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Abstract
This paper investigates the extent to which economic, political and socio-cultural factors help in country risk assessment. A risk rating model to evaluate the factors determining country risk is formulated. The results of the study show that India represents a high risk country. The economic risk has the highest risk score and political risk has the lowest risk score. However, various investor friendly reforms are on their way and India's macroeconomic fundamentals and future prospects seem highly conducive for corporate growth.
Keywords: Country risk, economic factors, political factors, socio-cultural factors, sovereign risk, country risk rating
The globalization of world economies accompanied by an internationalization of financial markets has led to the growing interest in identifying the determinants of country risk analysis. Country risk analysis represents the potentially adverse impact of a country's environment on the multinational corporation's cash flows and is the probability of loss due to exposure to the political, economic, and social upheavals in a foreign country. Accordingly, a number of studies examining the concept of country risk have surfaced in the last two decades. Researches on country risk assessment have evaluated economic, political and social factors, and their interactions in determining the risk associated with a particular country. The studies have emphasized a multidisciplinary approach to identify and investigate the extent to which country risk measures can predict periods of instability.
Different definitions have been proposed for country risk. Investors and lenders, when evaluating the risks of a country, generally base their assessment on the political and social environment of a country. Accordingly, a number of studies examining the economic and political factors affecting country risk assessment have surfaced (llan Alon, John Spitzer, 2003).
Shapiro (1999) defines country risk as the general level of political and economic uncertainty in a country affecting the value of loans or investments in that country. From a bank's stand point, it refers to the possibility that borrowers in a country will be unable to service or repay their debts to foreign lenders in a timely manner. Bourke and Shanmugam (1990) define country risk as "the risk that a country will be unable to service its external debt due to an inability to generate sufficient foreign exchange". Within this framework, country risk is viewed...