Chapter 17 Multinational Financial Management 555Various forecasting services measure the level of country
risk in di# erent countries and provide indexes that indicate
factors such as each country’s expected economic perfor-
mance, access to world capital markets, political stability,
and level of internal con! ict. Country risk analysts use
sophisticated models to measure risk, thus providing corpo-
rate managers and investors with a way to judge both the
relative and absolute risk of investing in di# erent countries.
A sample of recent country risk estimates compiled by Insti-
tutional Investor is presented in the accompanying table.
The higher a country’s score, the lower its country risk. The
maximum possible score is 100.
Rank Country Total Score
1 Switzerland 96.4
7 Germany 94.8
11 France 94.1
12 United Kingdom 94.0
13 United States 93.8
17 Japan 91.4
29 South Korea 79.9
33 Chile 77.4
34 China 76.5
44 Russia 69.4
Rank Country Total Score
46 Mexico 69.3
52 South Africa 65.8
55 India 62.7
60 Brazil 60.6
70 Turkey 52.0
84 Argentina 41.9
92 Iran 35.7
118 Tanzania 27.9
161 Iraq 13.9
174 Zimbabwe 5.8
The countries with the least country risk have strong market-
based economies, ready access to worldwide capital mar-
kets, relatively little social unrest, a stable political climate,
relatively low in! ation, and a sound currency. Switzerland’s
top ranking may surprise you, but that country’s ranking is
the result of its strong economic performance and political
stability. You also may be surprised that the United States
was ranked 13th. At the lower end of the range, there are
fewer surprises. Each of those countries has considerable
social and political unrest and no market-based economic
system. An investment in any of these countries is clearly a
risky proposition.MEASURING COUNTRY RISK
Source: Excerpted from Harvey P. Shapiro, “Feeling the U.S.’s Pain,” Institutional Investor, March 2008, pp. 107–110.
The U.S. stock market represents approximately 35% of the
world stock market; as a result, many U.S. investors hold at least
some foreign stock. Analysts have long touted the bene" ts of
investing overseas, arguing that foreign stocks improve diver-
si" cation and provide good growth opportunities.
When investing in international stocks, you need to rec-
ognize that you are investing in both the foreign market and
the foreign currency. Table 17-4 indicates how stocks in each
country performed in 2007. Column 2 indicates how stocks in
each country performed in terms of the U.S. dollar, while
Column 3 shows how the country’s stocks performed in terms
of its local currency. For example, in 2007, Brazilian stocks rose
by 42.6%, but the Brazilian real increased by about 20% versus
the U.S. dollar. Therefore, if a U.S. investor had bought Brazilian
stocks, he or she would have made 42.6% in Brazilian real terms;
but those Brazilian reals would have bought 20% more U.S.
dollars, so the e# ective return would have been 71.1%. Thus,
the results of foreign investments depend on the foreign
market and on what happens to the exchange rate. Indeed,
when you invest overseas, you are making two bets: (1) that
foreign stocks will increase in their local markets and (2) that
the currencies in which you will be paid will rise relative to the
dollar. For Brazil and most of the other countries shown in
Table 17-4, both of those factors were favorable in 2007.INVESTING IN INTERNATIONAL STOCKS
(Continued)