1. Introduction An increasing number of companies are taking advantage of the external trade, which represents huge business opportunities as much as the possibility of buying products and, mainly, the development of new profitable and promising markets. The financial institutions, while financing the commercial flow among nations, are trying and taking advantages of such opportunities as well. On the other hand, out of the commercial extent, new business opportunities are realized to those ones who are interested on investing extra values abroad through direct investments or through the stock and security markets (public and private). So, all of them, investors, banks, and companies are trying to improve their asset returns, taking advantage of the amazing international liquidity opportunities, brought by the process of globalization. However, to some countries, such opportunities do not only mean increasing of the investment return. They also represent additional risks from the volatility intensification of returns of each implemented business decision. Therefore, country risk analysis is getting importance day by day. In this report we have analyzed the country risk of Bangladesh.

1.1. Origin of the Report:

The BBA program under the Department of Business Administration offers a course named “International Financial Management” (FIN-465) which requires every group to submit a report based on consumer behavior and marketing strategies which is determined by the course instructor. We are assigned to prepare the term paper by our honorable course instructor “Md. Shehub Bin Hasan”. The report has been prepared to serve that purpose.

1.2. Objectives of the Study:

The main objective of this report is to fulfill the mandatory requirement for the international financial management course. But there are other objectives of this report. Those are:

To analyze the overall country risk of Bangladesh To find out whether the country is suitable or not To find out ways to reduce the country risk

These are the core objectives of this report. And in this report we will go through each of the objectives mentioned above.

1.3. Methodology of the Study:

This report includes quantitative and qualitative data relating to our topic. Mainly “secondary data” is used to complete the report. Information was collected primarily from various websites. We also took help from our text book to depict theoretical matter. To analyze country risk we have used checklist approach. Checklist approach involves making judgment based on every one of the political and financial factors that contribute to a firm’s assessment

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of country risk. It engages in rating and weighting all the identified factors, and then consolidating the rates and weights to produce an overall assessment.

1.4. Limitations and Delimitations:1.4.1. Limitations:

The limitation of the study is defined by the expensiveness of the facts covered by the study and those that left out. It is observable that almost all studies have some boundaries. During performing my work, we had to face a number of limitations. These are as follows:

Privacy of Information: Information needed for country risk analysis was very hard to collect because this information is not open for public. This is one of the major limitations of the study.

Financial Limitations: Prepare a proper report is not possible in a very limited amount of money. Because, a huge amount of data and face to face contact with the people related to this sector was needed. But, we did not have that much fund to collect information from a various range of sources.

Time Limitations: We have been given a very limited time. Within this time it is impossible to prepare a proper study report. It was not possible for us to conduct proper interview with all the people, from whom we might collect proper information.

Data Collection: We cannot get accurate result by assuming something. This report is mainly based on assumption. So, the data in not totally much reliable.

1.4.2. Delimitations:

Instead of the limitations, we have tried our best to make the report as much relevant and reliable as possible. That’s why we have also collected data from different government websites and conducted proper analyses to prepare this report in a well manner.

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2. Country Overview: Bangladesh

2.1. Financial Risk Factor:

Bangladesh is a developing economy supported by the agricultural sector. Over the years, the economy has developed strongly in the industrial sector, especially in readymade garments. This garment industry has now become a significant contributor to the GDP of the country. Moreover, Bangladesh has also seen growth in industries involved in mining and quarrying of natural gas. Major challenges like higher population, along with frequent natural calamities are influencing the overall development of the economy. Following sub-factors affect the countries overall financial risk.

2.1.1. Economic Growth:

Economy plays a vital role in the development of a country. It also plays a very important role in the risk for foreign investment. The following factors are related to the overall economic growth of a country.

