A multicriteria approach to country risk evaluation: With an example employing Japanese data

Abstract

In practice, multinational corporations (MNCs) and other international investors take into account a number of criteria in the process of evaluating a country's risk level. The most popular quantitative approach currently employed to evaluate a country's risk level applies a set of fixed (often equal) weights to the risk criteria employed. Unfortunately the criteria weights, since they are fixed, are the same for all investors and for all projects, regardless of their specific risk sensitivities. The approach developed in this paper allows international investors to rank the risk criteria themselves, according to both their importance and their relative clarity. Since investors' projects possess heterogeneous sensitivities to the various types of risk, they will, in general, rank the various criteria (risks) differently. This allows investors to determine a different optimal set of criteria weights and hence, to obtain individualized ratings (and hence, rankings) of the countries, which reflect the unique risk sensitivities possessed by each of their projects.