Abstract
Country Risk in exports is derived from the capacity of payment and the losses that insolvency can cause to the creditors. Instead, the country risk in foreign direct investment is related to breach of contract, deprivation of property rights, damage to assets or cessation of activities. The operations of foreign direct investment (FDI) are different in nature to exports. Therefore, regarding country risks some questions arise: is country risk different also?, which are the common risks and which are specific risks to exports and FDI? Both share five types of country risk: the transfer risk, the impossibility of converting currencies, the exchange rate risk, the risk of war or political violence and sovereign risk. The risk of expropriation is specific to foreign direct investment and does not affect trade. This paper makes a comparative analysis of the risks in exports and foreign direct investment. The aim is to find out to what extent they differ. The conclusions are valid for multinational firms and developing countries with a growth strategy based on FDI.
Highlights
A multinational firm is exposed to two diferent kind of risks in its foreign direct investment (FDI)i operations: those risks related to the management of their own business in a different country and those related to the political and macroeconomic environment of the host country
The economic, political and social contexts can eventually cause losses to foreign investors. How can those losses be originated? Which elements can become country risk events? Is country risk similar for exporters and for foreign direct investors? The goal of this work is to identify the dynamic elements of a country that can generate losses to foreign firms operating inside the borders
The result is a map of the risk events that can face multinational in front of the risk events that can affect to exporters
Summary
A multinational firm is exposed to two diferent kind of risks in its foreign direct investment (FDI)i operations: those risks related to the management of their own business in a different country and those related to the political and macroeconomic environment of the host country. The former are the commercial risks and depend on how efficient the direction and management of the Project are. Exports and FDI operations are different in nature and so are their potential losses According to these differences, is country risk similar for both in a single country? We conclude about the differences for both operations in a single country
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