: FDI sometimes affects the sovereignty and autonomy of the country and
often leads to destabilize the governments in many underdeveloped countries.

20. HOME COUNTRY BENEFITS OF FDI
 Inflow of foreign currencies in the form of repatriated dividend, license fees, royalty etc. will
increase the foreign earning and thereby forex reserve.
 FDI increases export of machinery, equipment, technology etc. from the home country to host
country.
 Increased industrial activity in the home country enhances employment opportunities.
 Home country executives, technicians and labours can learn skills from its exposure to host
country.
 Home country can transfer skill and earn money.

21. HOME COUNTRY COSTS OF FDI
 Home country’s industry and employment position are at stake when firms enter foreign markets
due to low cost labour.
 Results in retrenchment in the home country.
 Current account position of home country suffers as FDI is a substitute for direct exports.

22. INVESTOR (MNC) BENEFITS OF FDI
 Access to foreign markets
 Access to natural resources.
 Reduces the cost of production
 Overcoming trade barriers like tariffs and quotas.
 Firm’s competitive strengths like management and organization can be exported efficiently
through FDI

23. INVESTOR (MNC) COSTS OF FDI
 Risk from political changes
 Economic non viability
 Threat of nationalization or expropriation
 Challenges in local sourcing
 Exposes company to exchange rate fluctuations
 High tax rates and restrictions on repatriation of profits to home country.

24. FDI POLICY OF INDIA
 The Department for Promotion of Industry and Internal Trade (DPIIT) is responsible for formulation
and implementation of promotional and developmental measures on FDI in India at present.
 Earlier called as The Department of Industrial Policy and Promotion (DIPP)
 DPIIT is under the control of Ministry of Commerce and Industry, Government of India
 The Department for Promotion of Industry and Internal Trade was established in 1995 and has been
reconstituted in the year 2000 with the merger of the Department of Industrial Development.
 FDI policy clearly states the permitted and prohibited sectors and also the entry route , regulations
and conditions for each permitted sector.

25. DEPARTMENT FOR PROMOTION OF INDUSTRY
AND INTERNAL TRADE (DPIIT) – Role & Functions
 Formulation and implementation of industrial policy and strategies for industrial development in
conformity with the development needs and national objectives.
 Monitoring the industrial growth, in general, and performance of industries specifically assigned to
it and including advice on all industrial and technical matters.
 Formulation of Foreign Direct Investment (FDI) Policy and promotion, approval and facilitation of
FDI.
 Formulation of policies relating to Intellectual Property Rights in the fields of Patents, Trademarks,
Industrial Designs and Geographical Indications of Goods and administration of regulations, rules
made.
 Administration of Industries (Development & Regulation) Act, 1951.
 Promoting industrial development of industrially backward areas and the North Eastern Region.

26. FDI PROHIBITED SECTORS IN INDIA
 Lottery Business including Government/private lottery, online lotteries.
 Gambling and Betting including casinos.
 Chit Funds
 Nidhi Company
 Trading in Transferable Development Rights (TDR)
 Real Estate Business or Construction of farm houses (shall not include development of town shops,
construction of residential/ commercial premises, roads or bridges and Real Estate Investment Trusts
(REITs) registered and regulated under the SEBI )
 Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
 Sectors not open to private sector investment- atomic energy, railway operations (other than permitted
activities mentioned under the Consolidated FDI policy)

27. FDI ROUTES TO INDIA
1. Automatic Route
FDI is allowed under automatic route without prior approval either of the Government or the Reserve
Bank of India in all activities or sectors as specified in the consolidated FDI policy issued by the
Government of India from time to time.
2. Government route
FDI in activities not covered under the automatic route requires prior approval of the Government
which are considered by respective administrative ministry or department. Also known as approval
route. It means that investment in the capital of resident entities by the non resident entities can be
made only with the prior approval of government. The proposal for foreign investment should be
made through foreign investment facilitation portal.

28. SECTORS UNDER AUTOMATIC ROUTE WITH 100 %
FDI APPROVAL
 Agriculture, Plantation Sector – 100%
 Mining and exploration of metal and non metal ores, Coal & Lignite – 100%
 Trading wholesale, E commerce, Single Brand Retailing , Duty free shops – 100%
 Broadcasting services – 100%
 Airports Greenfield and Brownfield – 100%
 Air transport service , Civil Aviation sector – 100%
 Construction development, Industrial parks - 100%
 Asset construction, Credit information companies – 100 %
 Petroleum & Natural gas exploration – 100%
 Pharmaceuticals greenfield – 100%

