FREE ESSAY ON COUNTRY RISK ANALYSIS

COUNTRY RISK ANALYSIS

In the effort to reduce company risk while simultaneously expanding operations, the firm
should consider expansion into a new geographic market. By taking advantage of the unique
attributes of the Irish economy and aligning them with the characteristics of this
company, the potential to maximize shareholder wealth improves while the risk exposure of
the company declines. By expanding our information technology operations into Ireland,
this risk/return strategy can be successfully accomplished. 
Located just west of Great Britain, the Republic of Ireland is a small island state
surrounded by the Atlantic Ocean. The population in 1999 was estimated at 3,632,944
people. The estimated growth rate each year was also estimated at .38% each year. Of
this, people held the Nationality of being Irish, and their decent was mostly English and
Celtic. Their has been a very distinct religious dominance in this country, with 92% of
the population being Roman Catholic, and 3% Anglican, and the other 5% was comprised up
of Jehovah's Witnesses, Jewish, and Others. As for a language, the people of Ireland
mostly speak English, but Irish, a unique dialect of Gaelic, is spoken mainly in areas
located along the western coast.
In 1921, the pushes of Nationalism resulted in the Independence of Ireland from their
mother country, the United Kingdom. Since then, much dispute about the status of Northern
Ireland, which remains under the control of the British, have caused periods of severe
conflicts between the Protestant control government and the Catholic population of
Northern Ireland. Currently, peace talks are in progress between the Northern Ireland and
British governments. 
In terms of their governmental structure, Ireland is a republic, and they have had their
Independence since December 6, 1921. Internally, the structure of their governing powers
is as follows. There is a Chief of State (president), Head of Government (Prime
Minister), a Cabinet, a Legislative Branch and a Judicial Branch. These governing offices
do work together in order to establish a well functioning government for the country.
Along the lines of politics, there are also practicing political parties that represent
different areas of interest to the Irish people. There are active military branches
including the Army, Naval Services and Air Corp., as well as the National Police. 
The government of Ireland has worked very hard to boost its country's economy. Over the
past ten years, the government has implemented a series of national economic programs
that have been designed to hinder inflation, reduce government spending, and to also
promote foreign investments. Although Ireland is a small, modern, trade-dependent
country, there have been some recent changes. The economy of Ireland is averaging a
growth rate of 9.5% per year. For the last ten years, the growth rate of Ireland's
economy has been over three times the EU average. 
Exports have remained the primary contribution to Ireland's growth, but consumer
spending, and the recovery of construction and business investments, have contributed to
the economy's performance. In 1998, the estimated GDP was $67.1 billion. In terms of per
capita income, its estimate was $18,600. Ireland has an unemployment rate of about 5% -
less than half the EU average.
In a recent article in the Irish Times, "Irish Unions Warn Gov't Wage Pact Threatened By
Inflation," it was reported that the Irish government has recently made agreements with
labor unions regarding a national pay agreement. They received warning by labor unions
that this agreement may be threatened by rising inflation. Ireland currently is facing a
very high inflation rate of 5%. This is the highest percentage in the whole EU. This new
wage deal that had been agreed upon locked in cumulative pay raises totaling 15.75% over
the next 33 months. According to many economists, over the past 10 years, the wage pacts
have become a "cornerstone" for Irelands economic reversal. This reversal has seen GDP
grow for an average of 9% per year between 1994 and 1999. The pact was called the Program
for Prosperity and Fairness, and its purpose was to draw up a plan to make cost of living
expenses reasonable in relation to inflation. Currently, Ireland is working to create a
prospering economy, make sure that inflation is under control, and keep unemployment
down. 
Ireland's information technology industry has developed rapidly in recent years. Since
1980, 40% of all investment in European electronics has been based in Ireland. It is the
software capital of Europe - 60% of all software packages sold in Europe are produced in
Ireland. Considering the IT industry is expected to rise by 117% before 2003, it would be
beneficial to draw from the pool of IT knowledge that currently exists in Ireland and, by
doing so, avoid creating and developing this industry from the ground up.
Another factor that may attract multinationals is the existing legislation regarding the
tax system. Depending on the company, at the government's discretion, they may not be
obligated to pay taxes for the first three to five years of operations. So, new companies
that want to expand into and explore the overseas market may choose to establish
themselves in Ireland for this reason alone. This will allow them to get involved with
the overseas market, while doing it tax-free, thus reducing the risk of the venture. 
