Annex I: Corporate Case Studies

CASE STUDY ONE: A US ENERGY COMPANY (CONOCO)·

Introduction

Conoco is a major US oil company, with approximately 20% of its invest­ments in coal and 10% in chemicals. Approximately one-third of total sales are outside the United States; principal overseas markets are Canada, the EC and South Korea.

Organizational Aspects

Prior to 1979, international political and economic assessments in Conoco were undertaken informally by several analysts within the corporation's Co­ordinating and Planning Department. In 1979, a separate International Analysis group was established within this department, charged with interna­tional business environment assessment; it comprised a director and three analysts. In 1987, the Co-ordinating and Planning and Strategic Planning departments were merged to form a new Planning and Analysis Department. The International Analysis group was disbanded and the political risk assessment function decentralized, with country-specific assessments being prepared by the various operating departments.

Methodology

The political assessments have generally avoided a comprehensive, macro­political and macro-economic approach, in favour of project specific analyses. Even wherc political and economic assessments are conducted, they are expressed in terms of how politics and economics will affect the corpora­tion's operations.

To the cxtent possible, the political risk assessments are quantified, especially those pertaining to government policies as they affect energy supply and demand and contract terms. Representative subjects analyzed include:

quantifying the effects of British tax changes on North Sea oil operations; a comparative study of 12 upstream (exploration and production) operating environments: political, economic, fiscal, geological and regulatory; the outlook for Egypt's operating environment; an assessment of OPEC member states' minimum desired revenues;

• This study is partly based on Jones (19116).

180

Corporate Case Studies 181

the level, type and market effects of subsidies available to European coal producers; the outlook for government issues affecting Conoco's marketing operations in Ireland; the outlook for Saudi Arabia's oil production and pricing policies and the specific factors shaping those policies.

Integration

When the International Analysis group was operating, the principal 'clients' of the unit were the Co-ordinating and Planning Department and the operating divisions themselves. However, neither group was obliged to contact the risk assessment unit, and at least one half of its work for these groups was self­initiated. This lack of a formal requirement that project proposals be vetted by the unit meant that sometimes political risk considerations were excluded from the decision-making process. As a result, the group did not live up to corporate expectations and was disbanded in 1987 and the political assessment responsi­bilities were devolved to other parts of the corporations.

Currently, a Worldwide Exploration group utilizes both the remaining in­house expertise and external resources to produce balanced assessments; the emphasis is on understanding the risks that the company is incurring, in order better to develop risk management strategies.

CASE STUDY TWO: A US MANUFACTURING COMPANY (PILLSBURY)·

Introduction

Pillsbury produces branded foods and has interests in milling flour, merchan­dizing grain ingredients and operating/franchising fast food and convenience restaurants. Sales in 1987 totalled nearly $6 billion, of which around 10% were overseas; principle foreign markets are Canada, the EC and Mexico. It is owned by the British company, Grand Metropolitan pic.

Organizational Aspects

Originally, political risk assessments were performed by the Mergers and Acquisitions unit, the International Division unit, the Government Relations Department, or a combination of all three. By the mid-1980s, however, the rapid growth of the company's international operations had forced senior management to centralize the function even though it remained rather informal. By creating 'preliminary business development teams' which cut across traditional divisional boundaries, the company now undertakes strate­gic marketing analysis (by someone from the International Division), project financial analysis (by someone from Mergers and Acquisitions) and political

• This case study is partially based on Krause (1986).

182 Annex I

and macroeconomic analysis (by an analyst from the Government Relations Department).

Methodology

Just as the overall corporate approach to political risk assessment remains informal, so does the process of risk assessment. The company is still experimenting with methodology but has found that senior management acceptance is greater when 'structured qualitative' analysis is undertaken than when quantitative analysis is undertaken. At present, there are several formats for political risk assessment:

I. New country profiles, which present a broad analysis of the political and economic climate of the country and a very specific investment report tailored to the product and locale of the potential new investment.

2. Reports of major policy changes in countries where Pillsbury has existing operations (e.g. reports on the expected changes brought about by the GATT negotiations or the debt crisis and elections in Mexico).

3. Reviews of possible changes in international policy that might impact on the company's operations. (For example, the possibility of major changes in the European Community's Common Agricultural Policy).

4. Policy changes by the United States which affect the company's overseas operations (e.g. grain embargoes, sanctions, aid extension, etc).

The issues examined in these reports are very company- and project-specific. Examples of issues examined include, food production and distribution (government policy regarding food safety, distribution, price controls and farm policy), finance issues (tax policy, currency stability, inflation and controls on profit repatriation), labour issues (labour costs, productivity and unionization) and health issues (food labelling, nutrition content, inspections, etc). All are prepared as 'non-regular (ad hoc) studies'.

Sources of Information

Several methods of data collection are used in preparing a political risk report, depending on the type of investment being considered. Sources typically used include:

Outside consultants, reporting services and academia - good sources of general information but seldom issue-specific enough to deal with a particular industry sector or investment. (Consultants are relied on for approx. 50% of the political assessments.) Government contacts in Washington and overseas, including the State Department, the CIA, the Department of Commerce, and the Office of the US Trade Representative for general background and specific invest­ment or product information from in-country government sources. In-country managers who provide a unique insight into potential problems or opportunities, but who have obvious biases regarding future corporate operations.

Corporate Case Studies 183

Current suppliers and customers, and analysts in professional organizations, such as the Council for International Business Risk Management (CIBRM).

Integration

The members of the Board of Directors, including the President of the company, receive approximately one-half of all political risk reports. The assessments are used primarily as input into the strategic planning process and into specific investment decisions.

CASE STUDY THREE: A US INDUSTRIAL COMPANY (UNION CARBIDE)""

Introduction

Union Carbide is a major diversified industrial corporation, with interests in chemicals and plastics, gases, metals and carbons and speciality products. Sales in 1987 approached $8 billion, of which approximately one-third were over­seas; overseas operations were principally in Canada, the EC, South America and the Far East.

Organizational Aspects

In the mid-1980s, a political risk assessment team was assigned the task of developing recommendations on country risk analysis. However, unlike many other corporations, Union Carbide did not seek to institutionalize this team; rather, it remains an ad hoc group of key personnel who have retained their other responsibilities in line and staff departments. Heavy reliance is placed on the use of outside consultants.

Methodology

The political risk assessment team was charged with the development of an early warning system for senior management, the development of consistent risk assessments, the incorporation of country risk into business plans and capital budget proposals, and the development of guidelines for senior management to control country risk exposures. The company's risk evalua­tion model is presented in Figure A.I. The building blocks are the collection analysis of internal and external data which track important country issues and which may indicate political changes that could affect the company's foreign operations. These data elements are then used to compile a Country Risk Exposure matrix, which presents two critical inputs to the decision-making process: existing exposure and level of risk.

External consulting services and in-house capabilities are used to capitalize on both internal and external country risk expertise. External services are used

• This case study is partially based on Roberts (1985, 1988).

184 Annex I

primarily to draw on specialized political expertise while in-house personnel make the external assessments company-specific. Reports are in a 'structured qualitative' format.

POLITICAL EVENTS HISTORY

EXTERNAL CONSULTING

SERVICES

Sources of Information

UNION CARBIDE CORPORATION Country Risk Evaluation Model

EXTERNAL REPORTING SERVICES

COUNTRY RISK

EXPOSURE MATRIX

AREA/AFFILIATE COMPANY

SOURCE DATA

Figure A.l

AFFILIATE 'SOURCING! FINANCING!

SELLING' SURVEY

UCC INTERNAL DATA

Data is collected and processed on a continuous basis. Principal sources include various high-calibre newspapers, such as the New York Times and the Financial Times of London, supplemented by such magazines as The Economist and Euromoney. Formal and informal professional networks are important; the principal political analyst belongs to the Council for Interna­tional Business Risk Management.

Integration

The thrust of political risk assessment in Union Carbide is to foster a milieu for studying and discussing risk issues outside the process of actual decision

Corporate Case Studies 185

making. The results of these deliberations are communicated to management by means of an annual and other reports, including investment and budgeting proposals, 10- and 20-year corporate scenarios, annual business plans and individual country reports.

