Select one of the BRIC countries. Outline and organize a list of macro-economic, cultural, financial and political variables you would need to check before considering a foreign investment in such a country. Limit your list to approximately 20 variables.
What would be different on that list if the investment considered was to occur in a rich, developed economy such as Germany, Japan or the United States?
Investment in Developing Countries:
When investing in developing countries investors must analyze several variables before deciding to settle there. Indeed, since social, cultural and economic environments are different, it is key to analyze the countries in order to maximize the probability of success of the investment.
Answer and Explanation:
When investing in a BRIC country, like Brazil for example, investors must take into account at least the following variables:
Macroeconomic- and financial variables:
1) GDP growth in recent years
2) Inflation rate
3) Interest rates
4) Debt to GDP ratio
5) Trade balance
6) Current account balance
7) Exchange rate (nominal and real)
8) Unemployment rate
9) Returns in recent years in the stock market
10) Investment over GDP
11) Exports over GDP
12) Foreign direct investment over GDP
13) Capital inflows over GDP.
14) Budget deficit
Cultural, political and social variables
3) Poverty rate
4) Infrastructure index
5) Homicides per 100.000 people
6) Corruption index
If we were to invest in a rich developed country many of these variables would not be important. For example, with the exception of language, all the other cultural, social and political variables would not be as important. Moreover, when it comes to macroeconomic and financial variables, investors use them to try to predict if the country is about to face a crisis. When investing in developed countries the probability of crisis is much lower than in developing countries. In consequence, even when all the variables are important, investors would be much more tolerant when deciding to invest in a developed country.
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from Finance 305: Risk ManagementChapter 3 / Lesson 3