How does country risk matter for foreign direct investment?

In this paper, we aim to identify the political and financial risk components that matter most for the activities of multinational corporations. Our paper is the first paper to comprehensively examine the impact of various components of not only political risk but also financial risk on inward FDI, from both long-run and short-run perspectives. Using a sample of 93 countries (including 60 developing countries) for the period 1985-2007, we find that among the political risk components, government stability, socioeconomic conditions, investment profile, internal conflict, external conflict, corruption, religious tensions, democratic accountability, and ethnic tensions have a close association with FDI flows. In particular, socioeconomic conditions, investment profile, and external conflict appear to be the most influential components of political risk in attracting foreign investment. Among the financial risk components, only exchange rate stability yields statistically significant positive coefficients when estimated only for developing countries. In contrast, current account as a percentage of exports of goods and services, foreign debt as a percentage of GDP, net international liquidity as the number of months of import cover, and current account as a percentage of GDP yield negative coefficients in some specifications. Thus, multinationals do not seem to consider seriously the financial risk of the host country.

Competition of the mechanisms : how Chinese home appliance firms coped with default risk of trade credit?

During the transition period from a planned economy to a market economy in 1990s of China, there was a considerable accrual of deferred payment, and default due to inferior enforcement institutions. This is a very common phenomenon in the transition economies at that time. Interviews with home electronics appliance firms revealed that firms coped with this problem by adjusting their sales mechanisms (found four types), and the benefit of institutions was limited. A theoretical analysis claim that spot and integration are inferior to contracts, a contract with a rebate on volume and prepayment against an exclusive agent can realize the lowest cost and price. The empirical part showed that mechanisms converged into a mechanism with the rebate on volume an against exclusive agent and its price level is the lowest. The competition is the driving force of the convergence of mechanisms and improvement risk management capacity.