A. Gross Domestic Product (GDP):

This is the total production of a country over the year. We can see a cyclical pattern in the growth of GDP of Bangladesh over the last 10 years. Still, the growth rate is better relative to other countries. The GDP growth rate of Bangladesh over last 5 years is given below:

Figure 1: GDP growth rate of Bangladesh over last 10 years

B. Gross National Income (GNI):

 If we look at the growth rate of the gross national income of Bangladesh over last 10 years then we can see there is a sudden drop in last three years. So, this is a matter of risk for the

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country. Because their national income is in a decreasing trend, it may hamper the economy in near future. The GNI of Bangladesh over last ten years is given below:  

Figure 2 GNI of Bangladesh over last 10 years

 2.1.2. Inflation Rate

Inflation rate is another important factor while determining the country risk of a country. From the last ten years inflation rate data we can see, the inflation of this country is in an increasing trend from last couple of years. This is very alarming for the country and it will increase the risk further. Inflation rate data over last ten years is given below:

Figure 3 Inflation rate of Bangladesh over last ten years

 

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2.1.3. Foreign Direct Investment (FDI)

 If we look at the inflows of the foreign direct investments for last five years, then we can see increase in the FDI in recent year. It means the rising inflation rate couldn’t affect the FDI, which is a good sign for the country. Foreign direct investment over last five years is given in the figure below: 

Figure 4 Foreign Direct Investment in Bangladesh over last5 years

2.1.4. Interest Rate

 From the table below we can see in case of deposit, the interest rate is following a trend which is upward sloping from last few years. But, in case of lending, the interest rate fluctuates too much. This is very confusing for the investors to make their investment decisions. So, this is also risky and will affect the country risk. 

Central bank interest rates (%)Year On lending On deposits

2012 9.402011 11.16 7.462010 8.06 6.082009 4.39 6.292008 10.24 7.092007 7.37 6.842006 11.11 6.992005 9.57 5.902004 5.74 5.562003 8.17 6.252002 9.56 6.49

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2.1.5. Official Exchange Rate

In 2012, the exchange rate increased by a large amount. It creates uncertainty in the investment decisions of foreign investors. But, from the 6 years data we can see, the overall exchange rate doesn’t fluctuates that much. But, continuous depreciation of the currency over last will have a negative impact on the country and will increase the country risk. 

Official exchange rates during 2006-2012

Year USD EUR GBP

2012 81.32 106.48 130.90

2011 71.04 94.92 112.02

2010 69.18 96.24 109.42

2009 68.80 94.52 111.17

2008 68.60 100.96 137.48

2007 69.03 90.17 133.44

2006 67.08 81.74 119.41

2.2. Political Risk Factor:

Bangladesh has a parliamentary form of Government; functioning on the basis of its self drafted constitution. The powers of the Government are divided into executive, legislative and judiciary. 

The executive powers of the country lie with the President, elected by members of the Parliament (the House of Nation). He is assisted by a Cabinet that is headed by the Prime Minister. The Cabinet also exercises the executive powers under the supervision and control of the President. The Cabinet also stands responsible to the House of Nation.

The House of Nation has the legislative powers of the country. It comprises of 300 members, elected by way of direct election and an additional 45 female members are elected by the existing members.

A. Regulatory Environment

Bangladesh is ranked 130th in the 2011 Index of Economic Freedom. Its economic freedom score is 53.0 (out of 100), an increase of 1.9 points from the previous year. The rise in ranking was due to higher business and investment freedom. 

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B. Corruption Perception

Bangladesh is ranked 134th in the World’s Corruption Perceptions Index 2010. Its index score is 2.4 (out of 10), reflecting high levels of corruption.

C. Freedom of Information

The country is ranked 126th on the Press Freedom Index 2010. It indicates that the government laid high restrictions on the press.

There are around 40 daily newspapers in Bangladesh. The majority of them are published in Bengali and English. 

D.  Income Tax Rate

The Government of Bangladesh levies a minimum tax of BDT 2,000 on all individual taxpayers. However, income tax is further charged on the basis of five income slabs varying from 10% to 25%. Any non-resident person, other than Non-Resident Bangladeshi, is liable to pay fixed tax at 25% of his/her income.