Postscript

During the latter 1980s, Union Carbide sold its battery and home products businesses, with the result that most of its overseas risks today result from US exports and local resales of the company's products. Consequently, while the overall approach to political risk assessment remains essentially unchanged. the amount of time spent on political risk analysis is far less than in the past.

CASE STUDY FOUR: A US INTERNATIONAL BANK (WELLS FARGO BANK)·

Introduction

Wells Fargo is the tenth largest bank in the United States, with assets of $44 billion. Most of these assets are in California; previously, the Bank also had offices in Asia (Japan, Hong Kong and South Korea) and in the Bahamas. However, these were sold when a co-operative agreement was reached with The Hongkong and Shanghai Banking Corporation, which gave the Bank access to a worldwide network in more than 50 countries.

Organizational Aspects

Wells Fargo Bank began to develop a systematic approach to country risk management in 1977, motivated in part by the problems it had incurred in Peru and Turkey. Initially, the Bank had a Country Review Department within the international banking group comprising a manager, five analysts and a small support staff. Its mandate was to collect both economic and political information from a wide variety of publications and contacts, including those within the bank, to analyze it and prepare a country assessment and risk rating recommendation for a Country Review Committee (see below). As the Bank has reduced its international loan portfolio to nearly zero and is no longer involved in international lending, this department has been reduced substanti­ally. Currently, assessments are undertaken to support the Bank's trade financing activities.

Methodology

The format for country studies varies from a detailed and comprehensive report on those countries of most interest to management to a brief overview of key issues for other countries. The approach to country risk assessment is

* This case study is partially based on Miklos (1983).

186 Annex I

basically judgmental. While a great deal of attention is devoted to economic data and projections, and computer programs are used to manipulate the data, the purpose of such quantitative analysis is to establish a basis for making informed judgments.

The bank's concept of country risk distinguishes between two separate, though interrelated, aspects of risk ~ transfer risk and sovereign risk. The former concerns the possibility that borrowers within a given country may be prevented from servicing their foreign debt because of a general shortage of foreign exchange in that country. Here, the analysis contains three basic elements: cash flow, liquidity and debt. Sovereign risk involves two kinds of contingencies ~ the first is the possibility of a major socio-political discontin­uity as has occurred in Iran and Nicaragua; the second is that the political, social or real physical circumstances of a country could impede its ability to make necessary structural adjustments.

Whereas the Bank's analysts follow standard economic theory to guide their transfer analysis, they have developed their own approach to the analysis of sovereign risk. Starting with an assessment of a country's overall stage of socio-political and economic development, the analysts examine those factors which could modify the level of development, either positively or negatively. These factors include: the degree of social, cultural and ethnic cohesion, national integration and the sense of national unity, the rate of population growth and urbanization, the relative youth of the population, the degree of political stability, the degree of political participation, external political relations, the human resources in the country, the endowment of natural resources, the ability to mobilize domestic and foreign savings, and the extent to which investment flows into economically productive uses. The Bank's objective is to project sovereign risk over a 10-year period and transfer risk over five years.

Integration

When the Bank was active in international lending, the Country Review Committee was chaired by the senior vice president who was head of the support services staff and included the head of the Country Review Depart­ment, the deputy head of the international group, the chief international credit officer, the bank's international economist and an experienced officer from corporate banking. The Committee met as often as required, normally about once a month, to review country developments reported by the Country Review Department and then to consider a specific set of country assessments that had been prepared by the analysts. After reading the report, listening to the presentation of the analyst and debating the key issues, the Committee voted on the risk rating to be established for a given country.

The Country Review Department initially tried to review all countries at least once a year and the more important ones several times a year. Through experience, and over time, however, they came to the conclusion that they did not require a detailed annual review of such creditworthy countries as Switzerland, Germany or Japan, nor did they require annual updates on the 40 or so countries in which the bank was no longer marketing because of excessively high risk. Thus, they subsequently focussed their attention on some

Corporate Case Studies 187

40 to 45 middle level countries. In addition to these annual reviews, there was provision to undertake an emergency review, should sudden changes occur; for example, when the Iran-Iraq war broke out in 1981, the country limit for Iraq was immediately suspended and subsequently cancelled (the limit for Iran had been cancelled somewhat earlier).

After the country risk assessment reports had been reviewed, a marketing plan was established with country limits and allocations for each country. After the Country Review Committee had evaluated the risks, the line division developed a marketing/profitability plan that described exactly what kind of business it proposes to do in a specific country, with which type of customer (government, banks, private sector companies, etc), and the profits or other advantages it expected to gain. These business objectives were then brought together with the risk evaluation to the International Management Board, which consisted of the international group head, and the heads of the divisions in the international group who determined group policy.

After the country marketing plan had been thoroughly reviewed and approved by this group, with a full realization of the risks involved, a recommendation for the necessary country limit and allocations was forwar­ded to the Executive Office (the President of the Bank and the Vice Chairman) for approval. Whenever a country was downgraded by the Country Review Committee, the line division had to resubmit its marketing plan along with its recommendations for retrenchment or other defensive actions, as appropriate, and this often resulted in a reduction of the limits and allocations.

CASE STUDY FIVE: A US REGIONAL BANK (THE CITIZENS AND SOUTHERN NATIONAL BANK)·

Introduction

The Citizens and Southern National Bank is part of the Citizens and Southern Georgia Corp., the thirtieth largest commercial banking company in the United States, with assets of $21.1 billion.

Organizational Aspects

The political risk unit was established in the early 1980s and currently comprises five country analysts. all of whom undertake economic as well as political research. Virtually all assessments are made in-house, with little reliance on outside consultants.

Methodology

The country risk profile system was developed to provide a means of comparing economic and political risks among various countries. There are four major categories in the risk profile system:

• This case study is partially based on Oleksiw (1988).

Tab

le A

.I

Cou

ntry

ris

k pr

ofil

e ex

> ex

>

Swed

en

1987

rat

ing

2.15

19

88 r

atin

g 2.

15

1989

est

imat

e 2.

20

1990

fore

cast

2.

10

All

Dol

lar

amou

nts

ill U

S$ b

illi

om

unle

ss o

ther

wis

e in

dica

ted

Est

imat

e F

orec

ast

1987

R

atg.

19

88

Rat

g.

1989

R

atg.

19

90

Rat

g.

I. D

EB

T C

OV

ER

AG

E C

AP

AC

ITY

Gro

ss f

orei

gn d

ebt:

tot

al

$56.

100

$64.

740

$69.

120

$76.

960

Lon

g-te

rm c

omm

erci

al d

ebt

$47.

240

$55.

220

$59.

980

$67.

040

Off

icia

l de

bt

$0.0

00

$0.0

00

$0.0

00

$0.0

00

Sho

rt-t

erm

deb

t $8

.860

$9

.520

$9

.140

$9

.920

Tot

al d

ebt

to G

DP

35

.4%

1.

48

36.2

%

1.43

41

.0%

1.

14

40.1

%

1.19

Deb

t/ex

port

s 10

0.7%

2.

39

104.

1 %

2.

35

125.

6%

2.09

12

5.6%

2.

09

Sho

rt-t

erm

deb

t as

% o

f 22

.4%

2.

07

21.4

%

2.15

20

.4%

2.

22

19.5

%

2.29

m

erch

andi

se i

mpo

rts

Net

bor

row

ing

$3.4

30

$8.0

70

$7.0

10

$6.6

20

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ss b

orro

win

g $2

1.1

10

$25.

430

$28.

530

$28.

760

Gro

ss r

eser

ves

(inc

l. go

ld)

$11.

111

$10.

980

$13.

615

$13.

736

as %

of

tota

l de

bt

19.8

%

0.99

17

.0%

0.

85

19.7

%

0.98

17

.8%

0.

89

as %

of

tota

l im

port

s 19

.5%

17

.0%

23

.9%

21

.4%

M

onth

s im

port

cov

erag

e 2.

3 2.

0 2.

9 2.

6

Inte

rest

/exp

orts

9.

6%

10.0

%

12.0

%

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Deb

t se

rvic

e ra

tio

(m&

l)

27.6

%

0.74

23

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1.

14

33.8

%

0.12

33

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0.

18

Deb

t se

rvic

e ra

tio

(s,

m&

l) 41

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37

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51

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48

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Tot

al e

xpor

ts

$55.

73

$62.

21

$55.

04

$61.

25

Tot

al e

xpor

ts t

o G

OP

35

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1.

