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Business Environment Risk Intelligence

Introduction

There are different approaches to country risk assessment. Qualitative analyses include aspects such as legal and political risks that require analysis of qualitative data. Financial institutions that utilize qualitative analyses include COFACE, EIU, and IIF among others. Conversely, the quantitative approach involves econometrics, analytical, ‘Logit’ and non-linear conditional analyses (Guy and Kamga 41). Nonetheless, there are specialized institutions in country risk rating that include business environment risk index (BERI), Euromoney, and Coface & Ducroire amongst many others. This is a report on BERI’s risk rating system. It focuses on the establishment of BERI, as a country rating institution that utilizes both qualitative and quantitative approaches when rating countries on risks prevalent in their business environment.

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Business Environment Risk Intelligence (BERI)

BERI is a private company that specializes in providing companies with an accurate risk analysis and assessment of various countries. Indeed, it is one of the pioneers of country risk assessment and it currently operates in over 140 countries across the world. Starting in 1966, the company serves financial institutions and firms in the international markets. In addition, BERI provides multi-client services to its clients. Among its core strengths is its ability to provide reliable and accurate predictions that have enabled the company to establish global clients. Currently, the company’s headquarters are located at Friday Harbor, Washington. Nonetheless, some processes such as research, analyses, and publication of reports are done in various cities and locations all over the world.

Dr. Haner is the managing director of the company having served as its founder and initiator of report publication and assessment of future financial and economic situations in different countries and financial markets. The company receives numerous publications from all over the world for analysis by its professionals. The analysts include a panel of experts that assesses specific qualitative and quantitative aspects of the publications and accord the accurate country risk rating.

Publications and utilization of Qualitative and Quantitative Analysis

BERI releases risk forecasts and ratings three times annually. This happens in April, August, and December. The company offers qualitative analyses of the past, present, and future risk assessment to numerous companies with operations that are located all over the world (Brown 61). In line with the dynamic nature of the dynamic global business environment, BERI has refined its rating system over the years. The current system offers an all-inclusive numerical assessment of the prevalent operating environment, political factors, and foreign exchange trends to over fifty countries across the world (Burstein 111). These countries are considered important owing to their role in shaping global economic and financial trends.

Historical, current, and future predictions make up the “Composite Score” that is critical in providing the correct rating system for various countries (Burstein 112). Historical Ratings Research Package (HRRP) is always available and facilitates global companies to get an understanding of past trends of a specific country (Guy and Kamga 47). In any publication, fifty important countries have a briefing that is segmented into four sections. The first section consists of political risk indicators in addition to the operation risk index. Besides, each of the countries has a briefing on the current insights with comments on future predictions and emphasis on opportunities at the disposal of the country under analysis. Additionally, this section of analysis also highlights the problems that a country may face in the immediate and long-term future.

Section three of the briefing contains financial and economic data that are important in providing vital indicators for upcoming years. Finally, during the briefing dedicated to the fifty most important countries, BERI provides political factors and information that may predispose a country to an improved or a deteriorating risk rating. Such factors as the prevalent governance system, dynamics in leadership, and projected political situation of the country in the short term and long-term facilitate the analyses of a specific country’s political environment (Guy and Kamga 57).

Guy and Kamga say that the rating institution dictates that their clients (international businesses and companies) must have at least five years prediction horizons (49). Besides, it says that a company ought to implement its decisions successfully. As such, BERI’s clients ought to have a management system that can respond to changes in the global business environment while at the same time instituting changes in their respective corporate and business environments (Brown 63). They also ought to comprehend that information in print and broadcast press may assist them in providing the rationale for specific forecasting positions but they rarely provide a qualitative assessment of the situation and may be used ineffectively.

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Many of BERI’s publications utilize both quantitative as well as qualitative analysis of the risk factors that are present in different countries. It is important to realize that such a publication as FORELEND, which assesses country risks for international lenders has both aspects of qualitative and quantitative analysis. First, lenders’ risk quantitative and qualitative tools of analysis characterize the analysis of the FORELEND (Guy and Kamga 77).

Besides, the introduction of data and statistics is a purely quantitative source of analysis that many companies explore as an important aspect of accurate forecasting. In addition, BERI qualitatively analyzes political factors making special emphasis on government structures and future projection of political risks to the business environment. The company utilizes qualitative tools for accuracy, clarity, and reliability. The qualitative analyses ought to be consistent with the past performance of a country (Jeffrey 56). The qualitative factors are summarized in BERI’s publications providing insight into current financial and economic issues.

Definition of Factors used in BERI’s Rating systems

BERI utilizes various risk factors during its analyses of risks accruing to the different business environments. First, the analysis considers the political risk index. International businesses and governments face this risk in the context of macroeconomic transactions. Guy and Kamga say that it entails potential complexities that global businesses may experience owing to specific political decisions (53). Some decisions may have potential beneficial or detrimental effects on international business (Brown 69).

