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Multinational Finance, 6th Edition by Kirt C. Butler

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Chapter 12Foreign Market Entry and Country Risk Management

Listen up, my Cossack brethren.
We'll ride into the valley like the wind, the thunder of our horses and the lightning of our steel striking fear in the hearts of our enemies!
…And remember—stay out of Mrs. Caldwell's garden.

—Gary Larsen, The Far Side

This chapter begins with a description of alternative entry modes into foreign markets, including exporting, international contracting, and investment-based entry. Many important issues regarding the choice of market entry mode are addressed. For example, why are some manufactured goods and services successfully exported while other products and services sell only in local markets? Why do some multinational corporations prefer to export while others build overseas manufacturing facilities and invest directly in the foreign market?

The chapter then describes sources of country risk and their cash flow consequences for international investors and the multinational corporation. Country risk is the risk that the business environment in a host country will change unexpectedly. The MNC is exposed to country risk to the extent that its value changes with unexpected events in that country. Exposure to country risk results in more variable outcomes in foreign markets.

Country risk indices have a political and a financial component. International lenders use these indices to judge the risks of lending to a particular country. As any loan officer knows, a creditworthy borrower must ...

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