89

34.8

%

1.86

32

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70

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%

1.64

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ds e

xpor

ts

$44.

01

$49.

33

$47.

41

$52.

78

% c

hang

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ds i

mpo

rts

$39.

53

$44.

58

$44.

70

$50.

81

% c

hang

e 24

.3%

12

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0.

3%

13.7

%

Tra

de b

alan

ce

$4.4

79

4.74

8 $2

.710

$1

.970

Cur

rent

acc

ount

bal

ance

($

1.24

7)

($2.

549)

($

1.92

0)

($2.

890)

as

% o

f to

tal

expo

rts

-2.2

%

2.\3

-4

.1%

1.

91

-3.5

%

1.98

-4

.7%

1.

83

as %

of

GO

P

-0.8

%

-1.4

%

-1.1

%

-1.5

%

DE

BT

CO

VE

RA

GE

C

AP

AC

ITY

RA

TIN

G

1.67

1.

67

1.46

1.

45

00

1.

0

Est

imat

e F

orec

ast

\0

1987

R

atg.

19

88

Rat

g.

1989

R

atg.

19

90

Ra

tg.

0

II.

INT

ER

NA

L E

CO

NO

MIC

IN

DIC

AT

OR

S

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ss d

omes

tic

prod

uct

($bn

) $1

58.5

4 $1

78.8

8 $1

68.6

4 $1

91.9

8 P

er c

ent

real

gro

wth

2.

4%

1.72

2.

0%

1.51

2.

5%

1.75

1.

1%

1.05

P

er c

apit

a in

com

e (U

S$)

$18,

874

$21,

194

$19,

981

$22,

746

GD

P (

US$

bn.

198

5 pr

ices

) $1

03.6

0 $1

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0 $1

08.3

4 $1

09.5

3 Pe

r ca

pita

inc

ome

(198

5 U

S$)

$12,

333

$12,

524

$12,

836

$12,

977

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ulat

ion

(mill

ions

) 8.

4 8.

4 8.

4 8.

4

Infl

atio

n ra

te

4.2%

2.

68

5.8%

2.

57

4.4%

2.

67

6.2%

2.

54

Mon

ey s

uppl

y gr

owth

rat

e 5.

0%

5.1%

6.

3%

6.0%

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epos

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8.8%

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ding

rat

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Gen

eral

gov

't de

fici

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) as

% o

fGD

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2.2%

3.

00

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00

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3.

00

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3.

00

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iona

l de

bt a

s %

of

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P

53.0

%

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%

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Cor

rupt

ion

2.90

2.

90

2.90

2.

90

Exc

hang

e ra

te:

aver

age

6.34

6.

13

6.96

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nits

per

US$

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r en

d 5.

58

6.16

6.

96

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ER

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NO

MY

R

AT

ING

2.

57

2.49

2.

58

2.37

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PO

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ICA

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Gov

ernm

ent

stab

ilit

y 2.

\0

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2.

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engt

h o

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vern

men

t au

thor

ity

2.60

2.

60

2.60

2.

60

Secu

rity

cap

acit

y 2.

70

2.70

2.

70

2.70

W

illin

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s to

em

ploy

2.

00

2.00

2.

00

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ffic

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itut

ions

3.

00

3.00

3.

00

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ompe

tenc

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reac

urac

y 2.

70

2.70

2.

70

2.70

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al s

tabi

lity

2.

70

2.70

2.

70

2.70

Po

licy

form

atio

n 1.

70

1.70

1.

70

1.70

PO

LIT

ICA

L E

NV

IRO

NM

EN

T

RA

TIN

G

2.28

2.

28

2.28

2.

28

IV.

EX

TE

RN

AL

EN

VIR

ON

ME

NT

Eco

nom

ic v

ulne

rabi

lity

2.

\0

2.\0

2

.\0

2

.\0

F

orei

gn r

elat

ions

2.

30

2.30

2.

30

2.30

Se

curi

ty

2.50

2.

50

2.50

2.

50

EX

TE

RN

AL

EN

VIR

ON

ME

NT

R

AT

ING

2.

30

2.30

2.

30

2.30

Dat

e re

vise

d:

\0 J

an.

90

Sour

ce:

Cit

izen

s an

d S

outh

ern

Nat

iona

l B

ank.

>.

0

192 Annex I

Debt Coverage Capacity, which measures a country's immediate ability to service its foreign debt. The rated factors include the size and burden presented by foreign debt obligations, the relative magnitude of foreign reserves, the strength of foreign exchange earnings capabilities, and the direction and relative size of the balance of trade in goods and services. The Internal Economic Performance category, designed to measure certain aspects of domestic economic performance. Indicators that have the most bearing on the country's export sector are stressed. There is a time-lag before developments in the internal sector of the economy affect the external sector. Therefore, this category provides an indication of the country's ability to service its debt beyond the immediate future. Political Environment, which comprises two elements:

(a) Policy Formation, which is a subjective judgment of the effectiveness of a country's economic management team to develop policies that will enable the country to service its debt. An economically sound country may quickly deteriorate if its management team adopts inappropriate policies. Likewise, a country having problems may be able to solve them if it adopts appropriate policies.

(b) Policy Implementation, which measures a country's ability to carry out successfully appropriate economic policies. The best formulated policies are worthless if the government cannot carry them out for political or social reasons. Such factors as government control, the potential for unrest, and bureaucratic competency are assessed in this category.

The External Vulnerahility category measures a country's economic, political and military vulnerability to changes within the international environment that would affect its ability to service its foreign debt.

Regular reports, periodically updated, are presented in the 'structured qualitative' format. The statistical country risk profile generated by this system is shown in Table A.I.

Integration

Located in the International Credit Oepartment, the political assessment unit prepares reports that are received by the President on a regular basis. The reports are used as input into making specific loan decisions and into foreign exchange operations.

CASE STUDY SIX: A CANADIAN BANK (THE BANK OF MONTREAL)

Introduction

The Bank of Montreal is Canada's second largest commercial bank, with assets of approximately Cdn $80 billion (approx. US$65 billion). In the latter I970s

Corporate Case Studies 193

and early 1980s it was particularly aggressive in international financial markets, building up large exposure in Latin America and Asia. More recently, it has withdrawn from such markets and is now targeting the US as its principal foreign market.

Methodology

An Early Start

An early system of country risk assessment developed by the economists at the Bank of Montreal is described by Nagy (1978). Under this system (since abandoned), risk was defined as the multiplication of the size of a potential loss by the probability that the loss would occur, where loss was defined as the difference between the discounted present values of the expected and the actual net income flows during a given period. The system recognized that, within the same country, both the size of a maximum loss and the probability that it will occur depend on the type of borrower. Other things being equal, it was held that the government is generally a better risk than the private sector and that, within the private sector, banks are generally better risks than other corpora­tions.

Country risk was analyzed along two dimensions - type of event or situation (e.g. war, revolution, civil disorder, mismanagement of the economy and deterioration in the balance of payments) and the likelihood of a particular impact of the event occurring (i.e., default, renegotiation of loan, rescheduling, etc). By assigning probabilities to the likelihood of the occurrence of the event and to the likely impact on loans to each type of borrower, the Bank was able to assign a country risk factor to every type of borrower. To facilitate the comparison of risk among countries, and the integration of its analysis into corporate decision making, a country rating system was developed, linking the level of country risk to the calculated country risk factor. Thus, countries were rated from AAA (virtually no risk), where lending was actively encouraged to D (unacceptable risk), where no lending was allowed.

A Novel Approach

A different form of country risk assessment was in use at the Bank of Montreal during the mid-1980s: that of 'country solvency indicators'. Here, an attempt was made to determine whether a country was 'insolvent'. Borrowing from corporate finance theory, Brown and Connelly (1983) defined country illiquidity as that situation when the financial resources available to a country in the short run were not sufficient for it to meet its international payments obligations on schedule.