The location of Ireland is something that may be unattractive to multinational
corporations. When looking for a location to which to expand, many factors must be
considered. Location, availability of resources and accessibility to those resources are
just a few of the factors to be thought about. Ireland is an island located in the
Atlantic Ocean, off the coast of Great Britain. There is a limitation in getting a
variety of natural resources. Since this is true, the manufacturers in Ireland must go
elsewhere to get the resources they need to service their production. Therefore, it makes
it very expensive to transport materials by boat, or by plane. If they were inland, they
would be able to get materials quicker and cheaper by train, or some other mode of
transport. 
As far as the multinationals that are established in Ireland, there are many. EMC is a
huge, rapidly growing corporation that manufacturers and sells computer hardware, mainly
data storage devices. Other computer manufacturers include Gateway and Compaq. In the
area of telecommunications, AT&T has established itself there as well. In terms of
banking and financial services, multinationals include, but are not limited to Mellon
Financial, Brown Brothers & Harriman, and Anderson Consulting. In light of all the
beneficial and not so beneficial factors of setting up a corporation in Ireland, these
companies have and continue to prove their success overseas. 
The Central Bank of Ireland is the institution in Ireland one must analyze when defining
the characteristics of exchange rate regime in Ireland. The Central Bank of Ireland came
into being in 1943 following the passing of the Central Bank Act in 1942. It replaced the
Currency Commission, which functioned as the national currency issuing authority from the
years 1927 to 1942. It is now a member of the European System of Central Banks. The
primary objective of the bank is the maintenance of price stability in the Euro/Ireland
area. The main responsibilities of the Central Bank of Ireland is to "define and
implement the single monetary policy; to conduct foreign exchange operations; to hold and
manage the official foreign reserves of the Member States; and to promote the smooth
operation of the payment systems. With all such responsibilities the bank holds, the
chance of an exchange rate crisis is low because of the stable Central Bank of Ireland in
place in that country. If the bank performs all of its functions properly there should
not be any kind of crisis concerning the Irish economy. The fact that the Central Bank of
Ireland is also a member bank of the Europeans System of Central Banks also gives the
bank credibility and a network of some other banks. Being part of this European bank
network also gives the Central Bank a support system, where if there is any emergency or
anything of that nature it has a number of European banks there for assistance. Again,
with all of the aforementioned characteristics we feel that the likelihood of an exchange
rate crisis occurring in Ireland with the Irish Punt is relatively low. 
Observing the exchange rate chart in the Appendix, the first and most obvious feature of
the chart is the overall decline of indirect quote of the Irish Punt. Over time the
decline in the number of Irish Punts per United States dollar shows the appreciation of
the Irish Punt over the dollar. In the past year, it has progressively taken less and
less Irish Punts to purchase one U.S. dollar and this shows the appreciation of the
currency. Much of this appreciation can be attributed to the booming Irish and European
economy. One economic indicator is inflation. Over the past year, the inflation in the
Irish economy has been rising. When the inflation is rising this means that many
consumers, inside and outside the country, are purchasing goods and services from
Ireland. In particular, when consumers are contributing goods from outside the country
that means that Ireland is exporting goods and its trade surplus is increasing. Exports
are growing more than imports, meaning there is more of a demand for Irish Punts, which
is why the Irish Punt is appreciating. The problem in Ireland is that the economy is so
good it may be getting out of control. When the inflation rate gets too high, the nominal
interest rates will increase because of the inflation. When nominal interest rates
increase, the Purchasing Power Parity says that in comparison to a country with less of
inflation rate, the country with the high nominal interest rate will have depreciation in
its currency. This scenario may be the case for the Irish Punt in the near future. 