Income tax rate for individual taxpayers

Income slabs (BDT) Tax rate (%)0-165,000* 0

165,001-440,000** 10440,001-765,000 15

765,001-1,140,000 201,140,001 and above 25

 E. Corporate Tax Rates:

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In the following table, the corporate tax rates are given for Bangladesh. This is a crucial factor for the MNCs. Because, they have to pay tax from their income so, if tax rate is higher, then the risk will also be higher. Recently, government has increased tax rate in some sectors so; it is not a good indication for the MNCs. Present corporate tax structure of Bangladesh is given below:

Corporate Tax Rates

Type of company/business Tax rate (%)Publicly traded companies (other than bank, insurance, leasing and other financial institutions)

27.5

Non-publicly traded companies (other than bank, insurance, leasing and other financial institutions)

37.5

Bank, insurance, leasing and other financial institutions 45

Mobile phone operators 45

Dividend or profit withholding 15

Expatriates 25

F. Labor Force 

In 2009, Bangladesh had an economically active population (labour force) of 53.7 million. Males constituted about 75% of the total labour force. During 2009, the Labour Force Participation Rate (LFPR) was 59.3% in the country.

3. Analysis of the Country Risk

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In this chapter, we have done our actual analysis on the country risk. In the below sections, the country risk of Bangladesh has been analyzed. We can have a look on the overall risk condition of the country from the figure below:

Figure 5 Country Risk of Bangladesh in Different Sectors

From the figure above we can have a look on the risk factor and impact of those factors in the overall country risk. Surely, it will give some idea about the paper work that has done below. The justification of the given weights to the different factors and the overall risk calculation or Bangladesh is given in the next segment.

3.1. Political Factors:

Political situation in a country plays a vital role in the decision making of the MNC for entering in that countries market. If the political condition is not suitable for them then they don’t enter that country. MNCs always seek for countries from where they can earn profits and bring money back into the home country of the MNC. After analyzing the situation in Bangladesh, we have given 40% risk weight in the political factor of Bangladesh. Political conditions have less impact on the business of MNCs relative to the financial factors; as financial condition of this country is very volatile presently; but have some impact. This is the reason behind the 40% risk weight given to the political situation of Bangladesh. Different sectors of political risk have been discussed below:

3.1.1. Political Instability:

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Political instability is always a big risk for the investors to do business in any country. If the political situation of that country is not stable then they have to face many hazels. Even for the business MNCs political situation plays a vital role for doing business. MNCs try to avoid countries with high level of political instability as they might not get considerable return from their investment in that country.

This is one of the major political risk factor in Bangladesh. The present political situation is so much risky that investors are in a great confusion about whether to invest in this country or not. This political instability has increased the country risk.

Weight: Political instability is the most important political factor in Bangladesh. Recent political situation is increasing the risk for investors to invest in this country. Presently the situation is very much unstable. Distance between the government and the opposition parties are increasing day by day. As a result, strikes, protests, rallies have become a common and regular activity for them. These things affect the business of MNCs or other investors’ because it affects the lifestyle and well being of life for the general people. So, MNCs not only find it hard to do business but also lose customers because of these activities of political parties.

For this reason, the highest weight in the political factor is given to the political instability, which is 50%.

Rating: We have given a rating of 5 to this factor in positive rating scale (where, 5 is high risk and 1 is low risk) because, it influences the political risk most. And for this reason, political instability is a vital role player in the risk analysis of Bangladesh. So, giving 5 in the rating scale to this factor is reasonable and justified.

3.1.2. Corruption:

This is also an important factor for Bangladesh. To do business in this country, entities, specially the MNCs have to pay a large amount of bribe. As this is also a positive side for them, but yet very much risky because, government of this country changes very frequently. Not only have the political parties setting up the government, but also a frequent shuffle in position occurred within a single tenure of a government. This is a major risk, as the authority changes in a corrupted country.

Weight: Corruption doesn’t have as much impact as political instability in the political factor. In some cases corruption is good for the MNCs and in some cases this is very bad for them. Like: in different sectors they can reduce the costs by giving bribe to get any work done. Though it is illegal but still this is happening regularly and became a tradition for the MNCs doing business in this country. On the other hand corruption may hamper the performance of the MNCs. For example, if the government changes then it become hard for them to run the business if they done anything by giving bribe. Their business may become obsolete in the country.

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As the advantage may be covered by the risk of changing government authority still, the risk is lower than the unstable political condition. So, its weight is also lower. We have given 25% weight to this after analysis its impact on the overall risk on the country.

Rating: There are both advantages and disadvantages of corruption especially for the corporations doing business in this country. But the disadvantage is slightly higher because, if government changes then the corporations have to reallocate everything. So considering this thing, we have given a risk rating of 4 to this fact. We think this rating is justified in the context of Bangladesh.