In this case, political risks may predispose companies to potentially hazardous or conducive environments that may increase or subsequently impede the global competitiveness of companies. Massey articulates that the stability of a specific country is one of the most important aspects of determining the political risk index (321). In this case, political stability does not always translate into an increased sense of democracy but it implies the consistency of the business environment. Researchers have shown that most authoritarian political regimes have the most stable political and government factors (Massey 327).

BERI focuses its analyses on both microeconomic and macroeconomic political factors that may influence the global business environment. The former refers to a country’s internal governance structures and policies that may hinder international businesses’ ability to penetrate the market. Macroeconomic political risks imply business environment risks at global markets. This includes policies and regulations that govern the international financial and economic markets and influence the future forecasts of the same. After analyzing these factors, Jeffrey points out that the institution comes up with a political risk indicator that is calculated in quantitative terms to give an impression of the prevalent political situation for various countries.

BERI also utilizes the operation risk index. Essentially, operation risk refers to the aspect of operating expenses that might accrue to a company when operating in global markets. According to Jeffrey, operational risk is the danger of losing substantial amounts of resources by a company owing to the country’s specific internal factors such as culture and social systems among many other things (45). Operation risk has incorporated numerous aspects over time.

In an attempt to have an accurate forecast of operational risk, such factors as globalization and deregulation play an important role. Nonetheless, the interconnectedness of financial systems across the world has not only introduced a momentous challenge in forecasting but also reduced the accuracy of the predictions. In particular, the use of operation risk to predict the 2008 financial crisis was not as accurate as many financial analysts point out.

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BERI complies fully with the Basel Committee that was introduced to provide guidance and give hints of operational risks. The committee defined the risk as to the resulting loss from poor and failed internal systems owing to exogenous factors (Burstein 72). Although the definition gives the framework of operation risks, BERI recognizes that the committee has given financial institutions and companies the autonomy to define operation risks by their respective businesses. Some sources of external threats include fraud, employment conditions, marketing practices, damage, and disruption of business operations (Guy and Kamga 91).

BERI also recognizes the apparent difficulty in defining operational risk. According to Jeffrey, the operational risk index may fail to offer precise and accurate forecasts due to assumptions and changes in credit facilities at the global financial markets (39). Nonetheless, companies have appreciated that operational risks are unavoidable in any business context although it is almost impossible to quantify the levels of the risks (Massey 312).

As mentioned earlier, reliance on the operational risk index to give a perfect prediction of the future led to the unforeseen financial crises of 2008. To mitigate the inaccuracies in the predictions, BERI’s risk rating system incorporates basic, standardized, and advanced measurement perspectives in the process of quantifying operation risks. Brown explains that the basic indicator model focuses on the revenue of a company and institution gave a specific fiscal year (70). A standardized approach is used to quantify the operational risk of companies by focusing on annual revenues generated by a specific line of business of a company. The advanced measurement approach utilizes internally defined methods of risk analyses and internal frameworks of an organization about operational risk (Brown 57).

Further, BERI’s risk system assessment utilizes the remittance & repatriation factor (R factor) to quantify the level of risk that companies face in their operations. This factor includes the amount that a country receives from operating in international markets through foreign exchange. Remittance is the amount of foreign exchange that leaves a country without going through the economic system (Burstein 124). This factor helps to give an overview of the risks at both remitting and repatriating foreign exchange. In other words, the amount of foreign exchange that flows outside the business context may serve as an important indicator and a predictive factor of risks associated with operating in a specific country.

Composite Score and Weights for the risk

All the above-mentioned factors are crucial during the calculation of the composite score. They represent a general quantifiable score that is composed of the three indices. BERI, therefore, produces a score that involves the calculation of all forms of risks that a company may face in the global financial market (Jeffrey 56). It implies, therefore, that the composite score is a relatively accurate system that combines all sorts of risks to give an overview of the entire microeconomic or macroeconomic environment.

While we consider that the business environment has no specific and uniform methodology to quantify apparent risks, each of the above three risks is accorded equal weight. However, BERI appreciates that political risks take different dimensions and are usually analyzed in qualitative terms, and as such, scales are used to understand how a combination of intricate factors yields different indices for the company. Nonetheless, with a panel of professionals conducting both types of analyses, BERI has been able to quantify such risks and give an accurate prediction of financial markets. Operational risk index and R–factor are similarly accorded equal significance to the ultimate composite score that highlights the level of risk in a specific country.

Classification of Risks

There are various sources of risks that are faced by international businesses. BERI classifies these sorts of risks into three categories that include political, financial, and economic risks.