29. SECTORS UNDER AUTOMATIC ROUTE WITH 49 %
CAPS / LIMITS
 Pension – 49%
 Infrastructure company in securities market – 49%
 Petroleum refining by PSUs – 49%
 Insurance – 49%
 Power exchanges – 49%

30. SECTORS UNDER GOVERNMENT ROUTE UPTO
100 % FDI APPROVAL
 Mining and mineral separation of titanium bearing minerals and ores – 100%
 Food product retail trading – 100%
 Print media for publishing and printing scientific and technical magazines / journals – 100%
 Satellites establishment and operation – 100%

31. SECTORS UNDER GOVERNMENT ROUTE BEYOND
49 % NEEDS GOVERNMENT APPROVAL
 Air transport service and Regional air transport service – Beyond 49%
 Defence – Beyond 49%
 Telecom services – Beyond 49%
 Private banking sector – Beyond 49%
 Private security agencies – Beyond 49%
 Investment by foreign airlines – Beyond 49%
 Broadcasting content service – Beyond 49%

32. PROCEDURE FOR APPROVAL THROUGH
GOVERNMENT ROUTE
Proposals can be filed online through Foreign Investment Facilitation Portal (FIFP). FIFP is a single
window clearance by Government of India to facilitate FDI. The proposals for FDI will be examined by
competent authorities as per the standard operating procedures.
 Submission of proposal and uploading required documents on FIFP.
 Department for Promotion of Industry and Internal Trade (DPIIT) assigns the case to the
concerned Ministry within 2 working days.
 Proposal is circulated online within 2 days to RBI for review from FEMA perspective.
 Proposals are scrutinized within 1 week and additional information or clarifications, if required are
asked for.
 On getting all the required information the respective competent authority is required to give out
its decision in next two weeks.
 Approval or Rejection letters are sent online to the applicant.

33. GOVERNMENT ROUTE – COMPETENT
AUTHORITIES FOR APPROVAL
 Mining – Ministry of Mines
 Broadcasting & Print Media – Ministry of Information and Broadcasting
 Civil aviation – Ministry of Civil aviation
 Telecommunication – Department of Telecommunications
 Public and Private Banking – Department of Financial services
 Financial services – Department of economic affairs
 Investments from Pakistan and Bangladesh – Ministry of Home Affairs.

34. POLICY MEASURES TO ATTRACT FDI TO INDIA
 Abolition of industrial licensing , privatization of public sector and opening of many sectors.
 Revamping of FERA into FEMA (Foreign Exchange Management Act)
 Introduction of automatic approval channel
 Establishment of major institutions like FIPB, FIIA, SIA to promote FDI inflows
 Allowing Foreign institutional investors (FIIS) to invest in all traded securities.
 Signing of bilateral investment and double tax avoidance agreements.
 Tax subsidies and concessions.
 Launching of Make in India.
 Invest India and India Investment Grid

35. OBSTACLES TO FDI INFLOW IN INDIA
 Lack of economic stability
 Lack of Political stability
 Poor infrastructure
 Foreign investment restrictions
 Lack of transparency

36. FOREIGN PORTFOLIO INVESTMENT (FPI)
 Foreign portfolio investment is investment by non resident entities in shares, bonds etc. of Indian
companies.
 It is investment in financial assets denominated in foreign countries currency.
 Investing in equities, bonds or other securities of Indian entities by non resident entities are portfolio
investment.
 FPI are highly liquid and indicate the indirect control of the investor in the management.
 Investors can make quick money through the frequent buying and selling of securities.
 FPI includes FII investments, funds raised through Depository Receipts (DRs) like GDRs, ADRs etc.

37. FOREIGN PORTFOLIO INVESTORS
 Class of investors who make investment in securities of Indian companies are called Foreign
Portfolio Investors.
 FPIs are required to register with SEBI in order to participate in the Indian securities market.
 Foreign portfolio investors includes foreign institutional investors (FIIs), qualified foreign investors
(QFIs)

38. TYPES OF FOREIGN PORTFOLIO INVESTORS
 Category I: Foreign Portfolio Investors
Includes government and government related funds in Central banks, pension funds, insurance,
reinsurance entities, Banks, asset management companies, investment managers etc.
 Category II: Foreign Portfolio Investors
Investors who are not eligible under category 1 and includes endowments and foundations, charitable
organisations, corporate bodies, individuals. The investor (FPI) has no control over the use of capital
he has invested. He does not participate in the management of the enterprise.