3.1.3. Attitude of the Customers:

Attitude of the customers towards the products an MNC offers, is also an important factor while calculating the overall risk for an MNC for going in a particular market. If the people of the country are not adaptive to new products then it will create a huge problem for the MNCs. So, this is mandatory for the MNCs to analyze the choice and interest of the people of a country before entering to that country for doing business.

In case of Bangladesh, the people of this country like foreign products. This is a huge advantage for the MNCs to do business in this country. As, people of this country accept foreign products from their own, so MNCs have less risk in this factor as the market condition of customers in this country is very much suitable for MNCs. There are still some risks associated for the MNCs about the attitude of the customers. That is, the awareness of people of this country about their own country products as well as the GDP of the country, especially in the garment sector. But case of the consumer goods, there is a possibility of the same risk that may arise. So, the attitude of the people of the country towards the MNCs is not totally risk free.

Weight: After analyzing the condition of the country about the customer’s attitude towards the MNCs we have found that, people of the country adapt foreign products very easily and people are very friendly to the MNC’s products. Instead of this advantage, there are also some risks associated with this that is the awareness of the people of this country about their own products. It increases the risk of the MNCs for doing business in this country. And this risk cannot be overlooked otherwise; the MNCs may find themselves in big trouble in near future.

Considering this situation that is the attitude of the customers towards the foreign products we have given 17% weight in this factor and we think that this weight is very much justified with the condition of Bangladesh.

Rating: This factor has a large impact on the value of an MNC if any change occurs as any change in the attitude may reduce the profit of an MNC in a large amount. So,

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we can give lower weight to this factor but the rating should be a bit higher according to its impact on the value of an MNC. For this reason we have given a rating of 3 to this factor.

3.1.4. Attitude of Host Government:

Attitude of the home government is another important factor while considering the overall country risk of a country. For example: in the communist countries the government does not allow MNCs. And even if they allow them, MNCs find it very difficult to run business there because governments do not co-operate with them. So, if the situation is like that then the problem will be higher and the return will be lower. On the other hand, if the foreign country government co-operate with the MNCs then they find it easier to do business in that country and the return turns higher for them.

In Bangladesh, the government is very much flexible with the foreign companies. Government of this country always tries to attract FDIs towards this country. The risk here is that they are increase the corporate tax or can impose barriers for imports or can restrict the transfer of money to their home countries. This is the risk associated with this factor to be considered while deciding to do business in this country.

Weight: As the government of this country is flexible with the business of the MNCs so the risk is also lower in this factor. As the risk is very low here, so the weight we are giving is also lower.

We are giving only 8% weight to this factor while considering the country risk of Bangladesh after analyzing the situation from the context of Bangladesh. We think the weight we have given to this factor is justified.

Rating: Attitude of the government in Bangladesh is favorable for the MNCs as they don’t go for any activities against the MNCs in near past. So the risk related to this factor is also lower. As, attitude does not change rapidly so, its impact on the value of MNC is also lower. That is why we have given a rating of 3 to this factor.

3.2. Financial Factors:

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Financial factors are very much crucial for the MNCs while doing business. These factors are directly related to the performance of the MNCs. Changes occurred in any of the financial factor will directly affect the overall value of an MNC. That is why MNCs are more concerned about the financial factors of a country such as, exchange rate, inflation rate, interest rate, and industrial competition.

Financial factors in this country for the MNCs are very much volatile. Especially the inflation rate of this country is rising over the last few years and the rate increases very frequently. As a result of that, the exchange rate is also changing frequently. It also places an impact on the interest rate of the country. Industry competition is the most common factor in every country an MNC goes. According to the present condition of Bangladesh 60% weight is given to the financial factors.

These financial factors in context of Bangladesh described below.

3.2.1. Interest Rate:

Interest rate has a direct impact on the exchange rate of a country. So, this is very important for the MNCs to analyze the movement of the interest rates before entering the market of any country. If interest rate changes very frequently then the risk increases for the MNCs, but also creates an opportunity for them to increase the return. If the interest rate is kind of stable then the return will be lower but the risk associated with interest rate will also be lower.