When evaluating the financial risk in Ireland, we believe that it is relatively low. Many
of Ireland's economic indicators show that Ireland's economy is healthy, and as
aforesaid, maybe too healthy. The real GDP Growth in 1999 in Ireland has been 8.6%. This
is a remarkable figure in comparison to its European peers: U.K. 1.7%, France 2.4%,
Germany 1.3%, the Netherlands 3.0%, Spain 3.7%, and Portugal with a Real GDP Growth of
3.1%. Ireland has even outgrown the U.S. and Japan in real GDP growth, with the two
having growth rates of 3.8% and 1.4 %, respectively. Ireland will continue to grow in its
real GDP with one 2000 projection of 7.5%. A projected figure also higher than the
mentioned countries. Another indication of Ireland's low financial risk is the
unemployment number. Most recently, this statistic has been at an annual low. This shows
that there are many opportunities in the Irish economy. One may look at this number from
an executive MNC perspective and say that there is not a very large pool of perspective
employee candidates for an emerging MNC. A statistic that combats this concern is that
47% of the population in Ireland is between the ages of 15 and 44. An overlapping figure,
also, is that Ireland has the youngest population in Europe, with over 40% under the age
of 25 years. 
There should not be much of a big worry as far as the future exchange rate of the Irish
Punt. In general it should stay relatively stable with some slight everyday volatility
overall. One thing someone may be cautious of is in the near future with regards to the
exchange rate. The economic boom is huge in Ireland and with inflation rising, there is a
probable chance of nominal rate rising, and consequently, a short-term depreciation of
the Irish Punt.
Currently, the Irish government offers concessions to multinational companies who expand
operations into Ireland. This has led to expansion within the country and contributed to
the impressive economic performance of Ireland. The most effective means of attracting
international expansion has been the tax advantages offered to multinationals. Depending
on how it is categorized, multinationals are exempt from filing income taxes for the
first three to five years of operations. Considering the average marginal tax bracket of
large firms is upwards of 40% in the U.S. and nearly 55% in Ireland, a company stands to
benefit financially from operations in Ireland. 
Considering international expansion into Ireland requires the allocation of resources and
capital while providing many benefits to the local economy, certain concessions must be
required on behalf of the Irish government. It would be requested that the profits
derived from international operations be exchanged at a previously established rate. It
would be arranged that such a rate would be the spot rate at the time of conversion less
a discount. This floating rate will protect the firm if rates either rise or fall while
not locking in a rate that could become unfavorable if rates drop substantially in the
future.
It would further be required that the upper management and other key personnel be
imported from abroad to provide consistent managerial techniques within the company's
corporate structure. However, entry and low level employees may be hired from the
surrounding communities. This will serve the interests of both the company as well as the
local community and economy.
Despite the favorable political and economical factors in Ireland, certain aspects of the
Irish culture must be considered when managing the workforce. Certain attitudes and
cultural differences exist that may render the traditional American management style
relatively ineffective. Ireland's beliefs and values that Americans would consider
"old-fashioned." Until recently Ireland has had a history of economic and political
despair. 
As the effect of properly functioning capitalism has not been fully experienced, Irish
citizens regard as priorities: religion, family and humor, rather than the American
ideals of prosperity, success and the notion of "more." However, they are not a people
adverse to hard work. Rather, the Irish demand a certain level of recreation particularly
that found in the local pubs. In other words, managers can expect Irish employees to work
diligently and effectively during the required times of operations. However, managers
should realize that Irish workers generally will not work late hours striving for
success, but instead will utilize this time spending it with family or socializing in the
pubs. Considering this, management must understand the work ethic of the traditional
Irish workforce, and integrate this factor into their managing techniques in order to
more effectively utilize their employees.
In terms of religion, the Irish culture is quite homogenous. Over 90 percent of the
population is Roman Catholic. As a result, the Vatican has particularly strong level of
influence within Ireland. Managers will find it difficult to deal with employees if they
are expected to participate in genetic research, developing biotechnology, or anything
pertaining to abortion. As the Irish tend to be stubborn, managerial tactics may prove to
be ineffective when managing under these types of conditions. Considering this, companies
that participate in any ethically or morally questionable operations specifically those
opposed by the Vatican and the Pope, should be carefully considered and not haphazardly
ventured into. 
In order to produce a more cohesive workforce, mangers must understand the philosophy of
pub-life in Ireland, which is inherent to the culture. In America, people frequent bars
with the intent to drink alcohol. Pubs in Ireland, however, are the focal point for
social interaction. It is not uncommon for priests, nuns, grandparents and families with
young children to be found at a pub in Ireland. By understanding its function, managers
can improve the group-dynamic by promoting social interaction and thus improving a
workforce's effectiveness through the philosophy of synergy.