39. FPI REGULATIONS AND POLICY IN INDIA
 FPI are governed under the provisions of Securities and Exchange Board of India Act,(SEBI) 1992
and Securities and Exchange Board of India (Foreign Portfolio investors) Regulations 2019.
 FPIs are also subject to provisions of FEMA Act 1999 and norms of RBI.
 No foreign portfolio investor shall make any investment in securities in India without complying
with the provisions of SEBI regulations.

40. INVESTMENT RESTRICTIONS AS PER SEBI
RULES
According to SEBI regulations, a foreign portfolio investor shall invest only in the following securities;
 Shares, debentures and warrants issued by a body corporate, listed or to be listed on a recognized
stock exchange in India.
 Units of schemes launched by mutual funds under SEBI (Mutual Funds) regulations 1996.
 Units of schemes floated by a collective investment scheme in accordance with SEBI (Collective
Investment Schemes) Regulations 1999.
 Derivatives traded on a recognized stock exchange.
 Units of real estate investment trusts, infrastructure investment trusts and units of alternative
investment funds.
 Indian depository receipts.
 Any other instruments or securities permitted by RBI and SEBI for Foreign portfolio investors.

41. TYPES OF FOREIGN PORTFOLIO
INVESTMENTS
1. Foreign Institutional Investment
2. Investments through DRs and Convertible Bonds

42. FOREIGN INSTITUTIONAL INVESTMENT
 Foreign institutional investments are made by foreign institutional investors (FIIs)
 Foreign institutional investor (FII) means an entity established or incorporated outside India which
proposes to make investment in India and which is registered as a FII with the SEBI.

43. INVESTMENTS THROUGH DRs AND
CONVERTIBLE BONDS
 Depository Receipts (DRs), Foreign Currency Bonds (FCBs), Foreign currency convertible Bonds
(FCCBs) are instruments issued by Indian companies in the foreign market for mobilising capital
from a foreign country.
 When foreigners buy these instruments, they make portfolio investment in Indian securities.

44. DEPOSITORY RECEIPTS (DRs)
 A depository receipt is a negotiable financial instrument in the form of a certificate issued by a
depository against underlying stocks or shares of a foreign company.
 The shares are deposited by the issuer company with depository (usually an international bank) and
the depository in turn gives depository receipts to the investors.
 Thus it can be traded on local stock exchanges like any other security.
 The depository receipt represents a particular bunch of equity shares on which the receipt holder
has the right to receive dividend and other corporate benefits from time to time.
 But the depository receipts in its own do not carry voting rights till conversion.
 Two types of depository receipts used by Indian companies to raise capital from foreign markets are
– American Depository receipts (ADRs) and Global Depository Receipts (GDRs)

45. GLOBAL DEPOSITORY RECEIPTS (GDRs)
 GDR is a security issued abroad and is listed on a foreign stock exchange.
 GDRs will give Indian companies increased access to foreign funds.
 GDR holder can at any time convert it into shares represented by it.
 Global depository receipts is a negotiable instrument used to tap the financial markets of various
countries with a single instrument.
 It represents a certain number of equity shares and is a dollar denominated instrument.
 The holders of GDR can convert them into shares by surrendering the receipts to the bank.
 A holder of depository receipts may become a member of the company and shall be entitled to
vote , only on conversion of Depository Receipts into underlying shares.

46. AMERICAN DEPOSITORY RECEIPTS (ADRs)
 American depository receipt is a negotiable certificate issued by a US bank.
 ADRs are denominated in US dollar representing securities of a foreign company trading in the
united states stock market.
 These instruments are negotiable and represent publicly traded local currency equity shares issued
by non American company.
 ADR enables an American investor to subscribe for shares of a foreign company offered in his
country.
 ADRs are easily transferable to shares and the ADR holders are paid dividend in US dollars.
 Some of the Indian companies who have gone for ADR are Infosys technology, ICICI bank etc.

47. DIFFERENCE BETWEEN ADR AND GDR
ADR is a negotiable instrument issued by a US bank GDR is a negotiable instrument issued by international
depository bank
Represents a non US company stock trading
in the US stock exchange
Represents a foreign company’s stock trading
globally
Enables foreign companies to trade in US Enables foreign companies to trade in any
country’s market other than US stock market
Issued in US domestic capital market Issued in European capital market
Negotiated in America Only Negotiated all over the world
Listed in American stock exchanges like
NYSE or NASDAQ
Listed in non us stock exchanges like London
stock exchanges or Luxemburg stock
exchanges

48. INDIAN DEPOSITORY RECEIPTS (IDRs)
 A foreign company can access Indian market for raising funds through issue of Indian depository
receipts .
 An IDR is an instrument denominated in Indian Rupees in the form of a depository receipt created
by a domestic depository (Custodian of securities, registered with SEBI) against the underlying
equity of issuing foreign company.
 An overseas custodian bank and domestic depository are mandatory intermediaries insisted by
SEBI for IDR issue.
 Thus IDR is an opportunity for Indian investors to invest in a globally diversified banking and
financial services at a reasonable price.