In Bangladesh, if we see the movements of interest rates over last few years then we can see, it varies within a certain level. It did not vary too much within last few years. So as per the interest rate risk, the risk for the MNCs is lower than the other financial factors.

Weight: After analyzing the condition of Bangladesh, and measuring the movements in the interest rate over last few years we have we can see, the interest rate is still suitable for the MNCs to do business in this country.

For this reason we have given 20% weight to this factor. In context of this country, we think this weight is very much suitable compared to the overall risk of the financial factor.

Rating: Interest rate has a big impact on the value of an MNC. Simple change in the interest rate can create a big difference. For this reason, though the interest rate risk is comparatively lower in this country but still we are giving a ration of 4 to this factor to make the calculation more reliable.

3.2.2. Inflation Rate:

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As we know, increase in the inflation rate creates a downward pressure of the exchange rate of the home currency in any country. From this, we can understand how important the inflation rate is, especially in the country with volatile economy. So, proper analysis of the inflation rate before entering the market of a foreign country is very much essential for any MNC.

If we consider the inflation rate of Bangladesh then we can see, the inflation is in an increasing trend over last few years. This is very dangerous for the economy of this country as well as the entities doing business here.

Weight: If we consider the present trend of the inflation rate in Bangladesh; which is growing frequently; then we have to give the highest weight in this factor while calculating the country risk of the country. So we have given the highest weight to this factor.

The weight we have given to this factor is 30% that we think justified enough for the country risk calculation.

Rating: We have also given the inflation rate a ranking of 5. As we have seen earlier about the impact of the inflation rate on the value of MNC and the present inflation trend in Bangladesh, this rating is natural.

3.2.3. Exchange Rate:

Exchange rate is another vital financial factor in the country risk analysis of a country. Exchange rate directly affects the return of the MNCs if they want to take the profit to the home country. But if they want to reinvest the return in the foreign country then it will not affect that much in the return of the MNCs. But in most of the cases, we can see MNCs want return according to their home currencies. In this case, exchange rate movements have a large impact on the operations of an MNC.

If we consider the situation of Bangladesh, then we can see there has been a huge jump in the exchange rate in recent years. The worst thing is, the currency is depreciating continuously so the exchange rate risk is high in Bangladesh.

Weight: As the exchange rate risk is very high in Bangladesh, that’s why the highest weight is given to exchange rate with the inflation rate. MNCs must consider this risk before entering in the market of Bangladesh.

In this situation we have given the exchange rate movement 30% weight in the financial risk factor of Bangladesh.

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Rating: The exchange rate movement in Bangladesh has given a rating of 5 because of its recent big fluctuations. This rating will make the calculation of country risk more valuable.

3.2.4. Industry Competition:

Industry competition is very common in each and every country for any company, whether that is a domestic or an MNC. So, industry competition is another important factor for calculating the country risk of any country.

In Bangladesh, this competition risk is lower for well known MNCs as the people of the country will accept the product even the competition is very high in every industry of this country. But for the average rated MNCs the risk is a little bit higher because they need to build up confidence about their products in the mind of the people in this country. In an average the risk associated with the industry competition in this country is average.

Weight: As the risk associated with this factor is average compared to the other risk factors. And considering the adaptability of the people of this country about foreign products an average weight has been given to this factor.

The weight we have given to this factor is 20% and it is justified because, some MNCs get advantages and some face disadvantages. Overall condition is average in the context of Bangladesh.

Rating: Industry competition gets a rating of 4 because of its comparative impact on the overall risk of a country.

3.3. Calculating the Country Risk:

Now we are about to calculate the country risk of Bangladesh for foreign investments. We have divided the total calculation in 3 steps. The first step is, calculating the political risk and its total rating. The second step is calculating the financial risk and its total rating. And the final step is calculating the country risk using the calculated total rating from the step one and step two.

The country risk calculation is given in the segment below:

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3.3.1. Calculation of Political Risk:

The political risk of Bangladesh is calculated below using the weights and ratings described above.