Country insolvency was defined as that situation when a country had an excess of liabilities over assets. The stock of liabilities comprised those external debt obligations denominated in foreign currency. As a proxy for a country's assets, the analysts calculated the capitalized stream of foreign exchange earnings over a 20-year period, discounted back to the present. If the present discounted value of these foreign exchange flows exceeded the debt out-

194 Annex I

standing, then the country was considered to have a positive net worth and, thus, to be solvent. If, on the other hand, the outstanding debt exceeded the present discounted value of the future earnings flow, the country was deemed to have a negative net worth, and thus to be insolvent. A distinction was made between illiquidity and insolvency in that, if a country did not have sufficient resources readily available to meet its current obligations, it was illiquid; if it was considered not to have sufficient resources over the foreseeable future, it was considered insolvent. By calculating a 'solvency ratio' (i.e., the ratio of net assets to liabilities), the Bank was able to calculate what reserves should be made for possible loan losses to foreign countries.

Political Risk Assessment

According to Warren (1985) at the Bank of Montreal the political risk assessment function embodies the following elements:

an orientation towards the future, a clearly stipulated time-frame, a stated credibility level, originality, clarity of presentation, a relationship and synergy with other types of intelligence in the organiza­tion.

The International Information and Assessment unit has the mandate to provide assessments about political risks that will affect the Bank's interna­tionallending activities. It does this by way of three types of analysis: i) long­range 'estimates' that present likely political scenarios; ii) the monitoring of short-term developments in the form of 'current intelligence'; and iii) the provision of specific reports and briefings on request from senior management.

A computer-based management system was developed to facilitate data collection and analysis. Called 'key dates', this system is really a sophisticated electronic filing and reference system which supersedes the old 'clipping and filing' system previously used. It is capable of storing 50,000 records and can be accessed by bank staff anywhere in the world (Johannson, 1988).

Integration

A Country Assessment Committee, chaired by a vice chairman of the Bank, brings together, evaluates and co-ordinates the products of their multi-input political and economic analysis. Moreover, this analysis is focussed on those countries or regions of prime importance to the Bank, and therefore is co­ordinated with the Bank's marketing and competitor intelligence systems. There is close collaboration between line and staff officers; a change in risk assessment means amendment to the Bank's operational plans. This close co­ordination and integration of knowledge across divisions gives the Bank a significant advantage over its competitors in adapting to environmental change and in developing new products and services (Warren, 1985).

Corporate Case Studies

CASE STUDY SEVEN: A BRITISH BANK (NATIONAL WESTMINSTER BANK)·

Introduction

195

National Westminster Bank is the second largest commercial bank in the UK and the sixth largest in Western Europe. At the end of 1989, its assets totalled £110 billion (approx. $187 billion).

Methodology

The current system of country risk analysis has evolved over several decades, having originally been based on a simple checklist of key financial ratios and political factors. During the 1970s and 1980s, the analysis became more sophisticated. A somewhat wider range of factors was taken into account and different time scales recognized, resulting in the development of short- and long-term risk models to complement the traditional medium (6-8 years) term study.

Short-term Model

The short-term model has a time horizon of one year. It concentrates on such liquidity factors as the liquidity gap and import coverage measures.

Medium-term Model

Ten country risk variables, falling into three broad categories (financial factors; structural/economic factors; and political/strategic factors) are ana­lyzed and projected over a period of 6-8 years. The weights attributed to the individual variables in the current approach are not fixed; rather, they are re­evaluated regularly and can be adjusted according to changing circumstances. For example, if one sees a gradual deterioration in the socio-political environment over, say, five years, increasing weight could be given to this variable over the forecast period (see Table A.2).

The model is quantitative, yielding a single number for each country, ranging from 0 (the least perceived risk) to 100 (the highest risk). Each risk variable is assigned a maximum risk level, reflecting its perceived relative importance in country creditworthiness, and the overall country score reflects the sum of the separate scores for each variable. In order to avoid claims of spurious accuracy, the overall spectrum of 100 is divided into four categories; the category into which a country falls is then used as the main classification of risk, rather than a country's actual score.

Although the model is quantitative, and yields a single number reflecting overall country creditworthiness, it is recognized that this is simply a convenient presentational device which facilitates the communication of the country risk assessments to operational managers. The analyses and weighting are essentially judgments made by the country analysts.

• This case study is partially based on Gutmann (1980) and Kern (1985).

Tabl

e A

.2

Illu

stra

tive

cou

ntry

ris

k m

odel

s - \0 0'

1

Fac

tors

acc

ount

ing

for

His

tori

cal

deve

lopm

ent

of

coun

try

risk

sh

ort/

med

ium

-ter

m r

isk

mod

els

Lon

g-te

rm r

isk/

pote

ntia

l mod

el

(a)

(b)

(c)

(d)

(e)

(f)

(g)

Fin

anci

al v

aria

bles

E

xter

nal

debt

as

a pe

rcen

tage

of

GN

P (

or a

s a

perc

enta

ge o

f ex

port

s)

5 10

10

10

5

Deb

t se

rvic

e ra

tio

25

25

20

20

20

IO}I

O L

iqui

dity

gap

rat

io

10

Cur

rent

acc

ount

as

a pe

rcen

tage

o

f G

NP

15

10

10

5

Impo

rt c

over

age

25

25

20

10

10

10

5

Str

uctu

ral/

econ

omic

fac

tors

C

omm

odit

y re

lianc

e 30

20

20

10

10

5

15

) In

a l

ong-

tern

> ri

"'/p

o"'n

tial

mod

el

Ene

rgy

vuln

erab

ilit

y 5

10

10

15

stru

ctur

al a

nd p

olit

ical

fac

tors

rel

ate

not

Sop

hist

icat

ion

of

fina

ncia

l on

ly t

o ri

sk b

ut a

lso

to f

utur

e bu

sine

ss

inst

itut

ions

10

10

10

5

pote

ntia

l, f

ocus

sing

on

such

thi

ngs

as:

Eco

nom

ic s

truc

ture

and

si

ze o

f ec

onom

y an

d its

res

ourc

es,

grow

th

man

agem

ent

15

in t

otal

GN

P o

r in

spe

cifi

c in

dust

ries

, le

vel

of

affi

uenc

e (G

NP

per

hea

d),

and

Pol

itic

al/s

trat

egic

fac

tors

10

20

20

25

30

30

45

J

othe

r sp

ecia

l fa

ctor

s (e

nerg

y pr

ojec

ts,e

tc)

Tot

al

100

100

100

100

100

100

100

Sour

ce:

D.

Ker

n (1

985)

.

Corporate Case Studies 197

Long-term Model

Long-term (up to 25 years) assessments are also made, and are based upon a risk and opportunity matrix. With regard to risk, greater emphasis is placed on political factors than in the medium term study. Opportunity is principally measured by economic factors, such as growth in total GOP, level of affiuence, the demand for financial services and other special factors, such as major energy or other projects.

Sources of Information

The major sources of information include the reports of the IIF, which provides comprehensive reports on some 60 countries, the BIS, which provides information on commercial bank lending to various countries and is reasonably up-to-date and the World Bank's 'World Debt Tables', which provide information on public and publicly guaranteed external debt and debt service of developing countries plus, for some countries, information on private debt as well. The OECD annual report on 'External Debt of Developing Countries' provides information on public and private debt, but excludes military debt and, as with the World Bank information, is often up to two years out of date. As in most other banks, the IMF's 'International Financial Statistics' are used for current economic and financial information. The IMF's bi-monthly Survey is also used, as it provides details of Fund transactions and economic stabilization programmes to be adopted as a condition of IMF assistance. Various Central Bank and Ministry of Finance reports are also used, but these tend not to exhibit a high degree of consistency. And finally, reports from the Bank's own regional managers are found to be useful.

Integration

International credit policy can be likened to a three-legged stool, the 'legs' being risk assessment, marketing opportunities and the establishment of country limits. The Group Credit Control department is responsible for bringing together the risk assessments and marketing plans and determining country lending limits. Generally, the Bank tends to be somewhat conservative, as relatively more attention is placed on risk analysis than on marketing.

CASE STUDY EIGHT: A BRITISH MANUFACTURING COMPANY (COURTAULDS LTD)·

Introduction

Courtaulds is a major British vertically-integrated producer of synthetic fibres, with important business interests in fabrics, clothing, packaging products and paints. About half of its sales are outside the UK, equally divided between

• This case study is based on Anderson (1990).

198 Annex I

exports and foreign manufacturing, principally in the US, France and Commonwealth countries.

