The recent events in Syria, Iran, Iraq, Tunisia, Egypt, Libya and Pakistan have highlighted the importance of political events to business. Government actions, furthermore, are increasingly pervading all spheres of business activity. Since political events and government actions may affect enterprise performance, there is a need to take them into account in planning and executing strategy. As a response to the increasing impact of political events on business, a new function concerned with the assessment of country risk is gradually emerging in enterprises. Yet, this function is not without its obstacles. This study reports on the obstacles that plague the country risk process in multinational enterprises. In order to achieve this aim, interviews have been conducted with related persons in Jordanian enterprises, who are involved in risk management. It was found that the majority of Jordanian interviewees are unsatisfied with their existing approach for assessing country risk. This research has also offered suggestions for improving practice and offered directions for further research.
Managers who are involved in international business are at the heart of effective strategy execution. Limited research, nevertheless, exists to understand the process and its obstacles that make managers effective, most notably as they face new challenges brought forth by the changing global economy. The global economic crisis has highlighted the importance of managers in dealing with such obstacles. Furthermore, the changes in the global economy may create a need to rethink managerial approaches to deal with risks associated with business and the way they are managed. This is so important in developing country like Jordan.
Jordan is a lower middle income country with a population of 5.9 million and a per-capita GNI of US$ 3310 as in 2008 [
The global economic slowdown, starting in the second half of 2008, has created several medium-term challenges for Jordan. The three most important of these are lower global oil prices (which have a positive impact on trade deficit but a negative impact on transfers and capital account), lower private capital flows to developing countries (which were a major source of growth for Jordan in the recent past), and sharply lower global and regional growth outlook (which affect exports and remittances). Reflecting these effects, domestic economic performance has worsened since September 2008. Real GDP growth for the first three quarters of 2009 remained at 2.7 percent, compared to 9.1 percent for the same period in 2008. Sectors that experienced the strongest slowdown are those that benefit from the capital inflows, foreign transfers and foreign demand such as financial services, community and personal services, wholesale and retail trade and manufacturing.
The current account deficit is projected to narrow to less than 8 percent of GDP in 2009 driven by lower economic activity and lower international prices which translate into lower imports. With ongoing recovery in regional wealth and growth, it is also expected that inflows from services, income transfers and capital will improve over time. The risk of external financing difficulties is mitigated by largely prudent policies supporting a measured external adjustment and adequate liquidity. Reserves in foreign currencies of the Central Bank of Jordan (CBJ) increased to a record high US$ 11.5 billion in December 2009 (equivalent to 8.7 months of imports), up from US$ 8.6 billion at the end of 2008. The increase in the reserves of CBJ reflects the improvement in external balances and the conversion from foreign currency denominated deposits to Jordanian Dinar denominated deposits, reflecting the interest rate differentials.
Over the last 10 years, as suggested by [
In light of the above economic situation and developments in the literature, this study was undertaken to find out the obstacles that enterprises face in assessing country risk. It was felt that this information would shed some light on why managers tend not to use sophisticated tools even though these are available in the literature. The study also aims at identifying resolution for the obstacles to improve current practice and analyze and generate propositions about country risk in order to advance theory building in this area.
Risk assessment is a central component of risk management. For multinational enterprises (MNE), where such assessment involves international markets, the assessment, according to [
A number of sophisticated tools for assessing country risk have surfaced in the literature. There are two broad approaches to risk assessment: heuristic and scientific. [
The two primary types of risk analysis processes are qualitative and quantitative. Qualitative is a simplified process of identifying the major threats to which an enterprise is exposed. Basically, one must qualify which risks are worth protecting against. This process is more intuitive and generally can be accomplished in an abbreviated fashion by analyzing the prospected risk; the likely is it to occur and the impact of such occurrence. Quantitative, on the other hand, requires a direct correlation to the value of the assets that require protection. Enterprises are increasingly eager to know what the cost/benefit is to protecting an asset or process. In order to find this information, an advanced risk analysis technique, known as a quantitative approach, is used to provide statistical insight to risk prediction and impact. This method requires that one establish a monetary value for the assets and processes, estimate the probability of a threat occurring.