The success of the company pivots on the performance of the management selected to
undertake the venture. Considering a manager's performance is directly correlated with
his or her enthusiasm and eagerness towards the endeavor at hand, it is important to
select appropriate individuals that will exert these characteristics in a foreign
country. Normally, the selection process is an evaluation of the individual's abilities
to perform in a business setting. In this case, it must be determined if the individual
can, not only survive, but also thrive in the foreign culture. Therefore, a certain level
of "convincing" must be done to persuade the candidate to move to a foreign country.
The simplest and most obvious solution would be to offer additional compensation such as
a substantial salary increase or a relocation bonus. However, this is merely a temporary
solution for a permanent situation. Other factors should be evaluated and considered
before offering an individual the position. Several traits and competencies should be
considered when selecting expatriate managers for international assignments. In a recent
study of expatriate managers, the most successful individuals had similar personality
structures. These included people skills, adaptability and flexibility, tolerance,
emotional maturity, self-confidence and industry experience. (Shay, 33) Human resources
should search for individuals who fulfill this profile. Further considerations should
include an individual with little or no domestic attachments. A manager would be more
likely to relocate if s/he has to sacrifice less in order to do so. Younger people tend
to it this description as well as being more open to new experiences and possessing the
ability to learn quickly. 
Recently, the performance of female expatriate managers has received a growing level of
attention. Apparently, they are able to do their jobs well and able to "perform in the
most difficult situations. Numerous studies indicate that women would make excellent
expatriates and their openness, strength in relationships, and flexibility could be
decided advantages on an international assignment." (Dollins, 1)
Some individuals are apprehensive towards the idea of working for prolonged periods of
time overseas because they feel as if they will become trapped and be denied the
opportunity to return home because they were one of the few to accept the position. In
response, the idea must be reinforced that this is not a permanent transition. By
creating an accelerated promotion program, the idea that international assignments are
only temporary, can be fostered. Through this tangible program, the individual will come
to understand that the position is a necessary "stepping stone" for future advancement.
It is a means, not an end, and therefore not a final destination. Hopefully, this will
encourage managers to become involved in overseas ventures as well as gaining experience
in a different aspect of the company's operations.
After the manger is selected, proper cross-culture training is necessary. Focused efforts
must be made to develop a program that prepares expatriate managers and their families
for the challenges they and their families will face abroad. Obvious topics should
include currency, government system, architecture, language, etc. It should emphasize the
"objective aspects of culture help managers understand what to expect in their daily
routine and the social dynamics they will encounter." It is not enough, however, for
expatriates to learn about the objective characteristics that distinguish the host
culture from that of their home country. They must also understand the more "subjective
characteristics," such as customs, values, beliefs and norms. Cross-cultural training
programs that incorporate subjective cultural characteristics help develop a better
understanding of the values and beliefs that influence behavior in the foreign country. 
Respondents to a survey reported that "such training can improve job satisfaction and
performance and provides a competitive advantage over other global players. Thus training
has the potential of making a significant impact on international ventures." (Shay, 35)
With a previous understanding of the country and the culture, the expatriate manager will
feel more comfortable in the new environment and, therefore, improve their performance. 
The expansion of our IT operations into Ireland will prove to be beneficial for the
company as well as to its shareholders. In addition to the increased revenues, this
project offers the advantages of diversification. Ireland will provide the company with
an existing "technically literate" population, which requires minimal training. Little
resources are needed to be imported into the island country for the purposes of software
manufacturing. In terms of exporting, the software can be delivered over the Internet
thus reducing transportation costs. While foreign expansion is cost intensive and
requires additional coordination and management, the current tax laws of Ireland
temporarily suspends income tax obligations of multinational companies for a minimum of
the first 3 years of operations. Overall, the benefits of expanding into this market
offset the potential risks of the expansion. 
Bibliography
Works Cited
Dollins, Ilene. "1998 Global Relocation Survey." Employment Relations. Winter 1999: 
25 i4 p1.
Jordan, Joe. "Selecting Expatriate Managers: Key Traits and Competencies." Leadership 
Organization Development Journal, March-April 1998 v19 n2-3 p89.
Shay, Jeffrey. "Expatriate Managers." Cornell Hotel & Restaurant Administration
Quarterly. Feb 1997, v38 n1, p30.
"Irish Unions Warn Gov't Wage Pact Threatened By Inflation" Dow Jones Newswires April 26,
2000.