Organizational Aspects

Courtaulds was one of the first British companies to establish an economics department, in the early post-war period; its mandate from the beginning was to provide advice to management on investment proposals and on interna­tional trade issues. With the restructuring of the company in the 1980s, the economics department was decentralized, with only the Chief Economist and two economists remaining at head office, as part of the Public Affairs Department. Principal activities undertaken by this group include the fore­casting of domestic and foreign economic trends, investment appraisals and policy analysis.

Methodology

Reflecting the sharp reduction in staff, following the re-organization of the economics department, much greater reliance is placed on the use of outside consultants rather than on in-house analysis. Thus, for example, economic forecasting is now more a question of interpretation and development of analysis generated externally rather than the generation of forecasts per se. Similarly, industry analysis now primarily involves the analysis of externally supplied intelligence. However, investment appraisal and policy analysis remain essentially in-house functions.

There is an increasing concentration within the macroeconomic forecasting activity on political economy and especially the conduct of economic policy in the developed countries and its influence on exchange and interest rates and their influence, in turn, on the competitive position of the company in key markets. In addition, such issues as the development of the EC and the impact of the liberalization of Eastern Europe are reviewed, and their likely impact on corporate business noted.

Sources of Information

The Chief Economist is well plugged in to industry and professional organizations. He chairs the Economic Policy Committee of CIRFS, the Paris-based European Man-made Fibers Association and the Confederation of British Industry's GATT Working Party. Discussions with officials and economists in the UK, Western Europe and the US are part of such activities. In addition, there is active staff involvement in such professional organizations as the Royal Institute of International Affairs, the Policy Studies Institute and the Society of Business Economists.

Integration

The Chief Economist is responsible professionally to the Chairman and Chief Executive. He is also responsible functionally to the Group Executive as a whole, reporting to it through the Director of Corporate Communications.

Corporate Case Studies 199

The dissemination of assessments within the corporation, with the exception of budget forecasts, is mainly informal. Advice is frequently verbal or in point form following discussions with senior management. Direct communication between the economic staff and management is encouraged and is common­place. Written briefs are also prepared, especially for top management.

The macroeconomic forecasts are used as an input into strategic planning and budgeting and, to a lesser extent, to labour negotiations. Exchange and interest rate forecasts are used by the corporate Treasurer.

CASE STUDY NINE: AN AUSTRALIAN BANK (AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD)

Introduction

The ANZ Bank is the third largest Australian Bank, with a capital base in 1990 of some US$3.6 billion and assets of US$81.5 billion. In 1984 it purchased Grindlays Bank, in the UK, and currently has operations in 50 countries.

Organizational Aspects

The country risk unit was established in the late 1970s, and currently comprises eight analysts. All of these analysts have other responsibilities besides country analysis; approximately 70% of their time is spent on issues other than country assessment. Little reliance is placed on outside consultants.

Methodology

ANZ's approach to country risk assessment draws heavily on the philosophy of the Grindlays Bank system (see Ashby, 1983). Reports are limited to four pages of narrative plus one page of standardized statistics and forecasts up to five years ahead. The analytical section of the report is based on qualitative judgments and numerical forecasts and follows a standardized format, divided into seven sections:

creditworthiness, principal risks, recent economic developments, debt structure, socio-political environment, short-term prospects, medium-term prospects.

The first section of each country risk assessment, which looks at creditwor­thiness, is essentially an executive summary of the following sections. Here, a clear statement is made on the country's creditworthiness; categories of creditworthiness are: unacceptable; low or poor; moderate or acceptable; high; and undoubted. This section also indicates whether creditworthiness is unchanged since the previous assessment, or whether it has improved or

200 Annex I

deteriorated. Separate statements are made on creditworthiness in the three maturity ranges: short-term (up to one year); medium-term (1--4 years); and long-term (over 4 years); explicit evaluation is also made of the prospects for improvement or deterioration in creditworthiness

The second section, principal risks, highlights the critical factors to monitor in the future. Together with the first section, this section presents a one-page action-oriented policy summary for the Group Credit Policy department.

The third section of the report, on the recent economic developments, is concerned mainly with the structure and growth performance of the economy, its resource base, and economic policies, the way in which these factors affect the country's ability to service its foreign debt. Throughout the report, the focus is 'what effect does this have on the country's creditworthiness?' For example, a country may have a high rate of population growth. This is only considered relevant if it forces the government to adopt a policy of rapid economic expansion which, in turn, may lead to heavy imports of capital goods and raw materials, which could push the balance of payments on current account into deficit. Similarly, the rate of growth in the money supply may cause an acceleration of inflation, which could jeopardize the country's export competitiveness.

In the fourth area of study - the debt structure - those factors which are more obviously linked with debt-servicing ability are considered. Here, the ability to expand exports rapidly and/or to compress imports and therefore to reduce the burden of debt servicing are given special consideration. The debt­service ratio is considered a key element, although it is recognized that over­reliance on this single ratio as a guide to creditworthiness can be misleading.

In the fifth section of the analysis - the socio-political environment - a country's willingness to repay its debt is examined. The social and political structure of the country is reviewed, with a focus on determining the stability of the present government. Questions asked include: 'Could a government hostile to foreign interests emerge during the next 5 or \0 years?'; 'Will violent social unrest cause physical damage - sabotaging a pipeline, destroying a key power plant - which might impair the country's ability to generate adequate foreign exchange earnings?'; and 'Is there any threat of invasion by an outside power or conflict with a neighbour?'

The final sections examine the short-term and medium-term economic and political outlooks for the country concerned and the implications of this outlook for the bank. The statistical/forecast tables appended to the narrative comprise a one-page summary spreadsheet of data and forecasts covering a 12-year span, and are based on the three inter-related forecasting 'blocks' (balance of payments, external debt and GDP/inflation).

Sources of Information

The economists use a variety of sources of information in their research and analysis. The IIF is a prime source of statistical data, as is the IMF. Reliance is also placed on central bank reports, finance ministry reports and economic development plans from virtually all of the countries in which the bank is involved. The analysts also receive a great number of economic and financial journals from all around the world. This reading is supplemented by visits to

Corporate Case Studies 201

some of the countries concerned, by contacts on a personal basis with economists in other banks, in government agencies, in international organiza­tions and with visitors to London from the countries concerned. In addition, the bank's representatives on the spot in many countries supply information and advice to the country analysts.

Integration

The principal method of integration of the country analyses is through the Credit Policy Department of the international banking division.

Annex II: Export Credit Insurance

CANADA

The Export Development Corporation (EDC) was established in 1969 to provide insurance and guarantees for private sector exporters and financial institutions and to extend direct financing to purchasers of Canadian exports.

Each transaction is required to meet a minimum level of Canadian content, which is generally 60%. Coverage is normally extended for both commercial and political risks from the date of contract or of shipment. On short-term transactions, exporters may choose to have cover for political risks only. Insurance is on a co-insurance basis, with EDC covering losses up to 90% of the insurance value and the exporter assuming the remainder. Exporters are encouraged to take a Global Comprehensive or Global Political policy; the former provides cover against both commercial and political risks inherent in export sales made on short-term credit while the latter covers only specified political risks. In both cases, all export sales must be insured, unless excluded by EDC. Alternatively, the exporter may take a Selective Political policy, where the exporter selects the countries for specified political risks; all export sales to selected countries must be insured.

FRANCE

The Compagnie Franrraise d'Assurance pour Ie Commerce Exterieur (CO­FACE) was set up in 1946 as a semi-public, joint stock company. As well as operating on its own account, it operates the short- and medium-term credit insurance service on behalf of the government.

Transactions insured by COFACE may, in principle, include a foreign content of up to 40%, if this originates from another EC country, up to 30% from a non-EC country if there is a reciprocal agreement between France and that country, otherwise a maximum of \0% is allowed.

COF ACE offers a wide range of insurance schemes covering both commer­cial and political risks. For heavy capital goods and major projects, individual policies are available covering commercial (85-95%) and political (90-95%) risks. For mass-produced light manufactured goods, either a comprehensive policy, covering both commercial (85-90%) and political (90%) risks or an open policy, covering only political risks (90%) is available. For exports of consumer goods, raw materials and equipment, coverage is usually given by COFACE on its own account; commercial risks are covered up to 85% and political risks up to 90%.

202

Export Credit Insurance 203

GERMANY

Under the official export credit insurance scheme, the federal government carries both political and commercial risks. A consortium, comprising the private company Hermes and the publicly-held Treuarbeit provide and manage the insurance business in the name of the government.