49. FOREIGN CURRENCY CONVERTIBLE BONDS &
FOREIGN CURRENCY BONDS
 FCCBs and FCBs are special category of bonds used by companies to raise money in foreign
currencies.
 They are issued in currencies other than the issuing company’s domestic currency
 They are bonds issued by an Indian company expressed in foreign currency and the principal and
interest of which is payable in foreign currency.
 FCCB is a foreign currency debt instrument that an Indian company issues.
 FCCBs and FCBs are issued in accordance with the foreign currency convertible bonds and ordinary
shares scheme 1993, depository receipts scheme 2014 and RBI regulations.

50. MASALA BONDS
 Masala bonds are bonds issued outside India by an Indian company denominated in Indian rupee.
 Masala is an Indian word used to denote spices.
 Such bonds are issued to raise funds from foreign investors.
 In short masala bonds are rupee denominated bonds issued by Indian companies in foreign
markets.
 As issued in Indian rupees, the investor needs to bear the exchange rate risks, when the rupee rate
falls. The issuer is not affected by the risk due to exchange rate changes.
 HDFC is the first Indian company to issue masala bonds in 2016.
 In Kerala, KIIFB Kerala Infrastructure Investment Fund Board issued this bond

51. EXTERNAL COMMERCIAL BORROWINGS (ECBs)
 External Commercial borrowings are loans raised by Indian companies from foreign markets at
commercial rate of interest.
 These loans are commonly provided by foreign commercial banks and other institutions.
 ECBs are availed for a minimum average maturity of 3 years.
 ECBs are permitted by the government as a source of finance for Indian corporate for expansion
of existing capacity as well as for fresh investment.

52. DIFFERENCE BETWEEN FDI & FPI
FDI is a real investment FPI is a financial investment
Investment for a long term period Aimed at short term profits.
Investments cannot be liquidated or
withdrawn easily
Investments can be liquidated easily
Direct involvement with the promotion and
management of the firm
Do not have such direct involvement
Any investment above 10 % is treated as FDI Investments under FPI not to exceed 10 % of
the total paid up capital of a company

53. COUNTRY RISK ANALYSIS
 Country risk represents the potentially adverse impact of a country’s environment on a firm’s cash
flows.
 Country risk is described as the economic, political and business risk that are distinctive to a
specific country and that might result in unforeseen investment losses.
 Country risk analysis acts as a screening device for MNCs to avoid conducting business in
countries with excessive risk.
 If the country risk level of a particular economy begins to increase, the MNC may consider
divesting its subsidiaries located there.

54. SIGNIFICANCE OF COUNRY RISK ANALYSIS
 Monitor countries where the MNC is presently doing business.
 Screening device to avoid conducting business in countries with excessive risk.
 Improve the analysis for making long term investment or financing decisions.

55. FACTORS INFLUENCING COUNTRY RISK
Political risk factors
 Consumers attitude in host country
 Attitude of government
 Blockage of fund transfers
 Currency inconvertibility
 War and internal conflicts
 Bureaucracy
 Corruption
Financial risk factors : Country’s economy, Financial distress, Economic growth indicators.

56. TYPES OF COUNTRY RISK ASSESSMENT
 Macro Assessment
Overall risk assessment of a country without consideration of the MNC’s business. A macro assessment
involves consideration of all variables that affect country risk, except those unique to a particular firm
or industry. Considers both political and financial factors. Serves as a foundation that can then be
modified to reflect the particular business of the MNC.
 Micro Assessment
Risk assessment of a country as related to the MNC’s type of business. A micro assessment of country
risk is needed to determine how the country risk relates to the specific MNC. Micro factors include the
sensitivity of the firm’s business to real GDP growth, inflation trends, interest rates etc.

57. TECHNIQUES OF ASSESSING COUNTRY RISK
 Checklist Approach: Rating & weighting all the identifies factors and then consolidating the rates
and weights to produce an overall assessment.
 Delphi technique: Collecting various independent opinions and then averaging and measuring the
dispersion of those opinions, without any common group discussions.
 Quantitative Analysis Techniques: Regression analysis tools are applied to assess the sensitivity of a
business to various risk factors and to identify the factors that influence the level of country risk.
 Inspection visits: Involves travelling to a country and meeting with government officials to clarify
uncertainties.
 Combination techniques

58. THANK YOU ALL