Political Risks

Political risks include all those factors that typify the international and national markets due to governance and policy issues (Guy and Kamga 81). Risks like coup d’état, political violence, and poor governance structures represent some of the political risks that companies seek to reduce. BERI also emphasizes the policy frameworks that govern macroeconomic and microeconomic financial markets. In this tune, macroeconomic political risks are usually apparent in numerous instances in the world.

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For instance, Brown explicates that China has imposed export quotas on the exportation of rare earth materials such as steel, manganese, and silicon, to mention but a few such raw materials (73). Nonetheless, the political atmosphere in the country is conducive for foreign direct investment. In this scenario, trading with China at the macroeconomic level is riskier than at the microeconomic level. Hence, political decisions and policies that influence financial environments indicate classifiable political risks.

Financial Risks

BERI classifies factors that influence business financial position as risks. They include operational costs that represent a substantial amount of risk. Operational costs exerted by external factors may cause a substantial fluctuation in stock markets leading to a risky environment that affects companies’ operations in the affected countries (Burstein 73). It is important also to understand that such financial risks as systemic risks are entrenched in the systems of financial institutions. BERI claims that the 2008 financial crises were due to the interplay of multiple factors.

The continued exposure of different financial institutions to the global financial system resulted in the revelation of the financial institutions’ inability to absorb pressure from the external forces and global shockwaves (Brown 76). Liquidation crises, sudden fluctuation in the stock and asset prices in addition to financial policies may be considered as financial risks by BERI. While many financial indicators may not be quick to differentiate between economic and financial indicators, BERI appreciates that the two are intricately related and only distinguishable by the guidance of financial regulations, policies, and guidelines.

Economic Risks

Both macroeconomic and microeconomic policies are largely classified as economic risks. In this case, BERI establishes both commodity and monetary markets as factors that influence the economic conditions of businesses. It is worth noting that such risks as currency overvaluation and undervaluation may represent financial risk due to their impact on the stock exchange (Massey 79). Nevertheless, they are also important economic indicators and as such, classified as economic risks. Other economic risks that BERI notes include consumer price indices, tax regimes, unemployment rates, inflation rates, and availability of factors of production. In this line, the company also recognizes that gross domestic product (GDP) is instrumental in revealing the exact position of an economy (Brown 81). This helps to forecast future financial risks and management.

BERI Target Clients

BERI provides services to numerous governments and multinational companies. Currently, the company serves over a hundred companies, which have subscribed to their publications. In addition, the provision of the necessary information to policymakers and executive officials has increased the reputation of the company. The company has differentiated its reports and publications to suit the specific needs of different companies. Top CEOs and investors can access particular publications that explicate in detail the nature of risks that their companies face. Governments utilize their reports to shape financial and economic policies in line with risk ratings received. The ratings also provide them with an overview of the status of their economies and factors that might require adjustments and policy review.

Summary

In sum, Business Environment Risk Intelligence (BERI S.A.) is a private American company that was founded in 1966 and provides international businesses and countries with quantifiable financial forecasts. The company uses the risk-rating system to quantify the nature of risks that are apparent in their business environments. By using quantitative analyses, the company can reveal the operation cost index as well as repatriation and remittances factor (R factor). To comprehend the political risks, the company explores qualitative analyses and ensures that the data they receive is factual and reliable. The use of the two analytical models allows the company to compute the composite score (Massey 367). The score is a number that reflects the risk rating and is different in all financial markets and countries.

BERI classifies financial, economic, and political risks. Financial risks include liquidation, stocks devaluation, and systemic risks among many others. Economic risks entail the challenges that result from microeconomic and macroeconomic conditions. These might include investors’ confidence, exportation and importation practices, consumer price index, unemployment rates, gross domestic product (GDP), and inflation rates among many others.

Political risks refer to the impediments associated with government systems, structures, policies, and regulatory frameworks (Brown 12). All the above risks are important in ensuring that the rating system is accurate and able to predict future economic and financial trends. With such analysis, BERI can provide invaluable information to executives of international companies as well as governments. This sort of information facilitates the decision-making processes of the institutions.

Works Cited

Brown, Pechman. Countries’ Risk Rating Systems: Euromoney, COFACE and BERI, Massachusetts: Brookings Institution Press, 2010. Print.

Burstein, Peter. Finance: Risk Rating systems, Edison, New Jersey: Aldine Transaction, 2010. Print.

Guy, Leopold and Kamga, Wafo. Political Risk and Foreign Direct Investment, Upper Saddle River, New Jersey: Prentice Hall, 1998. Print.

Jeffrey, Simon. A Theoretical Perspective on Political Risk, Irwin, New York: McGraw Hill Publishers, 2004. Print.

Massey, Delsh. Risk Rating Systems, New York: Russell Sage Foundation, 2009. Print.

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