Cover is normally only for German exporters, with a domestic content of at least 90% (60-70% in the case of foreign content from another EC country and 70% in the case of foreign content from Austria, Sweden or Switzerland).

In principle, political and commercial risks are covered together. Only in the case of comprehensive policies can coverage be limited to political risks, if the creditworthiness of the foreign buyer is too low to insure the commercial risks as well. Besides the supplier credit cover for the risks incurred by the exporter, there is also a buyer credit (tied loan) cover available for German banks providing export finance; instead of the normal percentage of cover (85% for commercial and 90% for political risks) the banks may choose a cover of 95% for both risks. Coverage is not available for the exporter's share of the risk. Three types of cover are available: single transaction cover; multiple transac­tion cover and comprehensive cover. The exporter is not required to take out insurance for all business, except in the case of comprehensive cover.

In principle, all types of goods and services may be insured, including construction projects, consignment contracts and capital investments.

ITALY

The Special Section for Export Credit Insurance (SAC E) was established in 1977 as an autonomous section of the Istituto Nazionale delle Assicurazioni.

The SACE may insure up to 30% of the value of contract components of other countries belonging to the EC or a country with which Italy has signed a reciprocity agreement.

Cover is available for the export of goods and services, feasibility studies, medium- and long-term buyer credits and in the form of a short-term comprehensive export policy. Generally, both commercial and political risks are covered; the proportion insured against political risks may be as high as 90% for supplier credits, 95 % for buyer credits and 100% for buyer credits involving intergovernmental agreements; the percentage guaranteed for com­mercial risks is established on a case-by-case basis.

NETHERLANDS

The Nederlandsche Credietverzekering Maatschappij (NCM), a privately owned insurance company, has provided export credit insurance since 1925; an agreement with the Dutch government in 1932 provides for reinsurance with the government of non-commercial (principally political) risks and risks that fall outside the scope of private insurance.

204 Annex II

In principle, the foreign content of a transaction should be no more than 30-40% of the contract amount. If the foreign content is larger than this, NCM may insure the Dutch part of the transaction only.

Both short- and medium-term transactions can be covered. In the case of the former, the usual percentage of cover is 75% (maximum percentage cover is 95%) while in the latter, it is usually 95%.

SWEDEN

The Swedish Export Credits Guarantee Board (EKN) was established in 1933 as the official export credit agency. Up to 40% of the non-Swedish content of capital goods can be insured.

Insurance is available for political and commercial risks and is granted for those transactions in which the risks relative to the political and economic situation in the buyer country can be reasonably well appraised. For commercial risk coverage, the creditworthiness of the buyer is also evalua­ted. Normally, six months' credit is given for raw materials, semi-manufac­tured products and consumer goods; one year (and, in special cases, up to three years) for consumer durables; and five years for heavy capital goods.

UNITED KINGDOM

The Export Credits Guarantee Department (ECGD) was established in 1978 as a government department responsible to the Secretary of State for Trade and Industry.

Unlike most other export credit agencies. ECGD does not impose any limitation on the proportion of foreign costs which can be considered for inclusion in credit insurance where the post-shipment credit period is for six months or less. For longer credit periods. the foreign content limitation is normally 30-40%.

ECGD offers short-term comprehensive guarantees, providing coverage for up to six months either for all the company's exports or an acceptable spread of them and specific guarantees for single contracts for capital goods that cannot be accommodated in thc comprehensive pattern. Under the former. ECGD is liable for 90% of the commercial risk and 95% of the political risks; under the latter, coverage is for 90-100%.

JAPAN

The Export Insurance Division (EID) of the Ministry of International Trade and Industry began operations in 1930. [n addition, the Export-[mport Bank of Japan offers a programme of guarantees for bank-to-bank loans and buyer credits that cannot be covered by E[D.

[n general. E[D will cover foreign content up to 50% of the contract value. Two types of coverage are offered: i) general export insurance. which provides short-term export credits with coverage for pre-shipment commercial risks and

Export Credit Insurance 205

post-shipment commercial and political risks; commercial risks are normally covered up to 60% (80% for exports from certain sectors) while political risks are covered up to 95%; and ii) export proceeds insurance, for exports of capital goods and construction projects; here, political risks are covered up to 97.5% and commercial risks up to 90%.

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Index

active risk retention 131 adaptability of corporations 3 Afghanistan 151 agriculture industry 13 AIG (American International

Group) 129. 162 air transportation 19, 20 Alcan Aluminium 115 Algeria 37 aluminium industry 17, 115 Amerada Hess 142 American Bell 13 American Can 160 American Express Bank III American International Group

(AIG) 129, 162 Angola xv, 155, 156 ANZ Bank (Australian and New

Zealand Banking Group) 199-201

APRA (Association of Political Risk Analysts) 69, 179

see also CIBRM APRM (Association for Political

Risk Management) 69,89 Arab-Israeli war 34 Argentina 22, 28, 50, 52, 116 Ariston 158 Association for Political Risk

Management (APRM) 69, 89 Association of Political Risk

Analysts (APRA) 69, 179 see also CIBRM

Australia 5-6. 16 Australia and New Zealand

Banking Group Limited (ANZ Bank) 199-201

Austria 203 avoidance. political risk 113-14 Azar, Edward 57

Baker Plan 29 balance of payments 25. 29. 54

216

Balfour Williamson 147 Bangladesh 78 Bank for International Settlements

(BIS) 29, 69, 197 Bank of America 61, 67, 147 Bank of England 40. 141 Bank of Montreal 98. 101, 147,

153. 192--4 banking industry

Canada 96,98-103. 171-2 case studies 185-97, 199-201 information sources 88-9, \01,

109-11 international lending 30--1, 53-4,

71 Mexico 147 nation-states 17, 19,20 Portugal 158 risk management 133-5 Third World debt crisis 26, 28,

171-2 United States of America 5, 7,

75, 79-80, 85-8, 92 Western Europe \05-9, 111-12

Banque Franc;aise du Commerce Exterieur (BFCE) 119, 124

Banque Nationale de Paris 111-12 BBC (British Broadcasting

Corporation) 68 Bechtel Corporation 83 HERI (Business Environmental Risk

Index) 60, 62-3. 64, 65 BFCE (Banque Franc;aise du

Commerce Exterieur) 119, 124 BI (Business International) 60, 62,

63,64,65 BIS (Bank for International

Settlements) 29. 69, 197 branch-plant economies 18 Brazil

country risk analysis 54. 162-3 debts 28 investments 22. 116. 156 oil industry 35

Index 217

Bretton Woods system 16, 24-6 British Broadcasting Corporation

(BBC) 68 Burkina Faso 22, 68 Business Environmental Risk Index

(BERI) 60, 62-3, 64, 65 Business International (BI) 60, 62,

63,64,65 Business Risk Service 63

Cabot Corporation 116, 139 Cameroon 163 Canada

capital 16 exchange rates 27 foreign direct investment 14, 20 insurance 118, 119, 121, 123-4,

202 international co-operation 38 risk assessment 77,94-103, 162,

171-2 strategy formulation studies 6

Canadian Association for Studies in International Development (CASID) 69

Canadian Council of the International Chamber of Commerce (CCICC) 94, 98. 101, 102

Canadian International Development Agency (CIDA) 68, 101

capital-intensive manufacturing corporations 169-70

Canada 96, 100 United States of America 78-9.

82-3,92 cash flows 70-1 CASID (Canadian Association for

Studies in International Development) 69

Caterpillar Incorporated 83 CCICC 94,98, 101, 102 Centre for the Settlement of

Investment Disputes 128 Chamber of Commerce 69. 89 Chase Manhattan Bank 81. 84.

141.151.160

checklists Canada 98, 99, 100 United States of America 80, 82,

86,92 Western Europe 109

Chemical Bank 87 chemical industry 4, 5, 7 Chile

risk assessment 52, 78, 89 risk management 114-15, 130

China 79, 156. 162 Chrysler 116, 148 CIBRM (Council for International

Business Risk Management) 69, 135, 179, 183, 184

CIDA (Canadian International Development Agency) 68, 101

Cigna 149, 162 CITI 129 Citibank 86 Citizens and South Georgia

Corporation 187 Citizens and Southern National

Bank 187-92 clothing industry 33 co-financing 134 coal industry 154 COF ACE (Compagnie Fran~ise

d'Assurance) 119, 124, 202 Comparing the Foreign Policy of

Nations (CREON) 57-8 competitor information network 38 computer industry 17,37 computer simulations of political

environments 58 concession agreements 130 Conflict and Peace Data Bank

(COPDAB) 57 Conflict Watch 58 Conoco 180-1 consultants 83. 92, 109, 175, 182.