The review of the country risk literature indicates that, when an international enterprise’s management acknowledges the value of risk assessment and deliberately assess country risk, the approaches to risk assessment can be divided into two broad categories: qualitative and quantitative [
It seems that few empirical country risk studies have included particular qualitative tools (e.g. [
A review of the empirical studies of country risk indicates that, although qualitative tools are subjective and vulnerable to the bias and errors of the analyst, multinational enterprises tend to use such tools more often than their quantitative counterparts. Such a tendency was reported in the context of Canadian enterprises [
However, empirical research has shown that few enterprises use these sophisticated tools regularly. The political assessment function appears to be quite varied, ranging from informal assessment by top management to a formal. When assessing the external environment, managers tend to rely heavily on interpersonal contact for their information sources. The integration of the Assessment of country risk into decision-making tends to be informal and unsystematic. Finally, the literature has uncovered a number of strategies that multinational enterprises have used to reduce country risk.
In this study a survey approach has been used to obtain primary data. Such approach is easy to undertake and allow a significant degree of control over the research process. Interviews were employed in this study. It was expected that many enterprises would respond to the interviews, because this research would provide one of the first studies of the obstacles in the field of country risk.
Interviews may be highly formalized and structured, using standardized questions for each respondent. Alternatively, they may be informal and unstructured. One typology that is commonly used relates to the level of formality and structure of interviews, whereby the following categories are utilized: 1) structured interview; 2) semi-structured interview; or 3) unstructured interviews.
Structured interviews use questionnaires based on a predetermined and standardized or identical set of questions. The researcher reads out each question and then record the response on a standardized schedule, usually with pre-coded answers. By comparison, semi-structured and unstructured interviews are non-standardized. [
A total of fifteen personal interviews were undertaken with managers and associate directors. This process lasted for two months. Using a semi-structured interview approach, a list of questions to be covered varied from interview to interview. Some questions were omitted in particular interviews, in order to account for the specific enterprise background of interviewees. The order of the questions was also varied depending on the flow of the conversation. Additional questions were asked when it was felt that additional research questions could be explored. The outcomes of the interviews were recorded by note taking. Each interview was required more than one hour.
The requirement of consistency in semi-structured interviews has lead to concerns about their reliability [
In order to reduce the doubts about validity and reliability, and to avoid the sources of bias, the following measures were taken in our interviews: a) all interviewees were selected from top management in order to access similar levels of professional competence; b) identical opening comments about the nature of the research questions preceded all interviews; c) a learning approach to questioning was used so as to make interviewees feel confident and elicit as much information as possible.
The outcomes of the risk manager interviews were based on an analysis of the interviewer’s notes. These findings have been categorized into two categories: a) the obstacles in assessing country risk and b) the visions for country risk management.
An overriding sentiment expressed by 62 percent of interviewees is the require of satisfaction with their existing approach to assessing country risk. This finding is in accord with that reached by [
These obstacles are discussed throughout this research when qualitatively explaining the managerial practices and can be summarized as follows: a) the process of country risk is time consuming, which may also lead to postpones in preparing the outcome, so the outcomes can also be out-dated; b) the data required to use quantitative tools may not be readily available and, if available, data tend to be in the wrong format and biased because such data are collected for purposes other than risk assessment; c) the use of quantitative tools requires a statistical background and use of a computer. In addition, interpreting outcomes also needs particular skills; d) down- ward communication from management at the decision-making level to risk assessors, is limited, which also means that the risk assessment process seems to have received no apparent support from top management.
However, interviews with those managers who were positive towards their assessment processes, revealed two main themes: satisfaction with existing arrangements and disbelief about the assessment’s outcomes. A financial enterprise, for instance, assesses country risks when “necessary” describing his approach as “pragmatic”. Even if the need is conceded, the respondent believes that formal assessment cannot yield better outcomes than he does. The satisfaction with existing arrangements is linked to another reason; skepticism. A bank, for instance, is negative toward the need for formal country risk. To this end, both satisfaction with existing arrangement and skepticism about the findings provide a rationale for why some enterprises need not do more in assessing country risk.
