Risk Analysis Using PEST_Session3

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Cologne University of Applied Sciences / Fachhochschule KlnFaculty of Economics and Business Administration/ Fak 04

Prof. Dr. Frank Gogoll,Prof. Dr. Wolfgang Veit

Source: Rugman and Collinson, International Business , 4 th Edition Pearson Education Limited 2006

4.04 Business Development and Infrastructure: Trade Africa - Training in Export Promotion

Introduction

Country risk analysis examines the chances ofnon-market events (political, social andeconomic) causing financial, strategic or

personnel losses to a firm following FDI in aspecific country market.


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Generic PEST framework

The generic political, economic, social (orsocio -cultural) and technology (PEST)

framework is used to: map out particular competitive environments orinvestment contexts for firms at the regional ornational level.

compare country conditions. build future scenarios to understand short-term

and long-term threats and opportunities.


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Figure 1: PEST framework for country analysis


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Desirable additionsto the PEST framework

In addition to the PEST framework,managers must add:

Depth of knowledge risk assessments by political scientist andanalysts

economic analysis social analysis

Foresight accurate scenario-building.


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RISK

This is the Chinesecharacter for risk. Thefirst symbol is the symbolfor danger, while thesecond is the symbol foropportunity.

Risk is seen as dangerand opportunitycombined.


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The nature of political risk


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Levels of political risk

Macro political risk: a risk that affects allforeign enterprises in the same way

Micro political risk: a risk that affectsselected sectors of the economy or specificforeign businesses.


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Legal-governmental risks are potentiallyharmful to foreign businesses but are the

product of, or permissible within, the existingpolitical, economic and legislative system. Non-legal or extra-governmental risks lie

outside the system and are a violation of

existing laws.

Types of political risk


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Figure 2 Types and levels of political risk


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Table 1: Political risk: sources, agents, and effects


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Country analysis and political riskassessment


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Risk assessment

Forecasting political risk: informal approaches for assessing risk formal systematic procedures for assessing risk

ad hoc groups, standing committees Focus of assessment:

the political system in which the company will be doingbusiness

the goods to be produced and the operations to becarried outQuantifying risk vulnerability.


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Quantifying risk vulnerability

The political/legal, economic,sociocultural and technologicalenvironment of a foreign country hasdifferent implications depending on thetype of international business that a firmis evaluating. For example: export restrictions are more

important if a firm is seeking to set up a plantto produce goods for exports than if theproducts are for the local market.


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Table 2: The Weighted Country Risk Assessment Model


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Cologne University of Applied Sciences / Fachhochschule KlnF lt f E i d B i Ad i i t ti / F k 04

Prof. Dr. Frank Gogoll,Prof Dr Wolfgang Veit



Table 2 Continued

Risk Analysis Using PEST_Session3

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