198 consumer electronics industry 33 consumer goods industries 76, 170 continuous scanning models 10. II COPDAB (Conflict and Peace Data

Bank) 57 copper industry 17.78.97. 114-15.

149

218 Index

corporate strategy 3-12 Council for International Business

Risk Management (CIBRM) 69, 135, 179, 183, 184

Country Assessment Service 62 country risk analysis 53-5, 162-5

methodology 66--8, 85-8, 100-1, 107-9

models 195-7 profile 188-91

country solvency indicators 193-4 Courtaulds Limited 197-9 credit officers 88 Credit Suisse 105, III CREON (Comparing the Foreign

Policy of Nations) 57-8 cross-default provisions 134 Current World Stress Studies

(CWSS) 57

Daimler-Benz 142 debt coverage capacity 188-9, 192 Delphi techniques 80 Department of External Affairs 68,

101 development, country 15 Dimensionalities of Nations

(DON) 58 discount rates 70-1 diversification 116--17. 134 Djibouti 68 domestic borrowing 116 domestic climate 15, 51 DON (Dimensionalities of

Nations) S8 Dow Chemical Europe 7 Doyle, Patrick 66 drug industry 4. 5 durable goods industry 6

Eastern bloc countries 30 Eaton Corporation 79 EBRD (European Bank for

Reconstruction and Development) 31, 154

EC see European Community ECGD (Export Credits Guarantee

Department) 119, 126, 204

economic adaptability 67 economic climate 51, 54 economic mixed models 58 economies of scale 17, 57 EDC (Economic Development

Corporation) 66, 101, 119, 123-4,202

Egypt 116, 180 EID (Export Insurance

Division) 119, 204-5 EKN (Export Kreditnamden) 119,

126,204 EI Corte Ingles 158 electronics industry 5, 33, 38 embargoes 52 employment 22 energy conservation 35 energy industries 20 entry screening 19 Esso International 89-90 Ethiopia 22 European Bank for Reconstruction

and Development (EBRD) 31, 154

European Community (EC) 180, 181, 183

Portugal 155, 156, 158 events data trend models 57 exchange rates 24-6, 27, 29 exchange risk insurance 120 Eximbank see Export-Import

Bank export controls 22 export credit insurance 118-20,

160, 202-5 Export Credits Guarantee

Department (ECGD) 119, 126, 204

Export Development Corporation (EDC) 66, 101, 119, 123-4,202

Export-Import Bank (Eximbank) 61, 67-8, 80, 85

risk management 118-20, 160 Export-Import Bank of Japan 204 Export Insurance Division

(ElD) 119, 204-5 Export Kreditnamden (EKN) 119,

126,204 Export Managers Association 89

Index 219

exports 16, 54 expropriation 59,64, 66, 71

risk management 115, 116, 132-3 external debt 54, 67 external vulnerability 191, 192 Exxon 78

Falkland Islands war 146 FBIS (Foreign Broadcast

Information Service) 68 FCIA (Foreign Credit Insurance

Association) 118-20 FDI (foreign direct investment) 14,

16, 19-21, 22 Fiat 142 financing

international 114-15 parallel 134 project 134-5

Finland 129 fixed exchange rates 24-5 flexibility of banks 134 flexible exchange rates 26 food industry 4 footwear industry 33 Ford Motor Company 149, 158 forecasting 89 Foreign Broadcast Information

Service (FBIS) 68 Foreign Credit Insurance

Association (FCIA) 118-20 foreign direct investment (FOI) 14,

16, 19-21,22 Foreign Investment Review

Agency 20 foreign ownership 131-2 foreign relations 52 foreign resources 17 FORELEND 63 formal planning 4-7, 76 Fourth World countries 22 France

export credit insurance 118, 119, 202

foreign direct investment 14, 20, 25, 113

investment insurance 120, 121, 124,129

risk assessment 33, 38, 79, 111-12

free trade 31 Friedman, Irving 86 Futures Group 59, 60, 62

Gabon 37 gas industry 20 GAlT (General Agreement on

Tariffs and Trade) 31 General Motors 83, 116 Germany

export credit insurance 118, 119, 203

foreign direct investment 14, 20 investment insurance 120, 121,

125 risk assessment 27, 38, 147, 153,

186 globalization of industry 37-8 GLOBUS (Global Long-term

Options by Using Simulation) 58

gold convertibility 25 gold reserves 156 government interference 47,48, 50 Grand Metropolitan 181 Great Britain see United Kingdom Great Depression 38 Greece 45 'green' issues 53 Grindlays Bank 199 guarantees 30 Guatemala 97 Gulf Oil xv, 139 Guyana 115

Haner 60, 62-3 Hermann, Charles 57-8 Hermes 119, 125, 203 Hewlett-Packard 148 high technology industries 17 Honduras 22 Hong Kong 22, 39

IBRD see International Bank for Reconstruction and Development

ICI (Imperial Chemical Industries) 13

220 Index

IIF (Institute of International Finance) 70, III, 197,200

IMF see International Monetary Fund

Imperial Chemical Industries (ICI) 13

in-house expertise 55-7 Inco 97 India 20, 22, 35, 78, 79 individual perceptions of

environment 8 Indonesia 22, 97, 156 industrial action 46 industrial instruments industry 17 industrialization 54 industry sectors 169-71 inflation 25, 26 infonnal planning 4-7, 76 infonnation sources

American corporations 88-90, 182-3, 184

Australian corporations 200-1 Canadian corporations \0 I West European corporations 109,

III. 197, 198 INS (International Simulation) 58 Institute for Transnational

Studies 57 Institute of International Finance

(II F) 70, III, 197, 200 insurance, political risk 117-30 insurance industry 17, 19,20,30 integrated planning 4--7, 76 intelligence systems 68 interest rates 26 internal economic

performance 190, 192 International Bank for

Reconstruction and Development (IBRD, World Bank)

information source 89, 197 intelligence systems 68, 69, 88,

101 risk assessment 20, 29,47, III risk management 128, 134

International Center for the Settlement of Investment Disputes 128

international co-operation 38-9 international financing 114--15 International Monetary Fund

(lMF) intelligence systems 68-9, 88,

101, 197,200 Mexico 144, 146 Poland 154 Portugal 156, 158 risk assessment 20, 25, III South Korea 160, 162 Third World debt crisis 28, 29

International Process Simulation (IPS) 58

international risk 15 International Simulation (INS) 58 international trade 31-2 internationalization of

business 13-23 investment insurance 120-30, 139 investment models 80, 82 investment review regulations 21 IPS (International Process

Simulation) 58 Iran 136, 137-43

oil industry 34--5, 37 revolution 12, 39, 65, 77 risk assessment 40, 83, 104, 116,

186 Iran-Iraq war 35, 139, 187 Iranian Oil Ministry 142 Iraq 34, 187

invasion of Kuwait 12,37 Ireland 181 iron industry 117 irregular scanning models 10, II Israel 34 issue forecasting 89 Istituto Nazionale delle

Assicurazioni 203 Italy

export credit insurance 118, 119, 203

investment insurance 120, 121, 125

risk assessment 14, 27, 38, 50, 79

Iveco 142 I vory Coast 163

Index 221

Japan export credit insurance 119,

204-5 investment insurance 121, 126-8 risk assessment 14, 25, 27, 38-9,

186 Jenkins, Brian 58 Joint Publications Research

Service 68 joint ventures 115

Kennicott Copper 114-15 Kenya 163 Khomeini, Ayatollah 40, 137 Kimberley-Clark de Mexico 148 Kissinger, Henry 84 Korea see North Korea; South

Korea Korea Exchange Bank 160 Kuwait 34, 116

Iraqi invasion 12, 37

liberalization 33 licensing 29 liquidity 54 Little, Arthur D. 60, 62 Lloyd's of London 128-9, 139 loan loss provisions 29,40 local stakeholders 115 loss prevention 116-17 Luxembourg 154

machine tools industry 33 machinery industry 4, 5 macro risk 51 Malaysia 22 manufacturing industry 22

