Learn something new every day
More Info... by email
Macro risk is a type of political risk companies face when conducting operations in foreign countries. The increasing use of business technology has allowed companies to enter new foreign countries and expand their sales to numerous international economic markets. Many times, conducting business in a foreign business environment is not the same as running a business in the United States. Additionally, macro risks in a foreign country may not be the result of the current political system or business policies.
A common form of macro risk is the fluctuating value of a foreign countries currency. Currency fluctuations may occur for a variety of reasons, including the current monetary policy of the foreign country, the valuation of the currency by foreign markets or significant changes in the value of the foreign country’s resources. Fluctuating foreign currencies make it difficult for a U.S. business to accurately price goods or services produced in the foreign country’s market place. Companies may also face difficulties attempting to import or export goods produced in the foreign country since currency fluctuations may not allow producing companies to earn as much money moving these items to a different country. Another type of macro risk may come from the instability of the foreign country's current political system.
Many foreign countries are susceptible to rapid and significant changes in their political system. Countries attempting to reach out for foreign investment when a free market for capitalist-style political party is in power may be left in a lurch if a fascist or socialist form of government takes over the country’s political system. When this happens, U.S. companies may face intense macro risk if the foreign country begins taking over private businesses and nationalizing their operations. Once a U.S. company loses its foreign operations in the country, it may be subject to a significant write-off or financial loss on its financial statements. Companies that are attempting to avoid this type of financial loss from macro risk may choose to purchase political risk insurance.
Political risk insurance helps companies ensure banks, lenders or private investors that they have taken precautions when starting operations in foreign countries. This form of business insurance may be purchased at different amounts or with specific stipulations protecting the company from financial loss due to macro risk. However, these insurance policies may not be available for certain foreign countries with extremely volatile political systems or for countries unable to maintain a stable currency valuation.
@Sneakers41- I just can’t believe that businesses did not have any macro risk advisors that would have warned them of this type of problem. I think that when you consider macro risk management you also have to look to see if the country has a certain level of peace.
For example, countries like Costa Rica and Panama have been very friendly to American and foreign business investments. Most investment tools will recognize the stable political climate and lack of business taxes.
In fact, these countries don’t even have an active military. My husband’s company moved their accounting department to Costa Rica because they considered it a stable country that allowed them to operate at much lower costs than in the United States.
I think that the stability or of a foreign country is critical in the investment of a business overseas. The macro political risk is important to accurately assess because if the country changes its economic structure dramatically it will affect your business there.
For example, in the 1950’s many businesses were investing in Cuba and many Americans and people all over the world called Havana the “Paris of the Americas.” However, at the time Cuba was a democratic republic, but in 1959 with ouster of Batista, Fidel Castro took over and dramatically changed not only the political landscape, but the economic one as well.
Cuba became a Marxist state and all property was seized and
became government property. Businesses lost all rights to operate in that country and their property was also seized.
Some people knew that this was coming and got out prior to 1959, but many failed to see the macro political risk and lost all their investments in that country. Many similar things have been happening in Venezuela because its leader, Chavez has been nationalizing a lot of businesses.
One of our editors will review your suggestion and make changes if warranted. Note that depending on the number of suggestions we receive, this can take anywhere from a few hours to a few days. Thank you for helping to improve wiseGEEK!