Country Risk Analysis: India and Brazil

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IntroductionWhen making the decision to invest in a foreign country there are several measures that need to be taken and perhaps the most important measure is the risk analysis. By conducting a risk analysis the investor is able to predict future cash flows and earning potentials as well as make smart investment decisions based on the country's current state. In this case the US based manufacturing firm is trying to decide whether to build subsidiaries in India or Brazil. In order to help make the decision several areas of the country need to be evaluated. Economic, translation, and transaction exposure need to be assessed because these types of exposure can destroy an investment if they are not taken into consideration. Being aware of the economy of the country as well as the fluctuations in exchange rates are detrimental in making a sound investment decision. Political, socio-economic, and environmental issues also need to be evaluated to ensure that a subsidiary will be a fit in the country.

Economic ExposureA company's present value of future cash flows is subject to economic exposure and exchange rates. Transactions that contribute to transaction exposure are transactions that can cause economic exposure. This is due to the fact that each of these transactions is subject to ups and downs in exchange rates (Madura, 2006). Economic exposure can also occur even when there is not transaction exposure. India and Brazil are subject to transaction exposure, which in turn makes the countries subject to economic exposure in various ways. First, the US based manufacturing firm will be selling and purchasing items in India and Brazil, which not only exposes them to transaction exposure but also economic exposure. Also, the earnings from India and Brazil's manufacturing sites are also subject to economic exposure. Finally, a fluctuation in exchange rates could increase or decrease the demand for the manufactured product, which in turn can create or loose business for the US Company causing fluctuations in the economy.

India is a country that is full of new ideas and they desperately want to have a booming economy. Unfortunately, right now India is a very poor country and they still have a lot of room to grow because the economy has only grown on average 8% a year for the past three years (Mahapatra, 2006). According to India's Prime Minister Manmohan Singh India's main economic goal is inclusive growth resulting in the opportunity for individuals living in poverty to be able to find work and live in the cities. Growth in India will be challenging because an estimated 40% of the population lives on less than a dollar per day and a third of the countries people are not able to read or write (Mahapatra, 2006). Another concern for India's economy is the growing number of the population that has AIDS and without for education and medial treatment is number is continually growing. Terrorist's attacks are also threatening the economic future of India. The World Economic Forum summit was held late November 2006 and the conclusion of the summit is that India is confident about the economic risks that they are facing. India has identified the six major risks that are facing the country, which are water shortage, oil prices, growing population, sickness, changes related to the climate, and relationships with global trading partners.

Brazil is also facing several economic challenges and at the same time has made great strides in a few economic areas. One challenge that faces Brazil today is that the poorest one-fifth of Brazil's population makes up only 2.4% of the national income (Brazil County Brief, 2006). Brazil is only trailing South Africa in income inequality while one-fifth of the population lives on less than two-dollars per day. While primary school attendance is almost 100% pre school and college attendance is very low creating an uneducated work force, low-income workforce. A few of the other economic challenges are...
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