Not all investments warrant a country risk: some investments involve no country risk exposure. For instance, a financial enterprise has a policy that requires advance payment before undertaking any international operations. However, interviewees considered country risk important to their enterprise’s investments and believe that there is a require of satisfaction with their existing system of assessing country risk; while interviewees felt that country risk is an important factor affecting their foreign investments they did not feel they had realized the full promise of the assessment process. Upon deeper probing, the flowing reasons for the interviewees disaffection with their assessment system emerged: postponed report, imprudent assessment, data confront, misrepresentation of information, inappropriateness information, requirement of skills and require of top management support.
In addition to highlighting these obstacles with concrete examples, some resolution undertaken by enterprises are offered. It should be made clear that these obstacles are not mutually exclusive: an enterprise may suffer from more than one obstacle. Moreover, the likelihood of an obstacle seems to suffer from more than one obstacle. In addition, the likelihood of an obstacle seems to depend on whether the political assessment function is delegated to a personnel department or is conducted informally by top management. The use of quantitative tools, however, requires “statistical background” and the use of computers. In addition, interpreting outcomes needs particular skills. Subsequently, two obstacles face multinational enterprises in assessing country risk: require and/or inappropriateness of information and require of skills required for risk assessment.
Thus, enterprises utilize quantitative tools less frequently than qualitative tools. It is intuitional, therefore, to propose that enterprises which utilize quantitative tools may differ in some characteristics to those enterprises that do not use such tools. Indeed, enterprises that used quantitative tools are larger in size (median US$ 30.12 million versus US$ 9.91 million), have more years in international business (median 17 versus 11), generate higher revenue from international business activities (median 17.1% versus 8.2%) and have facilities in more countries (median 8.6 versus 5.5). An early study by [
According to [
Some enterprises have undertaken resolution in their assessment process to cope with the postpone obstacle. Instead of conducting an in-house study, which is time-consuming; these enterprises buy ready-made reports about a particular country. However, these studies often cover only the general political conditions in a country but not national origin, industry, enterprise and product-specific sources of country risk. Another possibility is to hire a consultant for that particular country to obtain quick and relevant information.
An important reason why quick action may not be taken by management is that the assessment process tends to be imprudent rather than practical. A country risk study is usually motivated by the intention to evaluate an investment proposal or to monitor the climate of an existing investment. If the assessment process does not anticipate investment proposals, quick action may not be possible. The common imprudent stance seems to occur because assessment resources are limited and therefore used cautiously. However, risk manager favored adopting a more practical stance that would entail instable countries that were considered to have a high country risk. The remaining countries would then be considered as possible investment locations. In his view, this procedure would avoid the obstacle of soliciting investment proposals in areas of high country risk.
The effective use of sophisticated country risk tools, such as Delphi, time series analysis, regression analysis and surveys may be impeded, as reported by [
Information, as suggested by [
Misrepresentation of information as an outcome of communication difficulties: differences in personal orientation of enterprise members can, as suggested by [
To overcome this obstacle, interviewees may consider adapting the report to fit the culture of the users although this moves likely to outcome in a loss of formation. Alternatively, the interjection of a mediator between top management and the Personnel department may reduce communication obstacles arising from differences in orientation. In a financial enterprise, the obstacle was solved by placing a quantitatively-oriented manager through a political science training program. Upon completion of the training program this manager served as a liaison between top management and the country risk unit.
A common obstacle frequently mentioned by the interviewees is the inappropriateness of most of the information to which they are exposed. For instance, in a financial enterprise the interviewee mentioned that “too much information of the wrong kind, not enough of the right kind”. Analysts in the personnel department may not know what kind of information management would like to have when designing a strategy. Consequently, if risk assessors do not know what type of information to look out for, they are likely to compile a report full of irrelevant information. For instance, in a financial enterprise, management requested a staff analyst to make a political conditions study of a one country. Deeper probing during the interview, however, showed that the analyst was not told the size or type of investment the management was contemplating. Without product and enterprise specific information, it was difficult for the risk assessor to determine what type of information was relevant to the investment. But even knowing more particulars about the investment would not have totally solved the inappropriateness of information obstacle in assessing the political environment. This is because of the non-determinis- tic relationship between political instability and country risk. For instance, if revolutions may occur but have no impact on a foreign investment, information about the occurrence of a revolution is not relevant.
