Strategy

Getting a Better Fix on Country Risk

New software help risk managers forecast the bottom-line impact of political instability.
Alix StuartSeptember 19, 2001

Right now, it’s hard to tell just how the US ”War on Terrorism” will play out. But clearly, such a battle will make it damned difficult for multinational corporations to conduct business in certain parts of the world. The question is: how will the recent terrorist attacks in the US — and the resulting political fallout — affect the bottom line of overseas business ventures?

Obviously, computing the likelihood and severity of polical variables is no easy task. Nevertheless, quantifying the risks of doing business in unstable regions was a hot topic even before Sept. 11. Adam Davids, CEO of the New York-based Global Association of Risk Professionals, says that several consortia and companies have rolled out operational risk models over the past few months.

PricewaterhouseCoopers, for example, recently partnered with Greenwich, Conn., software firm NetRisk Inc. to develop in-house tools for a wider corporate audience. The software analyzes internal loss data from a company and allows relevant external exposure data to be incorporated. Another model, developed by the Economist Intelligence Unit (a sister company of CFO Publishing Corp.), in London, ranks countries on the prevalence of shady business practices and cultural constraints.

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Similarly, Merchant International Group (MIG), also based in London, is rolling out a $25,000-plus software suite that incorporates the proprietary Gray Area Dynamics (GAD) index into traditional financial risk measures.

“GAD looks at the perception, as opposed to facts, because facts often have little bearing on actual transactions at a country level,” says Trevor Gunn, a deputy director at the Department of Commerce.

Other risk experts debate the value of crunching soft numbers, and note that they should not be used to make final decisions. MIG officials tend to agree. But Paul Brown, MIG’s managing director, points out that “once you start quantifying this stuff, you can approach insurance companies to cover it.”