Question

1. How should a firm adjust the capital budgeting for investment in a country where the chance of a government takeover is relatively high?

Answer 1

When setting up business in foreign countries the MNC's capital budgeting process will often incorporate country risk analysis.County risk often refers to the adverse impact the host nation's operating environment will have on the firm.It helps the firm to avoid conducting business in high risk countries.

One such country risk is the chance of government takeover.The firm can prevent this by using a small scale(time frame/life span ) for the project ,which would enable the firm to recover it's initial outflow rather quickly.Another method is that the firm could hire more staff from local work force .This in turn would help improve the reputation or image of the firm from a corporate social responsibility perspective and thus would put pressure on the government.The purchase of an insurance that provides coverage to certain extent of country risk is another solution.Another solution is to use distinct technology ,one that's harder to replicate.The firm can also resort to borrowing from the banks in the host country which would in turn pile more pressure on the host government contemplating a takeover..These are the various ways that a firm can adjust it's capital budgeting for investment in a country where there is a chance of takeover by host government.