Interviewees that receive the report dismiss most of the information as irrelevant because it tends not to be actionable. The users of the assessment may not know how the information that is provided can be utilized in designing a strategy. One possible resolution for the inappropriateness of information obstacle is management to start a process by cautiously defining the enterprise’s strategy so that the relevant information can be determined in the assessing process. This eliminates unfocused, assessing that would outcome in a waste of resources and the incomprehension of the risk assessor. However, the enterprise’s strategy should be flexible enough to permit adaptation based on the feedback of information from assessing. It is through this cycle that defining strategy helps assessing. Another common method to reduce the inappropriateness of information obstacle is to obtain information from other enterprises from the same industry and national origin that are already operating in the country of interest. This method tends not only to be inexpensive, but also focuses the assessing process by highlighting national origin, product and industry-specific sources of country risk.
Skills can be defined, as suggested by [
When evaluating an investment proposal, top interviewees, according to [
Although interviewees are acquainted with country risk to be an important determinant of enterprise performance, they seem to be disappointed with their assessing process. Undoubtedly the obstacles mentioned above contribute to their disappointment. If the country risk process is to be made more effective, the obstacles need to be determined. In general, the resolution to the commonly observed obstacles seems to fall into two categories: firstly, those involving changes in the political assessment technology and, secondly, those involving changes in the internal enterprise of the enterprise to make the assessment process more effective. Although both types of resolution can be used together, managers in enterprises with an inflexible enterprise may find that changes in technology may be easier to implement than adapting internally. It should be pointed out, however, that considering the nature of the obstacles that outbreak the assessment function, not much appears to be gained by developing more complicated assessing tools which may only make existing obstacles of inadequate data, communication, and postpone more sensitive.
In recognition of the obstacles in assessing country risk, and of the fact that even if country risk is predicted something must be done about it, interviewees are devoting more process into trying to work out the differences with the governments. According to one risk manager, “assessing that there will be a storm in the future is not as important as being able to ride through the storm”. The chairman of an industrial enterprise expressed his idea: “I believe that our enterprise should try to work with the government in resolving any differences that may arise”. The interviews evoked a number of creative conflict management strategies that have just begun to surface in the literature on strategies to cope with country risk.
The enterprise that was to set up in another Middle Eastern country involved design work, procurement of materials, and local assembly. Since the enterprise’s normal need of materials involved purchases from parties affiliated with non-desired countries, which would not be acceptable to the host country, it decided to break up the enterprise into the three parts: design work, procurement, and assembly. The procurement of materials was entrusted to the host country while the enterprise continued to perform the design work and assembly which did not involve a conflict between the two countries.
An industrial enterprise, has a subsidiary in an another Asian country that was facing increasing government pressure in the form of higher taxes, local content requirements, minority employment regulations, and import restrictions on unprocessed materials. Top management knew that the government badly needed foreign exchange to boost its balance of payments position. With this information in mind, top management was able to negotiate an agreement with the government that the enterprise would guarantee the country a minimum volume of exports a year from the subsidiary in return for relaxation of government restrictions on imports, taxes, local content, and employment. Government actions, however, were reducing the international competitiveness of the products made locally; management was able to hit a deal with the government to reduce restrictions on the subsidiary in return for exports.
There are numerous studies discussing sophisticated country risk tools. Most of these tools, however, appear not to be used widely in enterprises because of a number of obstacles plaguing their country risk process. Resolution for some of these obstacles which managers can use to improve the assessment function seems to involve changes in the assessment technology and changes in internal enterprise. Creative conflict-management also appears to be a promising area to reduce country risk.
An overriding sentiment, however, expressed by the majority of Jordanian interviewees is the requirement of satisfaction with their existing approach for assessing country risk. This dissatisfaction has been attributed to many obstacles that managers face while being involved in the assessment. Further research is needed in order to provide a clear understanding of the obstacles that managers face in assessing country risk. There is also a need to identify resolution for the obstacles in order to improve current practices.
More research work on creative conflict engagement between the government and the multinational enterprise seems to be a promising vision. Such research should focus not only on the content of the strategy, but also on the process of strategy formation involving negotiations with the government. On the whole, much remains to be learned about country risk management within multinational enterprises. It is hoped, however, that this research will motivate international business academicians and practitioners alike in further examining what is considered a fruitful area of research.