Canada 96, 100 United Kingdom 197-9 United States of America 79, 83,

92, 181-3 see also capital-intensive

manufacturing corporations Marcona Mining 114-15 marketing 117 Marks & Spencer 158 McClelland, Charles A. 57 McDonald's 30 mercantile trading houses 13

Mexico 136, 143-9 oil industry 35, 37 risk assessment 22, 65, 68, 181 Third World debt crisis 28, 162

micro risk 51 Midland Bank \09, 111, 112 Miele 158 MIGA (Multilateral Investment

Guarantee Agency) 128 military mixed models 58 Ministry of Foreign Affairs 68 Ministry of International Trade and

Industry (MITI) 126-7 MNCs (multinational

corporations) 15-23, 39-40 modernization 58-9 monopolies 16-17 motor car industry 33, 38 motorcycle industry 33, 38 Mozambique 155, 156 Multilateral Investment Guarantee

Agency (MIGA) 128 multinational conflicts 15 multinational corporations

(MNCs) 15-23, 39-40 multiple environments 15

NaIC (Nations in Conflict) 58 nation-states 17-21, 23 National Energy Programme

(Canada) 20 National Iranian Oil 141 national ownership 20 National Union Fire Insurance

Company 129 National Westminster Bank 143,

195-7 nationalism 59 nationalization 115, 116-17 Nations in Conflict (NaIC) 58 natural resource industries 13, 17,

169-70 Canada 96, 97, 100 United States of America 76, 78,

82,92 Nederlandsche Credietverzekering

Maatschappij (NCM) 119, 125-6, 203-4

Nestle 13, 149

222 Index

Netherlands export credit insurance 119,

203-4 investment insurance 120, 121,

125-6 risk assessment 14, 34

Newly Industrializing Countries (NICs) 22,26,30,31

Nicaragua 186 nickel industry 97 NICs (Newly Industrializing

Countries) 22,26, 30, 31 Nigeria 37, 162-3 non-durable goods industry 6 non-integrated planning 4-7 non-tariff barriers (NTBs) 31, 33 North Korea 54 Norway 35 NTBs (non-tariff barriers) 31, 33

ODA (Overseas Development Agency) 68

OECD (Organization for Economic Co-operation and Development) 17,68,69

oil crises 34-7 oil industry 17, 61, 65-6, 117

Canada 20 Iran 139, 141, 142 Mexico 144 South Korea 159 South Vietnam 56 United States of America 4, 180-1 Venezuela 133

oil prices 26, 28, 104-5 oligopolies 16-17 OPEC (Organization of Petroleum

Exporting Countries) 12, 34-5 OPIC (Overseas Private Investment

Corporation) 116, 122-3, 130, 139

Organization for Economic Co­operation and Development (DECO) 17, 68, 69

Organization of Petroleum Exporting Countries (OPEC) 12,34-5

Overseas Investment Insurance Scheme 127

Overseas Private Investment Corporation (OPIC) 116, 122-3, 130, 139

ownership foreign 131-2 shared 19

Pakistan 142 Paraguay 22, 68 parallel financing 134 passive risk retention 130-1 performance requirements 19 Peru 20, 185

risk management 114-15, 116, 117

pharmaceuticals industry 17 Philippines 22, 78 Pillsbury 181-3 Pohjola 129 Poland 30, 65, 136, 149 political environment

business risk 48, 49, 50-1 country risk analysis 55, 191, 192 instability 50-I, 59, 65 mixed models 58

political risk assessment 47-53, 162-5, 169~-79

methodologies 57-66, 80-5, 98- 100, 107-9

organization 55-7 political science 46-7 Political System Stability Index 64 Portugal 34, 45, 136, 154-8 private insurance 128-30 privatization 33-4 proactive planning 4-7, 76 process in environmental

scanning 8-9 Procter & Gamble 149 project financing 134--5 protectionism 12, 31-3, 38 public utilities 19 publications as information

sources 89, 184

Rand Corporation 58 reactive planning 4, 76 Reading & Bates Corporation 139 regression analysis 59

Index 223

regular scanning models 10, II religious groups 53 Renault 156 reporting lines 91, 102 retail industry 5-6 retention, political risk 130--3 Reynolds Tobacco Co., R.J. 142 risk assessment departments 28 risk ratings 87-8 Rosenau, James N. 57 Royal Bank of Canada 99 Royal Commonwealth Society 69 Rummel, R.J. 58

SACE (Special Section for Export Credit Insurance) 119,125, 203

Saint-Gobain 158 sanctions 52 Santa Fe International

Corporation 139 Saudi Arabia 34,36, 116, 181 scanning 3, 7-11, 82, 167, 176 scenario development 80, 82-3, 86,

98,99 Scott Paper 148 Sears 114 Sedco Incorporated 141 selectivity 133--4 service industry 6 sewing machine industry 38 shared ownership 19 Shell Oil 61, 65--6 shipbuilding industry 20 Singapore 22, 39 Singer 13 Singer, J. David 58 Skandia 129 Smithsonian Agreement 26 social conditions 52 socialist countries 14, 30 South Africa 53 South Korea 22, 39, 136, 158--62,

180 South-South co-operation 22 South Vietnam 56, 78 sovereign risk 186 Soviet Union 30,46, 151, 154 Spain 33, 45, 158

Special Section for Export Credit Insurance (SAC E) 119, 125, 203

Sri Lanka 163 stakeholders, local 115 Standard Chartered Bank 109, 112 Standard Oil 13 Starrett Housing 141 statistical analysis 80, 82, 99-100,

109 steel industry 4, 33, 171 strategic planning

departments 91-2 strategy formulation studies 4-7 strikes 46 structural adjustment

programmes 20, 29, 162 structural vulnerability 54 structured qualitative reports

Canada 99-100, 101 United States of America 80--3,

86, 182, 184, 192 Sukab 142 Sweden

export credit insurance 119, 203, 204

investment insurance 120, 121, 126, 129

risk assessment 14,21, 142 Swiss Bank Corporation 110 Switzerland 7, 14, 147, 203

country risk analysis 110, 111, 186

Taiwan 22, 39 Talbot Motor Company 143 Tanzania 22, 46 technology transfer 52 Teheran 40, 141 telecommunications industry 37 television receivers industry 37 terrorism 58 textile industry 33 Thailand 22, 68 Third World countries

foreign direct investment 14, 18, 21-2

risk assessment 17, 33, 35, 59, 113

224 Index

Third World debt crisis 12, 26, 28-30,75, 171

Mexico 136, 143 oil crises 35, 160

Threat Recognition and Analysis Project (TR and A) 57

tobacco industry 20 trade

liberalization 33 negotiations 17 protectionism 12, 31-3, 38 services 17

transfer, political.risk 114-16 transfer risk 186 Treuarbeit 119, 125, 203 Turkey 142, 185

Unilever 13 Union Carbide 183-5 Union des Assurances de Paris 129 United Arab Emirates 163 United Kingdom (UK)

export credit insurance 118, 119, 204

foreign direct investment international environment

35,38

14,20 27,33,

investment insurance 120, 121, 126, 128-9

risk assessment 7, 109, 154 United Nations (UN) 68· United States of America (US)

foreign direct investment 14, 20 international environment 16, 18,

27, 30-1, 34, 38 investment insufilncc 121, 122-3,

129 Iran 141, 143 Mexico 147

risk assessment 25, 40, 52, 73-93, 171-2

risk management 113, 116, 118-19

South Korea 162 strategy formulation 4, 5, 7, 10,

68 Third World debt crisis 28, 29

United Technologies Corporation (UTC) 84

Uruguay 17 US Agency for International

Development (USAID) 68

Venezuela 34, 133, 162-3 Vietnam 25 Volvo 142

WEIS (World Event Interaction Study) 57

Wells Fargo Bank 185-7 Westinghouse 160 Wharton Econometric Forecasting

Associates 147 World Bank see International Bank

for Reconstruction and Development

World Event Interaction Study (WEIS) 57

World Political Risk Forecast (WPRF) 60, 62, 63, 64, 89

World Politics Simulation (WPS) 58

world trade 31-2

Xerox 84-5

Zambia 46, 54 zinc industry 17