Literature Review - Mnes, International Business and Country Risk

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Literature Review on
Country Risk Management,
International Business and
Small and medium sized enterprises

Version 1.0

Introduction

This review is written to give readers a understanding of the meaning of Country risk Management, International Business and Small and Medium sized Businesses.
When business or institutions engage in international lending or cross-border exposures, they undertake not only the customary risk but also country risk, which is the risk associated with the economic, social and political conditions within a foreign obligator’s home country/jurisdiction. Therefore the understanding of Country Risk Management is of importance.

International business is a term used to describe all commercial transactions of private and governmental institution on sales, investments, logistics, and transportation that take place between two or more regions, countries and nations beyond their political boundary. In the world the importance of international Business keeps growing. This review will provide information on what the meaning is of international Business and it will give the reader a better understanding of International business, the driving forces of International Business and explain about the restrictions that play a role.

Regarding Small and Medium sized enterprises. This will give readers a view on in what accept they operate which companies are considered SMEs and what role they play in the world. This will also show you the difference between SMEs and MNEs.

Country Risk Management

When you look at the definition of Country Risk Management, it refers to taking account of the possibility that economic and political conditions, or an event in a foreign country, could adversely impact an institution’s or business in that country. The institutions that works in those countries in international lending or having other cross border exposure are vulnerable to country risk and you have to take that as a country risk manager in account. “Country risk is not limited to an institution’s international lending operations; rather because their other on balance sheet activities and as well as off balance sheet exposures also contain country risk.” [5] When looked at businesses or institutions that outsource internationally, such as electronic data processing, electronic banking or any consultancy/management services, with overseas parties that are involved, this also carries country risk. Institutions are indirectly exposed to country risk as a result of their exposure to domestic entities that have significant cross border exposures, these institutions are not required to take into account such exposures in their formal country risk management process. However, such indirect country risk assessment pertains to credit risk management and banks are expected to give due consideration to this aspect while taking an exposure on such domestic entities. Institutions can exercise little direct influence on the country risk they are exposed to. This distinctive nature of country risk necessitates that banks having significant cross border risk exposure should have adequate country risk management framework.

The term “country” in country risk management should be widely interpreted to include different jurisdictions or economic entities. For example, when you look at China, you should treat the Mainland China, Hong Kong and Chinese Taiwan as separate jurisdictions / economic entities in their country risk management processes. [6]

“Country risk can be broadly classified into sovereign, transfer/convertibility and contagion risk. * Sovereign risk denotes a foreign government’s capacity and willingness to repay its direct and indirect (i.e. guaranteed) foreign currency obligations. * Transfer/Convertibility risk arises if changes in government policies, or any event, result in a barrier to free conversion or movement of foreign exchange across countries. Under such conditions, a...
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