(1)Political Risk

Factors

(2)Rating Assigned to

Factor (within a range of 1-5)

(3)Weight Assigned to Factor According to

Importance

(4) = (2)*(3)Weighted Value of

Factor

Political Instability 5 50% 2.5

Corruption 4 25% 1

Attitude of the Customers

3 17% .51

Attitude of the Government

3 8% .24

Total Political Rating

100% 4.25

From the table we can see the total weighted value of political risk is 4.42 for Bangladesh.

3.3.2. Calculation of Financial Risk:

The financial risk of Bangladesh is calculated below using the weights and ratings described above.

(1)Political Risk

Factors

(2)Rating Assigned to

Factor (within a range of 1-5)

(3)Weight Assigned to Factor According to

Importance

(4) = (2)*(3)Weighted Value of

Factor

Interest Rate 4 20% .80

Inflation Rate 5 30% 1.50

Exchange Rate 5 30% 1.50

Industry Competition

4 20% .80

Total Political Rating

100% 4.60

From the table we can see the total weighted value of financial risk is 4.66 for Bangladesh.

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3.3.3. Country Risk:

The country risk is calculated below with the calculated ratings above and the weights of the political and financial factors.

(1)Category

(2)Rating as

Determined Above

(3)Weight Assigned to

Each Category

(4) = (2)*(3)Weighted Rating

Political Risk 4.25 40% 1.70

Financial Risk 4.60 60% 2.76

Overall Country Risk Rating

100% 4.46

So, the overall country is of Bangladesh is 4.46

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4. Findings and RecommendationsIn this chapter, we have discussed about our findings from this report and some recommendations for the MNCs for doing business in this country.

4.1. Findings:

While analyzing the risk of the country for the business of MNCs, we have found the following things related to this topic.

Financial factors of this country are volatile, especially in the recent years there has been a frequent changes in different financial factors of the country.

Recent political condition is not that much good for the country. This is getting riskier for the companies to do business here.

Very recent incidents in different industries have increased the awareness about the labor right. So, there might be new rules about labor control imposed by the government very soon.

Markets in this country are also very much competitive. It increases the risk for MNCs to do business in this country.

Lack of regulations about the fact of copyright exists in this country. So, MNCs unique products can be copied easily by the local companies.

In the macro level, the risk for MNCs is higher in this country for any kind of business.

In micro level the risk is slidely lower because, micro level factors of this country could not affect a MNC’s value that much.

The overall country risk is very high in this country for doing business for MNCs.

After the analysis we can see that, as for the present situation of this country, the country risk is very much high for the MNCs to invest in this country. There have been a lot of emerging domestic companies in recent years. It increases the competition for the MNCs. And the domestic companies get the support from the government. This is a huge disadvantage for the MNCs. So, from our analysis, we can say that Bangladesh is presently riskier for the MNCs to conduct business.

4.2. Recommendations:

We also have some recommendations for the MNCs who want to do business in this country or who are doing business presently in this country.

Bangladesh is a bit riskier for the MNCs who want to start business in this country, especially for foreign direct investments. But, this risk may be minimized within a couple of years; it is wise for the MNCs to wait till then.

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For the MNCs who are already doing business here doesn’t need to put up the shutters, because this condition of the country, especially the political condition is not long term and not new for this country.

If a MNC has already decided to do business in this country, then it will be wiser decision from them to invest less at this moment.

Interest rate movements are riskier for the individual investors but the exchange rate movements are suitable for speculation.

Proper and regular update is very much essential for the MNCs about the country risk of this country because the situation is changing in a regular basis.

These are some recommendations about the country risk for the MNCs and individual investors who want to do business in Bangladesh. It will be better for them if they follow these suggestions and periodically review the risk and update this information. Then, business in this country will be easier for them in this country, if they can match with the pattern of condition changes in this country.

4.3. Conclusion:

Country risk analysis is essential for the international investors to do business in any country. If investors invest funds without having proper risk analysis of that country then the chance of default is higher and a large portion of their funds may be lost. So, before doing business in any country, this is very much important to do proper country analysis. It will definitely reduce the default risk of invested fund and increase the profitability. The country risks analysis helps to identify the country where investment is suitable and most profitable. By doing this sort of analysis MNCs can increase their profit and also expand their businesses in a country where the potential of the profit is most. So, it is better for the MNCs to do proper country risk analysis before entering to any country for doing business.

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