Today's global economic realities are creating tremendous new opportunities worldwide. They also are revealing new risks. As a result, whether you are exporting, importing or investing abroad, it is essential to understand how country risk has changed—and how to protect your international business.

Traditional Risk Factors

Country risk has been traditionally viewed in terms of political, economic and social factors. Political risks are often assessed in terms of country stability and sometimes measured by the level of confidence in a government. Economic risks are reflected in levels of national growth, inflation, unemployment, balance of trade and taxes. Social risks are traditionally viewed in terms of social unrest.

How do these play out? A change in national leadership, for instance, sometimes leads to instability that results in social turmoil. And, a new regime that reverses policies often disrupts investments. Some predictable, but mostly unforeseeable, these actions often put international receivables at risk or severely disrupt supply chains.

Today's Economic Realities Bring New Risks

With the emergence of globalization, new country risks have emerged. One not well understood involves international portfolio investment. Also known as “hot money,” portfolio investment is driven by market forces and seeks the greatest returns.

As such, its flows often surge, then dip, partly based on perceptions of future growth and stability. As a result, it has wreaked havoc on some developing country economies and political structures as witnessed by the Mexican peso, and the Asian and Russian financial crises of the 1990s. Unlike past financial catastrophes, these clearly demonstrate how a financial calamity in one country can quickly spread to others, destabilizing entire regions.

Thinking Outside the Box

In addition to commercial risk, which considers the buyer's credit strength and the credibility of his/her bank, and operational risks, which involve the documentation and customs process, nontraditional country risks that do not fit into simple categories need to be evaluated.

For example, if your target market becomes a member of an emerging trade bloc, your exports there may decrease due to trade diversion—the process by which trade bloc members trade more among themselves and less with non-members. These potentialities need to be assessed well in advance.

Strategies for Managing Risk

Numerous uncontrollable risks, such as currency volatility in one country that can lead to the devaluation of national currencies in others, have expanded country risk. As a result, it is important to closely monitor a variety of factors in your target markets, implement tailored financial and hedging strategies to protect your receivables, and diversify sources of supply so as not to rely on any one country or region.

Country risk—which should be viewed differently today—must be effectively managed in order to safely grow any international business.

This article appeared in October 2006. (CM)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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